Stakeholder Study by Clean World Capital Points to Persisting Gap in Financing Clean Energy Projects

May 2011

In Spring 2011, Clean World Capital sponsored a study, conducted by students from London Business School, to identify financing gaps and barriers to stakeholder engagement in renewable energy projects. The study found a major gap for projects with capital expenditures around €200-300 million as it investigated investor perspectives on over 700 such projects in the UK.

The gap exists because pension funds tend to target projects with capital expenditure of €300 million and more, while infrastructure funds and private equity firms prefer investments in the €20-200 million range.

Similar discontinuity occurs between project development, construction and operation stages. Based on their risk-return preferences, investors get involved into one or two stages of project gestation. Thus, project ownership changes as a project moves from development into construction and on to operation. The highest rate of change in ownership occurs between development and construction, reflecting high risks encountered by developers as they obtain consent, planning permissions and satisfy other requirements for off-take.

Ironically, project developers are also the most capital-strapped group of investors among other heavy-weights such as pension funds or infrastructure funds. With the exception of cases when private equity firms directly invest into project developers' equity, project developers are on their own in raising capital at that stage.

Challenges exist further along in a project lifecycle. "We did not expect to see such a high degree of difficulty in securing project financing at the pre-construction and early construction phase," said Ogbemi Ofuya and Aarti Uplenchwar, the students who designed and carried out the study. An intriguing finding is the emergence of direct project investments by pension funds, and their preference to partner with investments from large, investment grade utilities and Engineering Procurement and Construction (EPC) contractors, offering reduced execution and operational risks.

From Clean World Capital's perspective, these findings confirm that more engagement and dialogue between the renewable energy sector and pension funds are required to create financing solutions for the faster roll-out of renewable energy. Since founded in 2008, CWC has been working to bridge the financing gap for independent, cleantech companies and renewable energy developers with attractive return prospects.

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