Fund Raising in Renewable Energy Projects

Renewable energy targets are implemented in as many as 164 countries. Many developing countries have some challenges to face such as financing renewable energy projects, knowledge of managing renewable energy and legal framework for such migration and finally the political leadership and the transparency required for this significant the shift in energy technology

Funding Sources

Renewable energy(RE) has traditionally two ways of sourcing investment.

Loan Funds: 

Bank borrowings focus more on the return on capital over a fixed period, and as such, the return on investment (ROI) is not the critical component of the transaction. As such, the return on investments is lower than other funding methods. Oil & gas m&a usually prefer this route.

Equity Capital

Here the capital infused by shareholders is for a longer period, and the expected returns are much higher as higher risk is assumed. The private lenders put more pressure for better returns as compared to a traditional financial institution. Infrastructure Fundraising for any new projects source infrastructure equity funds from venture capital or private equity funds.

The third option is that many existing oil and gas companies go for mergers with RE start-ups for greater synergy. Such oil and gas mergers and acquisitions fund the RE projects from their funds or reserves as a part of their corporate strategy throughout the life cycle of the project. The same internal investment may get refinanced depending on existing or new players who may benefit from the project then.

Key features of funding for RE projects.

·   Source of funding – Equity funds can be from a wide range of sources such as insurance companies, pension funds, stock markets, Real estate, and more. The loan funds are traditionally from banks.

·    Target –Equity funds are not averse to new technologies, greenfield projects, whereas the Loans provided by banks want mature technology with a proven track record of the borrower.

·    Risk –The categories vary from low. Medium to high risk depending on the lenders, but banks prefer low risk.

·      Returns-Equity Funds are for a longer period, typically ranging from 3-10 years depending on the project and the expected returns, which is higher compared to banks that have specific terms of the loan with a maximum period of 5 years.

·   Benefits- Equity borrowings give the project diversity, liquidity, and transparency with a high return on investment. Guarantees, collaterals, low returns back a loan from Financial institution. No involvement of the lenders in the project though it does provide tax benefits.