- Trenton Allen, Managing Director and CEO, Sustainable Capital Advisors (Presentation)
Trenton Allen defined finance as the study of how and under what terms savings, for example money, is allocated between lenders and borrowers. Financial structures exist to allocate key risks among project participants. Understanding these financial structures require understanding the different types of risk that may be involved in a renewable energy project. Allen described five general types of risk that impact financial structures, including:
- Counterparty risk: The financial strength experience or stability of participating parties
- Performance risk: How well does the project perform? Who is responsible if it does not perform to expectations?
- Technology risk: How well understood is the technology?
- Policy risks: How do changes in energy policy impact subsidies, tax credits, or other revenue sources? Can a change in policies change revenues?
- Financing risk: Who is responsible for obtaining the financing?
Allen elucidated the differences between self-financed and third-party finance projects, which represent the range of different types of financial structures. He pointed out that in the real-world a combination of these structures is often in use. Third party financing structures are designed to shift the majority of the project risks to the sponsors and investors/lenders, instead of being borne by the customers themselves. Policy frameworks, such as subsidies, tax credits and other regulations often enable the financial structures possible for a given project type.
Participants had a number of questions about how they could best apply theoretical information on finance delivered in the presentation. When a municipality is one actor in a financial structure, it is important to understand the specific role that municipality is playing. For example, in some projects the municipality may be taking on the role of an owner of a renewable energy project; in others, the municipality’s role might be best understood as a customer of the project. The implications of these roles, and the expectations and risks allocated to the municipality may different widely. Several participants discussed community subscription project models, and options to incentivize investment in cooperatively-owned or community-owned projects. Participants discussed how renewable energy policies impact the kinds of financing structures available in a given jurisdiction. Participants were curious about project size and scale, and methods to aggregate smaller projects to make them more attractive for investors. Participants also discussed technological obsolescence, and how to manage technology transfer within a project finance structure.
The session closed with a reminder to participants that renewable energy is a maturing industry and an established business opportunity. Projects that make good economic sense exist, along with a variety of potential investors, but, the challenge resides in matching the renewable energy opportunity with lenders who will bear the risk.