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One of the biggest common challenges being faced across the renewable energy spectrum is getting financial closure for projects.

If you thought that this is the case only for solar projects or more risky projects in domains such as waste to energy etc., you are a bit off the mark. Renewable energy projects in wind power and biomass power are also facing significant challenges in raising funds.

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This post does an analysis of the latest status and trends in this important aspect of renewable energy.

Starting off with the basics, financing could come from either equity or debt sources. Equity typically comes in the form of venture capital or private equity, or in the case of large companies, through IPOs. Debt, asset financing, could either come from internal sources, or from external sources in the form of project financing or balance sheet financing.

Given this range if financing options, and also a whole lot of predictions and announcements (here, here , here and here) one would have thought getting financing for renewable energy projects should be easy. But that is really not the case.

Well, it is not difficult for everyone to raise money. For instance, ReNew Power (Wind farms), Mytrah (Wind farms), ReGen Power (Wind turbine OEM), Kiran Energy (solar power developer) all raised significant amounts recently, but each of these companies had either a big background in renewable energy (ReGen has been in the wind business for over 5 years now and its MD has been in the wind power business for almost two decades), or are founded by people who have significant business backgrounds (Sumant Sinha, the founder of ReNew Power was earlier COO of Suzlon and he is also the son of Yashwant Sinha). But raising money for first generation entrepreneurs, small businesses and those with only determination and stars in their eyes (and very little else) is very difficult.

What are the key reasons for the difficulties faced for getting financing? These can be categorised into the following:

1. Business Risk – This is perhaps the most important reason. At the end of the day, for all their virtues, most renewable energy sources are not price competitive. While one can argue that the true cost of fossil fuels is not reflected in their prices, the reality is that current costs of power generation from fossil fuels are lower than those of renewable energy sources. Renewable energy projects hence necessarily need to rely on external support (subsidies, feed in tariff, tax rebates…) to compete. All these are dependent on government policies and government policies can be fickle as has been witnessed around the world (and in India too). All these make create significant business risks for the investor.

2. Technology Risk – While the technology risk is almost non-existent for a relatively mature sector such as wind power, it exists in huge doses for solar. Even in wind, the technology for small wind, vertical axis wind turbines etc., are still not fully proven. Where technology risks really are creating significant hesitation are in waste-to-energy projects. In this sector, a number of technical and operational uncertainties are being faced – be it biomethanation, pyrolysis, gasification. Incineration is perhaps the only proven technology, but with the public opinion strongly against incineration (mainly because of its alleged polluting nature). technology risks pose a significant dampener for investments in waste to energy.

3. Alternative Opportunities – All investors are not born equal, and all investors do not think the same. In fact, only a small percentage of investors I come across are genuinely interested in making the world sustainable – they are all after the next big thing that promises the next big returns. Once many of these investors realise that renewable energy is a long term game that also carries significant return risks, they start looking for other big things around them, and is it any surprise that there are indeed other exciting investments available for them?

All said, there are renewable energy projects are getting financed all the time. So what differentiates them from those that do not get financing? Some other examples of successful financing also could be a pointer to what types of deals do get financing.

REC (Rural Electrification Corporation) obtained a Rs 700 crores loan from a German bank

Welspun tied up funds for its 50 MW solar project in Rajasthan from a consortium of lenders

Baring & Aditya Birla PE plan to take a stake in Anu Solar, a Bangalore-based company making solar inverters

PE firm NEA invests Rs 84 crore in Trishe Developers, a wind power firm

Green Infra to raise $50 million from IFC

OPIC (Overseas Private Investment Corporation, part of the US government), plans to support IDFC PE with a $250 million loan – Green Infra, one of the leading renewable energy developers, was incubated by IDFC