The reduction in construction and maintenance costs per MW of renewable energy facilities, together with low interest rates, have led to a significant growth in the purchase prices paid for these facilities in the Spanish market. This trend is shared by other European countries, especially for projects that hedge energy price risk incorporating power purchase agreements with third parties. In this framework, questions arise about the economic rationale of the purchase prices paid for these projects. Consequently, we develop a project evaluation model that forecasts expected cash flow and time-varying required rates of return for a standard photovoltaic plant, in order to study the extent to which foreseeable market conditions—interest rates and equity risk premia, among others—translate into economically viable buyouts. Our results suggest that purchase prices paid for these initiatives often lead to buyer returns below those that would be reasonable according to market conditions. Indeed, we find that only facilities that reach a production 23% higher than the number of hours considered in the base case provide returns that compensate long-term financing costs. However, specialised investors can exploit their relatively low cost of financing to pay prices up to 73% higher than those affordable by classic investors.
We develop a model that allows us to compare the three most common alternatives used for financing wind projects, namely, (i) project finance debt, (ii) project bonds and (iii) mini-perm bank debt with potential refinancing at its maturity. The proposed model not only allows us to sort debts according to their convenience to the financial sponsor, but also helps to study the impact of refinancing conditions on the internal rate of return (IRR) for shareholders through a sensitivity analysis that comprehensively analyses those variables that are particularly uncertain in the refinancing process. Our results suggest that project bonds help maximize the leverage of the project, which leads to a positive effect on IRR for shareholders. The second-most attractive financing source is the mini-perm debt, but this fact is strongly dependent on the refinancing conditions. Our model contributes to fill the gap on the effects of the cost of project debt in developing and producing renewable energy.
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