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Power Purchase Agreements and Financing Renewables: An Interdependency

Steffen Hundt, Johanna Jahnel and Andreas Horsch
The Journal of Structured Finance Spring 2021, 27 (1) 35-50; DOI: https://doi.org/10.3905/jsf.2020.1.119
Steffen Hundt
is interim professor for banking and finance at the University of Paderborn in Paderborn, Germany
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Johanna Jahnel
is a research assistant at the University of Freiberg in Freiberg, Germany
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Andreas Horsch
holds the chair of investment and finance at Freiberg University in Freiberg, Germany
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Abstract

In the wake of energy transition, owners of renewable energy (RE) assets are seeking alternative sales channels besides subsidy schemes. Power purchase agreements (PPAs) can help both off-takers and sellers of RE to reach their economic targets. However, these contracts have to be structured in a way that ensures that the RE asset receives project financing. To show the interdependency between a PPA and project financing, we conduct a study based on three parts. First, we implement a financial model that shows the strong connection between PPA pricing and the debt sizing. Second, we analyze credit ratings and credit default swap spreads of different off-taker types and detect that electricity end-consumers like corporates can be a good alternative to the traditional utility off-taking the energy output. Finally, we conduct a survey among international banks having an exposure in global PPA markets. The survey results indicate that the bankability of a PPA strongly depends on the credit risk of the off-taker.

TOPICS: Commodities, credit default swaps, credit risk management

Key Findings

  • ▪ We discuss the access to project financing of renewable energy projects outside subsidies.

  • ▪ We present the importance of the off-taker’s creditworthiness for the overall bankability of renewable energy projects.

  • ▪ The debt sizing of renewable energy projects is commonly related to the sculpted debt approach which induces the risk of over-leveraging in case the underlying off-take scenario is too optimistic.

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The Journal of Structured Finance: 27 (1)
The Journal of Structured Finance
Vol. 27, Issue 1
Spring 2021
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Power Purchase Agreements and Financing Renewables: An Interdependency
Steffen Hundt, Johanna Jahnel, Andreas Horsch
The Journal of Structured Finance Apr 2021, 27 (1) 35-50; DOI: 10.3905/jsf.2020.1.119

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Power Purchase Agreements and Financing Renewables: An Interdependency
Steffen Hundt, Johanna Jahnel, Andreas Horsch
The Journal of Structured Finance Apr 2021, 27 (1) 35-50; DOI: 10.3905/jsf.2020.1.119
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  • Article
    • Abstract
    • OFF-TAKE SCENARIOS IN RE MARKETS
    • LITERATURE REVIEW
    • RELATIONS BETWEEN PPA PRICING AND PROJECT FINANCING: EMPIRICAL ANALYSIS
    • CONCLUSION
    • ENDNOTES
    • REFERENCES
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