October 6, 2011

Climate policy initiative finds long-term, stable policy support key to reducing cost of financing renewable energy projects

Feed-in-Tariffs (FiTs), Feed-in-Premia (FiPs), and Renewable Portfolio Standards (RPS) met through long-term power or premium contracts, lowered financing costs in case studies

Climate Policy Initiative (CPI)'s analysis of six large-scale renewable projects in the United States and Europe found that policies can deliver the largest reductions in project financing costs by providing long-term revenue support, offering revenue certainty, and reducing investor perceptions of risk. CPI identified specific ways in which policies affected the cost of finance for these projects and estimated the size of these effects by modeling a range of policy scenarios for each project. The analysis found that:

Duration of revenue support that is shorter by 10 years (with a raised level of support to maintain investor interest) increases financing costs by 11-15% of the cost of electricity.

Compared to a fixed-price revenue support (such as a FiT or RPS met with power purchase agreements), a premium over market prices that delivers the same returns to equity investors (through FiP or fixed-price Renewable Energy Certificates) increases financing costs by 4-11% of the cost of electricity.

Higher perceived risk - modeled using equity returns at the high end of industry expectations - increases financing costs by 3-9% of the cost of electricity. A range of factors can contribute to this perceived risk, from policy credibility to technology risks.

"Our financial modeling tool quantifies the impact of specific policies on the cost of finance," said David Nelson, Senior Director of Research and Programs at CPI. "This tool can help policymakers understand the impact of their renewable energy policy decisions on real world projects."

CPI used publicly available information and industry estimates to analyze a mix of mature and innovative solar and wind projects in the U.S. and Europe. All of the projects studied required policy support to attract sufficient investment. However, the types of incentives available to U.S. and European projects differed significantly. The U.S. projects made use of multiple, smaller incentives, most of which were cost support policies borne by taxpayers, such as tax incentives. European projects relied mostly on revenue support policies borne by ratepayers, such as feed-in-tariffs and feed-in-premia.

CPI also explored the question of how renewable projects can attract low-cost capital:

The risk inherent in the construction and operation of innovative projects is of great concern to investors, particularly debt providers. Without long-term debt financing, costs for the innovative U.S. solar power tower project we studied would have increased by 38% of the cost of electricity. Policies such as government loans and guarantees can help remove this barrier to affordable financing.

Institutional investors will invest in renewable projects if they have the expertise to evaluate these projects, are provided revenue certainty, and are insulated from policy and completion risks. Completion risks can be addressed by policy support or private contracts.

Climate Policy Initiative (CPI) is a global policy effectiveness analysis and advisory organization funded by George Soros. Its mission is to assess, diagnose, and support nations' efforts to achieve low-carbon growth.

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