How to build an investment case for renewable energy projects

An investment case clarifies the financial and non-financial drivers that determine project viability and investor confidence, including policy frameworks, technology choice, and long-term revenue visibility. Potential developers should expect to prepare documentation and pitches for investors or credit committees, and, in some cases, a bankable model utilising financial and technical assumptions, along with the data to back them up.

Several different revenue structures can be implemented, such as PPAs and Contracts for Difference, which could help to get a new project over the line. We'll also take a look at some of the key risk categories in taking a renewable project to market, including market, technical, regulatory, Environmental, Social and Governance risks and how to address them.

Understanding renewable energy investment fundamentals

Some of the key areas to incorporate into your investment case:

• Define what an investment case is: an investment case represents the reason a lender or investor should finance your project. It should be a structured argument that clearly lays out the financial and strategic viability of your renewable project.

• Explain the lifecycle of a renewable project: plans tend to go through five phases. Pre-construction phases include feasibility, development, and financing with sponsors, lenders, and contractors, before construction and operations begin.

• Describe the primary value drivers: a case should clearly lay out the technology type, for example, solar, wind, storage (and the capacity factor) as well as long-term capital expenditures vs. shorter-term operating costs. It should also explain how market prices and incentives might positively or negatively affect financing. 

• Introduce standard valuation metrics: valuation metrics can help to provide data that backs up an investment call, for example including a positive Net Present Value (NPV) and Internal Rate of Return (IRR), as well as payback periods to determine when a project will pay back its capital, Debt Service Coverage Ratio (DSCR) to cover off debt management and Levelised Cost of Energy (LCOE) which examines the cost of a unit of energy over the lifetime of a potential plant.

• Distinguish between equity and debt perspectives: investors will want to be made aware of risk/return expectations, the tenor (or time period) of the investment, and how covenant sensitivity might affect their investment.

Building a strong financial model

It's essential to consider all potential scenarios and how they may affect your renewable project, both positively and negatively, before the investment is secured. 

Inputs: highlight how an investor's funds will be used to finance, as part of a financing structure; this could include capital costs and operating expenses, as well as the negative impacts of tax regimes, depreciation rates, and inflation assumptions.

Revenue forecasting: knowing the potential revenue a project might generate is equally essential, as is understanding financial tools such as PPAs, feed-in tariffs, merchant prices, and payments that might affect this, such as ancillary services or capacity payments.

Explain sensitivity analysis: developers need to understand the project's risk tolerance, so they test its resilience under different pricing, cost, and generation scenarios.

Outline scenario modelling: as the market evolves, it's also essential that you prepare for these changes, accounting for market volatility and future technology learning curves.

Present benchmarks: a sound investment plan benchmarks events against comparisons. This might include benchmarking a plan against typical Internal Rate of Return IRR thresholds and capital structure mixes for onshore wind, solar PV, and hybrid systems.

Managing and mitigating project risks

• Technical risk: renewable energy sources are inherently unpredictable, so the technology doesn't always perform as expected. Elements to consider in a plan might include performance variability and equipment quality, as well as warranty coverage that kicks in when infrastructure is damaged. 

• Market risk: this unpredictable market can lead to a volatile trading environment, which might result in wholesale price exposure risks, imbalance costs, or even restrictions on energy production through curtailment.

• Regulatory/policy risk: changing subsidy regimes, permitting timelines, and grid connection rules.

• Financial risk: the economic landscape might also change over the lifecycle of your project due to interest rate changes, currency exposure, or additional projects, such as construction overruns.

• Explain risk allocation strategies: there are measures you can take to protect an investor's capital through safety polices such as insurance, long-term offtake contracts, Engineering, Procurement, and Construction (EPC) guarantees, to guard against projects overrunning, as well as diversification of portfolio by investing in more than one stream of energy source.

Incorporating policy, regulation and ESG factors

Some policy elements may be beyond your control, so it's essential to identify them, as well as any targets, be they voluntary or mandatory, that might affect a project. Positive developments that may bolster your investment case include net-zero targets, tax credits, green finance mechanisms, and ESG metrics that demonstrate how investing in renewable energy will achieve emissions reductions, biodiversity, and community engagement, and provide transparency for a potential investor. Ultimately, sustainability credentials can improve access to capital or lower the cost of finance, and you could explore green-energy-linked finance such as sustainability-linked loans, green bonds, and blended finance models.

A strong investment case for renewable energy combines robust data, credible modelling, transparent risk management, and a compelling sustainability story. Success depends on aligning project fundamentals with investor expectations and long-term market dynamics.