Power Purchase Agreements and Financing Renewables: An Interdependency

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.