Wind and solar plants have an unusual cost profile. Almost all the money is spent before the first unit of electricity is produced, and after that the ‘fuel’ is free. That makes financing, rather than technology, the deciding factor for many projects. This page explains the main ideas in general terms. KBB2 Wind Notes is an independent explainer: we do not fund, broker or advise on projects, and nothing here is financial advice.
Equity and debt
Most large projects are paid for with a mix of equity, money put in by owners who take the biggest risk and hope for the biggest reward, and debt, loans from banks or other lenders who expect to be repaid with interest. Lenders usually provide the larger share, but only if they are confident the project will earn steady income for many years.
Project finance
Often a project is set up as its own company, and lenders are repaid only from that project's income rather than from the owners' other businesses. This is called project finance. It means lenders scrutinise everything: the wind or sun data, the equipment, the construction contract, the grid connection and, above all, who buys the electricity.
The power-purchase agreement
A power-purchase agreement (PPA) is a long-term contract in which a buyer, often a national utility or a large business, agrees to buy electricity at an agreed price. It is the backbone of most deals. If the buyer is financially weak or has a history of paying late, lenders see higher risk and charge more, or stay away.
Managing risk
- Currency risk. Equipment is often bought and loans taken out in a foreign currency, while electricity is paid for in local currency. If the local currency weakens, repaying the loan gets harder.
- Payment risk. Guarantees from governments or development institutions can promise that the project will be paid even if the buyer falls behind.
- Political and regulatory risk. Sudden changes in rules or tariffs can wreck a project's sums, so investors value stable, transparent policy.
- Resource risk. A windless or cloudy year reduces income, which is why careful measurement matters.
Concessional and blended finance
Development banks and public funds sometimes lend on softer terms, take on risks private lenders will not, or pay for early studies. Mixing public and private money in this way is often called blended finance.
Paying for small systems
At household level, the challenge is different: people may not be able to afford a solar system upfront. Pay-as-you-go models, where customers pay small amounts over time, often by mobile phone, have helped spread solar home systems. Mini-grids face their own question of how to set tariffs that are affordable yet cover costs.
Why the cost of money matters
Because most of the expense is upfront, interest rates have a large effect on the final cost of the electricity. The same plant can produce much cheaper power where borrowing is cheap.
Read on
See Projects Explained for the steps from idea to operation, or our Country Notes for how these questions play out in different places.