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CHAPTER 3: PROJECT FINANCING

Over the last couple of decades, the vast majority of commercial wind farms have been funded through project finance.  Project finance is essentially a project loan, backed by the cash flow of the specific project. The predictable nature of cash flows from a wind farm means they are highly suited to this type of investment mechanism.

Recently, as an increasing number of large companies have become involved in the sector, there has been a move towards balance sheet funding, mainly for construction. This means that the owner of the project provides all the necessary financing for the project, and the project’s assets and liabilities are all directly accounted for at company level. At a later date, these larger companies will sometimes group multiple balance sheet projects in a single portfolio and arrange for a loan to cover the entire portfolio, as it is easier to raise a loan for the portfolio than for each individual project.

The structured finance markets (such as bond markets) in Europe and North America have also been used, but to a more limited extent than traditional project finance transactions. Such deals are like a loan transaction insofar as they provide the project with an investment, in return for capital repayment and interest. However, the way in which transactions are set up is quite different to a traditional loan. Different types of funding for renewable energy have emerged in recent years in the structured debt market, which has significantly increased the liquidity in the sector.

Typical structures and transaction terms are discussed in more detail further in this chapter.