Financing Projects That Use Clean Energy Technologies: An Overview of Barriers and Opportunities

Project finance is asset-based financing, meaning that the project lenders have recourse only to the underlying assets of a project. It involves both debt and equity, where the debt-to-equity ratio is typically large (e.g., 70% debt to 30% equity). Debt is used when available and when it is the least expensive form of financing, with equity still needed for credit worthiness. Most important,revenue from the project must be able to generate a return to the equity investors, and pay for interest and principal on the debt, transaction costs associated with developing and structuring the project, and operations and maintenance costs. Successful project financing must provide a structure to manage and share risks in an optimal way that benefits all participants, allocating risks tothose entities that are able to mitigate each specific risk, and to share information about putting risk management in the proper hands at the proper stage of project development. Contractual agreements are, thus, important in risk mitigation. Today's project financing typically involves the creation of a stand-alone project company that is the legal owner of the project assets, and that hascontractual agreements with other parties.