Project Finance in Renewable Energy: Sensitivity Analysis and Valuation

Abstract

Project finance in renewable energy remains complex regarding the risk allocation between parties and sophisticated financial modeling of the renewable energy power plants. This paper aims to address and evaluate these risks quantitatively by building a financial model of renewable energy projects and performing sensitivity analysis on key risk and success factors and demonstrate how investors value and decide to invest in renewable energy projects and/or companies. We mainly find that the effects of macroeconomics such as (interest rates and inflation) and lender’s (such as loan margins and the debt-service-coverage-ratio “DSCR”) factors on project’s prospect are relatively smaller when compared to those of project’s characteristics from revenue (such as plant’s capacity, energy generation, PPA price, and plant’s lifetime) and cost (such as CAPEX and O&M costs) factors. The outcome of this thesis will be useful for project developers and investors. Particularly, on the one hand, this thesis can help the developers identify and manage key risk factors of the project. On the other hand, it can help assist the investors to make a proper investment decision