L R AS Published on Tuesday 9 May 2023 - n° 444 - Categories:PV Watch

A look at the financing of power plants

The secret of the financing and profitability of solar and wind power plants is largely well kept, at least in France. It is therefore an event to have an international study that gives figures, even if they date from 2020. Unfortunately, the war in Ukraine and the rise in energy prices have subsequently diminished the interest of the IRENA study.

It appears that the rate of financing of power plants is very different from one country to another, and depending on the technology.

Is this a cause or a consequence? The financing rate appears to be lower in countries where many plants have been installed. It seems that the lower the rate, the easier it was to finance! A rate of 1%, 5% or 10% for the construction of a plant creates a different situation.



A study on power plant financing IRENA wanted to know how much it would cost to finance power plants in 2020 around the world.

Financing after agreement between developer and user Financing after agreement between developer and user: Initially, financing came from the government. When the plants became profitable, the financing was provided by banks based on the contracts signed between the developer and the user

The cost of capital The cost of capital: the financing is made up of equity and debt. The rate is less than 10% depending on the region and technology

Cost of debt and cost of equity These two factors influence the final rate and therefore the profitability of an investment.


The text


A study on the financing of power plants

IRENA has conducted a global study on the financing of solar, onshore and offshore wind power plants. Of course, we will limit ourselves to solar PV, even though it is not always easy to distinguish between the three technologies.

The 45 countries that responded to the survey account for 88% of new solar capacity added in 2020, 98% of new onshore wind capacity, and 87% of offshore wind capacity. The ten countries with the highest number of responses were the US, China, Europe (Germany, Denmark, Spain, UK, Ireland, Netherlands), and a few countries (Chile, Vietnam, Mexico). Europe accounted for the majority of responses with 51%.

The responses corresponded almost exclusively to project funding. A few responses corresponded to balance sheet financing.

The 2020 deployment of power plants comes from solar (51% of responses), onshore wind (38%), and offshore wind (11%). This corresponds fairly well with the distribution of installations in that year.

Funding used to rely on the public authorities to both validate and promote projects. In 2020, 51% of financing was based on "market risk", i.e. the agreement between a developer and a buyer, private investor, industrial user, electricity company, etc.


The cost of debt and the cost of equity

Commercial financing is increasingly practiced. It covers a shorter period than the life of the plant. It is based on a floor price or at least on production covered by a fixed price contract. The owner wants to secure a revenue stream at the time of commissioning in order to obtain bank financing. Therefore, during the life of the plant, the owner will need to look for one or more customers who will use his production. The owner will have to conclude one or more power purchase agreements. Approaches vary from country to country depending on the demand for energy, the presence of a wholesale market and the market price at the time of the initial contract.

PPA contracts differ from country to country. The objective of the power plant owner is to obtain revenue security that makes the project financeable.


The cost of capital :

There are different measures of the cost of capital. The most relevant decision criterion for investors is the after-tax cost of capital, also known as the "nominal after-tax WACC".

The terms KD and KE stand for cost of debt and cost of equity respectively. L is the leverage (or debt component) and T is the tax rate. Thus, the cost of capital is derived from the formula: KD ×L×(1-T) + KE ×(1-L).

The current (in 2020) cost of capital worldwide is between 1.1% and 12%. It ranges from 1.1% for onshore wind in Germany (for all three technologies, Germany has the lowest cost of financing: 1.1% for onshore wind, 1.4% for solar PV, 2.4% for offshore wind). It reaches 12% for solar PV and onshore wind in Ukraine.

The arithmetic average of the cost of large-scale solar PV was 3.9% in 2005.The arithmetic average cost of large-scale solar PV was 3.9% in China, 6.1% in Asia-Pacific, 4% in Western Europe, 7.7% in Eastern Europe, 8.7% in the Middle East and Africa, 6.6% in Latin America and 5.4% in North America. It should be remembered that these figures are for 2020, while the March 2023 power purchase agreements have been impacted by the 2022 gas and electricity cost increase. Hence the price difference with Pexapark's prices two years later, recalled below.

IRENA has also observed negative values on solar PV contracts. It analyses this as access to debt from international markets at a lower cost than the domestic market.

It notes that mature markets with access to low cost debt can reduce the cost of capital (CoC) to a very low level, suggesting very competitive LCOEs.


The cost of debt and the cost of equity :

The CoC is made up of two key elements: the cost of debt and the cost of equity. The cost of debt is the cost of financing a loan against the renewable energy asset. It is usually provided by a bank. The cost of equity is generally higher than the cost of debt to compensate for the higher risk exposure. The cost of equity is the return on equity required by the owner - usually the project developer. It varies according to the owner's assessment of the project's risk and the minimum return on the investment. The debt/equity ratio determines the relative contribution of these two values to the total cost of the project.

1°) The combination of the cost of debt and the cost of equity varies between technologies (with a range of 1% to 2%), and between regions

China, North America and Western Europe have very low costs of capital, in the range of 3 to 5%. In these regions, renewable energy financing ensures the deployment of renewable energy generation capacity. In Western Europe, rates are consistently lower than in the newer Eastern European markets.

In North America and Western Europe, the share of debt in the cost of capital is low, but for different reasons. In North America, the share of debt is generally low (35% to 65%) because the tax credits used to accelerate the deployment of solar and wind power provide an incentive to use equity. Because of this policy environment, renewable energy assets in North America contain more equity than other regions of the world, but the cost of equity is generally lower than elsewhere, due to the existence of a favourable tax environment because of tax credits.

In Europe, the share of debt is generally higher (80% or more), but the cost of debt is very low. This is due to very low base rates and also because the European banking sector (as well as the US banking sector) has mastered the financing of renewable energy projects.


Having taken a good look at the 2020-2021 period, Irena had asked the question of the evolution of the cost of capital by 2025. Respondents generally expected the cost of capital to change little in five years (they could not foresee the war in Ukraine), while stating that future power system planning often depends on cost forecasts.

Respondents said that the cost of solar PV in Europe was expected to increase by an average of 27 basis points (0.27%), with cost increases in France, Germany, the Netherlands, Spain partially offset by cost decreases in Denmark, Poland, Romania


References: IRENA study

Subscribe to the newsletter "Le Fil de l'Actu"...