Determining Bankability of Renewable Projects

Renewable energy project deployments are gaining market acceleration. Renewable technology share in the global energy mix is still dependent on financial support that encourages project deployments. Bankability is a term used in the renewable energy sector to describe the likelihood that any particular technology or manufacturer will be funded by financiers.

How Are Renewable Projects Financed?

According to the Renewable Energy World, most solar PV and wind energy projects are highly leveraged, with a majority being 70%-80% debt financed. For a renewable energy project to be bankable, certain risk-return parameters need to be aligned to emphasize confidence in the success of the project. Lenders are especially keen to understand the risk-return approach of proposed projects to ensure that funding is made available to project developers.

Measuring Project Bankability

As the renewable energy sector continues to mull over this important aspect of project investments, there are many factors to contemplate. It can be said that policy, regulations, market economics, and governance framework are equally important to defining bankability and project attractiveness. Measurable project economic specifics such as rates of return and local electricity tariffs are valuable as well. All of these factors affect the willingness of banks and project developers to fund renewable energy development. In most cases, long-term revenue projections are directly affected by a project’s risk management strategies.

Using lessons learned from similar past projects can help project developers define risk mitigation plans and improve project bankability. Learnings are practical if the industry focuses on quick wins and less risky projects while keeping sight of the big picture. In other words, incrementally scaling the size and investments of these projects is valuable. As technology matures, more projects will start becoming bankable.

What About Incentives?

Financial incentives and subsidies have long been the cornerstone of renewable energy investments. On one hand, these provide much-needed economies of scale. On the other hand, they encourage investments by ensuring that the generated electricity cost achieves attractive rates of return.

In a recent blog, I emphasized how subsidy scale backs created an uproar in the Chinese market. As the energy sector settles into this new normal of large-scale renewable energy adoption, technology investments and grid flexibility mean that renewable energy projects are becoming increasingly bankable, even without financial incentives. Projects could become bankable by diligently addressing perceived technical risks associated with financial exposure. To ensure bankability, stakeholders need to focus on quick wins and incremental scaling. They should then use their learnings and perceived risk mitigation strategies from these projects for new investments.