What is Energy Finance?
The field of energy finance is broad and comprises the many connections between energy projects and the finance industry. An important aspect of the field focuses on the unique ways in which energy projects and initiatives are financed. A key challenge in bringing new energy innovations to market, at scale, is access to financial resources. In many cases, energy projects are funded just as projects in other industries are, relying on things like venture capital to get going. In other cases, however, more tailored financing mechanisms like PPAs or inventive methods like crowdfunding are used. These alternatives can often be a better fit for the quirks of energy and in encouraging major switches to sustainable alternatives. Energy Financing can also be understood in terms of Corporate Finance and Project Finance. Put simply, Corporate Finance is concerned with funding an entire corporation as a whole, whereas Project Finance is concerned with raising funds for one specific project within the company’s broader operations.
Corporate Financing Methods
Power Purchase Agreement (PPA): PPAs are agreements between energy buyers and sellers. Under a PPA, power is independently generated by a seller and then agreed to be bought by a buyer, commonly a state-owned firm, for a fixed amount of time. PPAs are beneficial in getting renewable or clean energy projects off the ground by guaranteeing a revenue stream for producers; without such a guarantee, new energy projects may be too costly and risky to take on .
Venture Capital: Venture capital is financing provided by private investors to startups and small businesses that are in their early stages; venture capital has existed as a financing tool for a long time but has only recently taken on a larger role in investing in energy projects. A popular subset of venture capital is impact investing, where investments are made into promising projects that are set to have positive social or environmental impacts .
Project Financing Methods
Crowdfunding: Crowdfunding occurs over internet-enabled platforms and allows for any individual to invest, lend or donate a sum of money towards energy and sustainability projects. Crowdfunding is unique in that it can allow for risky or unconventional projects to take root without relying on the approval of traditional funders like banks; people who believe in the mission of a project or future customers can be the ones to back it.
Tax Measures: Governmental bodies can introduce taxes on commodities, goods or industries to discourage certain behaviours or the use of specific resources. A common example is a carbon tax, which taxes firms or individuals based on the amount of carbon they emit through their operations or consumption choices . Opposite from this type of tax liability is a tax credit, which is a reduction in taxes owed by an individual in exchange for partaking in a specific type of behaviour. Individuals that purchase electric vehicles, for example, are often eligible for a tax credit to offset the upfront cost and encourage a switch to more sustainable products.
Grants, Subsidies, and Loans: Governments can provide grants and subsidies to partially cover the cost of renewable energy technologies, increasing the profits from renewable energy projects while incentivizing greater private investment. Alternatively, governments can compensate banks to offer loans at a low-interest rate to finance renewable energy projects, the cost of these projects is reduced, increasing profits.
Property Assessed Clean Energy (PACE) financing: PACE acts as a means by which owners can apply energy efficiency upgrades to their residential or commercial properties and have the cost applied over time through their property tax assessments . PACE promotes a shift to renewable energy by reducing the upfront costs of such a transition for residents and businesses. The model is structured so that the stretched out payments are often accompanied with lower energy bills for the owner, offering gains on the initial investment. PACE financing is in place all over the United States and is being piloted in Canada.
The State of Energy Financing
Public and private sector partnerships dominate the field of energy finance today. Where there may be wariness on funding uncertain projects, countries such as Nicaragua have chosen to offer tax incentives that promote private investment into renewable energy endeavors and reduce potential losses . Morocco, in an effort to double its capacity for electricity generation in light of growing demand, has widely implemented PPAs to tap into private sector capital and utilize existing industry knowledge .
Although government initiatives have and continue to be fundamental in driving the creation and growth of alternatives to traditional energy, the private sector holds the most promise in financing future efforts. The United Nations Environment Programme is focusing its efforts in bringing together clean energy producers and private sector investors; this is necessary in order to achieve the level of investment needed to continue the energy transition that governments do not have the capacity for .
Recent blog posts about Energy Finance
- Donavan, C. (2015). Renewable Energy Finance. Imperial College Business School, UK. Default Book Series.
- Kalamova, M., Kaminker, C., & Johnstone, N. (2011). Sources of finance, investment policies and plant entry in the renewable energy sector.
- Mills, L. (2015). Global trends in clean energy investment. Bloomberg New Energy Finance, 5.
- Freehling, J., & Hayes, S. (2011, August). Energy Efficiency Finance 101: Understanding the Marketplace. American Council for an Energy-Efficient Economy.
Deep Dive Resources
- Solar Power Purchase Agreements
- Power Purchase Agreements (PPAs) and Energy Purchase Agreements (EPAs)
- Sutherland, R. J. (1991). Market barriers to energy-efficiency investments. The Energy Journal, 12(3).
- Newell, P. (2011). The governance of energy finance: the public, the private and the hybrid. Global Policy, 2, 94-105.
- Joshi, J. (2013). Renewable energy finance and securitization. The Journal of Structured Finance, 18(4), 215-219.
- Rolffs, P., Ockwell, D., & Byrne, R. (2015). Beyond technology and finance: pay-as-you-go sustainable energy access and theories of social change. Environment and Planning a, 47(12), 2609-2627.