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Project Finance is debt that is borrowed for a specific project. The amount of debt made available is linked to the revenue that the project will generate over a period of time, as this is the means of paying back the debt. This amount is usually adjusted to refelct inherent risks such as the production and sale of power. Should there be a problem with repaying the loan, the banks will establish first 'charge' or claim over the assets of a business. The first tranche of debt to be repaid from a project is called 'senior debt'.
Usually, project preparation for on-grid RE projects is carried out by large energy companies or specialised project-development companies. Energy companies finance the project preparation phase from operational budgets. On the other hand, specialised companies finance this phase through private finance, capital markets or with risk capital from venture capitalists, private equity funds, or strategic investors.
Tax equity is one of the important project finance available in the United States and certain other jurisdictions. It is a tax-based instrument that banks and other lenders can use to provide project finance for renewable energy projects.
Along with cash flows, clean energy also generate tax credits that can be sold to a third-party tax equity investors (who are mainly banks and large corporations who provide capital in return for tax credits and later use these credits to reduce their tax bill). Examples of tax equity are the investment made by Google in the renewable energy through its US$300 million contributions to SolarCity's US$750 million rooftop solar photovoltaic fund in 2015.
- ↑ Justice, S., Hamilton, K., Sonntag-O’Brien, V., UNEP Sustainable Energy Finance Initiative., Liebreich, M., Greenwood, C., & Bloomberg New Energy Finance. Private Financing of Renewable Energy - A Guide for Policymakers. 2009.
- ↑ Finance guide for policymakers (pg:18):