188. Renewable energy projects are typically capital-intensive and involve high leverage ratios, with up to 70-80% of the project being financed through debt. Financial risks derive from the capital structure of the project and its ability to generate cash flows sufficient to fund planned investment, operations and maintenance expenditures, service debt, and provide reasonable returns to the sponsor.
189. Several factors make access to finance a particular challenge for RE projects:
• Small size and returns. RE projects tend to be significantly smaller in terms of physical size and financial returns than conventional power plants, and are subject to high administrative costs associated with risk assessments, loan processing and insurance for such projects;
• Time profile of risk. RE project costs are 90% up-front. Although the energy source is generally free, there can be a long and expensive phase of construction and installation that delays revenue streams relative to fossil fuel powered plants;
• Lack of actuarial data: The lack of reliable historical weather information makes it difficult to construct financial models. There is often no information available, and any information that is available will usually be from a near-by weather reporting station that may not be an appropriate proxy for the project site;
• High transaction costs: RE projects involving newer technologies and less experienced sponsors are generally more time-intensive and difficult to execute than conventional energy projects. Additional costs arise from initiating and completing transactions, such as finding partners, negotiating, consulting with lawyers and experts, monitoring agreements, and evaluating opportunity costs.
190. As risk perceptions increase, lenders require that equity play a larger role in the project's financing structure. In order to protect revenue streams, project lenders may also demand greater guarantees against the risks of new and developing technologies, as well as performance guarantees in order to reduce the gap between expected and actual output - involving complex contractual obligations and climate data calculations for which data are not always available.