Decarbonisation Technology - August 2024 Issue

Government (Permits, policies)

Developers/ S ponsors and Investors (Equity)

Operator

Lenders (Debt)

Technology licensor/ Equipment supplier

Special purpose vehicle

Otake agreements

Feedback supplier

Insurance provider

EPC c ontractor

Figure 1 A generic project finance transaction involving multiple entities

secure the necessary capital, energy transition project developers or sponsors often turn to multinational corporations, private sources, public funds, and commercial banks. Private sources Energy multinationals and others raise capital by issuing equity or borrowing against their balance sheets. This approach allows them to leverage their financial muscle, accelerate transaction speed, and spread all the risks of an individual technology over a large global asset portfolio. Additionally, private equity (PE) funds such as CIP and BlackRock can invest significant capital amounts for proven technologies. In 2023, venture capital (VC) and PE funds alone contributed nearly $50 billion towards advancing the energy transition (BloombergNEF, 2024) . Additionally, privately owned energy transition technology companies can access capital markets by raising an initial public offering (IPO), which could help finance technology or project development. Public funds Governments can support energy initiatives through various means such as grants, tax credits, low-interest loans, and sovereign loan guarantees. These public avenues help de-risk emerging technologies, which makes projects more attractive to investors. For example, the US Department of Energy’s Loan Programs Office was authorised to underwrite up to $400 billion in loans (Plumer & Friedman, 2023) for energy transition projects. Public funds also play a role in making clean energy more accessible. The Green Climate Fund, created by the UN in 2010,

is focused on directing resources to developing countries, supporting them in reducing emissions and adapting to climate change ( Green Climate Fund, 2023) . Project financing The bulk of the $75 trillion required to achieve net zero by 2050 will likely come through debt offerings from commercial banks. Commercial banks differ from other private investors, such as energy majors and PE funds, as they typically have a significantly reduced risk appetite. A commonly used approach by banks to finance large infrastructure projects is called project financing. Project finance is typically characterised by non-recourse lending, where the creditworthiness of the project, rather than that of the project’s owners, is used to determine financeability. This approach democratises access to capital and reduces barriers to entry for smaller developers, which can lack the financial strength of large companies. In order to lend to a project, banks need to get comfortable with key factors such as the project’s costs, certainty of product offtake, operational performance, environmental and regulatory approval process, technological readiness, and the EPC contractor’s reputation. Collectively, these elements constitute the ‘bankability’ of a project. However, crafting a project finance deal is a complex endeavour. Project developers must negotiate across multiple parties, such as lenders, operators, insurers, contractors, suppliers, and even governments, to allocate risks equitably. This requires a rigorous feasibility and risk analysis to determine which party is best suited for each risk. The