Most energy projects never get beyond the development process. There are many reasons for this, but failure to obtain financing has derailed an increasing number of projects over the past few years.
The most common reason is the fundamental economics of the project do not provide confidence in an adequate return being paid to investors. There is effectively no hope for obtaining financing for any energy project if the project developer cannot demonstrate sound economic fundamentals to a potential investor.
Mike DellaGala and Jonathan McClelland’s recent article in AOL energy does a great job laying out the building blocks for financing a solar project. While some of the specifics of a solar development don’t apply universally (for example, solar trading credits and the solar resource are uniquely relevant to solar), the broad principles cover the key aspects of the basic economic story for an energy project.
More challenging to understand than failed economic fundamentals is why some projects do not get funded even where a developer can demonstrate solid financial fundamentals and the potential for returns that appear to reflect the investment risk. Over the past three years there has been consistent talk of how much “money is sitting on the sidelines” looking for good energy projects. Energy investors are commonly heard to say “if the project is really that good, it will get financed,” yet some projects that appear to be good, or even to be very good, don’t ever find financing.
The basic economic equation of whether a project gets funded turns on the level of certainty that an investor will get paid back its investment plus a return for the use of its money. How investors measure risk, formally and unconsciously, varies and many of the explanations for why projects fail to get funded grow out of unrealized risk intolerance. There are obvious risks, like technology or an electricity buyer’s credit worthiness. And there are risks that manifest in less obvious ways.