The key role of debt financing in developing renewable energy projects

Abstract

We develop a model that allows us to compare the three most common alternatives used for financing wind projects, namely, (i) project finance debt, (ii) project bonds and (iii) mini-perm bank debt with potential refinancing at its maturity. The proposed model not only allows us to sort debts according to their convenience to the financial sponsor, but also helps to study the impact of refinancing conditions on the internal rate of return (IRR) for shareholders through a sensitivity analysis that comprehensively analyses those variables that are particularly uncertain in the refinancing process. Our results suggest that project bonds help maximize the leverage of the project, which leads to a positive effect on IRR for shareholders. The second-most attractive financing source is the mini-perm debt, but this fact is strongly dependent on the refinancing conditions. Our model contributes to fill the gap on the effects of the cost of project debt in developing and producing renewable energy.