An analysis of six large-scale renewable energy projects in the U.S. and Europe has found that government policies, such as feed-in tariffs (FITs), feed-in premia (FIPS) and renewable energy portfolios (RPS), can deliver the largest reductions in project financing costs by providing long-term revenue support, offering revenue certainty and reducing investor perceptions of risk.
In its analysis, the Climate Policy Initiative (CPI) identified specific ways in which government policies affected the cost of financing for these projects and estimated the size of these effects by modeling a range of policy scenarios for each project.
For example, the amount of time a project receives revenue support, through policy initiatives, had the largest impact on financing costs. Debt providers match debt repayments to the expected cashflows over the life of the project. When revenue supports end early, projects must pay down debt faster to adjust for lower cashflows in later years. This effect increased financing costs by 11% to 15% of the levelized cost of electricity (LCOE) when revenue support was reduced by 10 years, according to CPI.
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 FIPs or fixed-price renewable energy certificates) increases financing costs by 4% to 11% of the cost of the LCOE, the analysis states.
In addition, higher perceived risk increases financing costs by 3% to 9% of the LCOE. A range of factors can contribute to this perceived risk, from policy credibility to technology risks.
CPI used publicly available information and industry estimates to analyze a mix of mature and innovative wind and solar 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 FITs and FIPs.
CPI also explored the question of how renewable projects can attract low-cost capital. Institutional investors tend to invest in renewable projects only if they have the expertise to evaluate these projects, are provided revenue certainty and are insulated from policy and completion risks, according to the analysis.