Renewable Energy Finance

Theory and Practice

Santosh Raikar, Seabron Adamson

• Publisher: Academic Press
• Year: 2019
• eBook ISBN: 9780128165546
• Topic: Business
• Subtopic: Energy Industry
• Index: Business

Renewable Energy Finance: Theory and Practice integrates the special characteristics of renewable energy with key elements of project finance. Through a mixture of fundamental analysis and real-life examples, readers learn how renewable energy project finance works in actual deals that mix finance, public policy, legal, engineering and environmental issues. The skills developed in analyzing non-recourse cash flow-based finance are applicable not only to green energy, but also apply more widely in project finance and infrastructure investing. The book's comparisons of developed and developing countries make it valuable to readers worldwide.- Presents real world cases in each chapter- Includes a companion website that contains renewable energy project finance models and other resources- Supports efforts to achieve environmental sustainability through renewable financing projects and cleaner production techniques

1

Financing the new energy economy

Abstract

While renewable energy has a long history, renewable power sources such as wind and solar power play a relatively small role in the modern energy economy, which is dominated by fossil fuels. Most plans for significantly reducing carbon emission rely heavily on these renewable energy sources. This could involve trillions of dollars of investment in renewable energy projects in the coming decades. Project finance will likely play a major role in funding these investments.

Keywords

Renewable energy; Carbon emissions; Energy flows; Decarbonization; Renewable investment

For most of history, almost all energy used by humans was renewable. The iconic windmills of the Netherlands date as far back as 1200 AD, and water and wind driven mills were used before that era to grind grain. As late as 1800, almost all of the energy consumed in Paris – then one of the largest and richest cities in the world – came from firewood and charcoal, although by the end of the 18th century firewood had to be transported over 100 miles on average to the French capital to meet the demands of a growing urban population. ¹ Only around 1830 would coal, the first fossil fuel to play a major role in the global energy economy, start to replace wood as the dominant energy source for Paris, London, and the other great European cities.

The evolution of renewable energy

The renewable energy derived from flowing water powered the early mills of the Industrial Revolution, but the growth of the modern world is heavily linked with the use of fossil fuels. Oil, coal, and natural gas power much of the man-made world around us, and are indirectly embodied in almost every product and service we consume.

In the United States and much of the rest of the developed world, the availability of cheap oil and other fossil fuels was taken largely for granted until the oil embargo of 1973, in which some members of the Organization of Petroleum Exporting Countries (OPEC) imposed an embargo on sales of oil to the United States. When combined with other supply and economic factors, the price per barrel of oil quadrupled over time after the embargo, bringing to the wider public recognition of the growing Western reliance on imported oil, and stimulating the belief among many that oil was a finite resource which could be depleted in a relatively short period.

The United States responded over the rest of the 1970s with a mixture of policies, from encouraging greater domestic production to conservation. The potential finiteness of reserves of oil and other fossil fuel resources became engrained in the minds of political leaders and the public imagination. In April 1977, US President Jimmy Carter addressed the nation on the need for a comprehensive national energy policy, with a strong focus on conservation. Carter famously referred to the energy crisis as the “moral equivalent of war,” and stated that “because we are now running out of gas and oil, we must prepare quickly for a third change, to strict conservation and the use of permanent renewable energy sources, such as solar power.”

Carter's initial energy policy speech was criticized as being short on specific policy details. One of the concrete policies to emerge was the Public Utilities Regulatory Policy Act of 1978 (PURPA). In the first major stimulus for renewable energy in the modern era, PURPA, among its other provisions, required electric utilities to purchase energy from certain “qualifying facilities”, which included renewables. The PURPA era brought forth the first major wave of new renewable energy projects in the United States.

Other countries also responded to the energy crisis. Energy research and development expenditures rose in the European Union in the late 1970s and early 1980s but various major European countries responded differently to the energy shocks. France concentrated on its nuclear industry. Germany, which had a large coal industry, was less dependent on imported oil for its total energy consumption, but also became after the 1986 Chernobyl accident more skeptical of nuclear power. Green ideas had taken hold in Germany even in the 1970s, and these provided an initial basis of public support for renewable energy research and development. Denmark, with few energy resources of its own, was highly dependent on imported oil. In 1976 two reports from the Danish Academy of Technical Sciences played a major role in shaping Danish renewable energy policy and the country's support of wind energy, including tax credits and investment subsidies. ²

Renewable energy in the global energy economy

Despite these developments, the share of renewable energy in total energy consumption has generally remained low in most countries, except for a few countries with abundant hydroelectric resources such as Norway.

At the global scale, renewable energy resources made up less than a fifth of all energy consumption in 2017, as shown in Fig. 1.1. ³ Fossil fuels accounted for almost 80% of total final global energy consumption in 2017. Another 7.5% came from traditional biomass sources (firewood, charcoal, etc.), which remain important energy sources for many people in some developing countries. The “modern” renewable energy sector accounted for only 10.6% of total final energy, and of this fraction only 2% of total final energy came from renewable power generation such as wind farms, solar photovoltaic (PV) and other sources.

Fig. 1.1 Global share of renewable energy in final energy consumption.
Source: REN21 Data.

A relatively low share for these renewable energy sources also holds true in the United States. While wind and solar power have made significant gains in the United States, it has grown from a low base. Fig. 1.2 illustrates the sources and uses of energy in the United States in 2018, based on analysis done by the Lawrence Livermore National Laboratory. ⁴ The left-hand side shows sources of energy, and total production in “quads” in the year. ⁵ On the right-hand side are consuming sectors (residential, commercial, industrial, and transportation). The electricity sector is an intermediate sector - other primary energy sources are used to generate electricity - but final consumption of electricity is in the four final sectors. Similar “Sankey” diagrams are available for other countries – we focus here on the US only as one example. ⁶

A brief review of this annual energy flow diagram illustrates some important aspects of US energy consumption. First and foremost, only just over a third of energy used actually provides useful energy services to customers and businesses – most of the energy produced is lost as “rejected energy” or waste heat. For example, consider the transportation sector, shown in the lower right-hand box. The transportation sector used 28.3 quads of energy inputs in 2016, but only achieved 5.95 quads of useful services (moving cars and trucks down the road or planes through the sky, for example). The rest was dissipated in heat, and reflects the relatively low thermal efficiency of combustion engines, aircraft turbines, and other transport power sources.

Second, it is easy to see that the transportation sector is one of the largest end-use segments, and is almost entirely based on petroleum at present, with small amounts of biofuels (chiefly from ethanol and biodiesel), natural gas, and (minimal) electricity used.

Third, the largest total user of energy is the electric generation sector, which used approximately 38% of total energy. Over half of the input energy for generating electricity came from coal and natural gas fossil fuels, with nuclear being the...

Table of contents

• Cover image
• Title page
• Table of Contents
• Copyright
• Dedication
• Foreword
• Preface
• Acknowledgements
• 1. Financing the new energy economy
• 2. Public policy mechanisms to support renewable energy
• 3. Basic project finance concepts
• 4. Modeling project cash flows and debt service
• 5. Renewable project finance structures and risk allocation
• 6. Tax structures for financing renewable energy projects in the U.S.
• 7. Financing distributed generation projects
• 8. Renewable energy in power markets
• 9. Managing transmission costs and risks for renewable projects
• 10. Alternative off-take strategies and managing merchant risks
• 11. Project development and valuation
• 12. Energy storage financing: opportunities and challenges
• 13. Renewable energy finance in the international context
• Appendix C: Sample term sheets
• Index