Introduction

The current interest in renewable energy has increased enormously. Now, private equity firms are showing a lot of interest in investing only in renewable energy projects. This also occurs in the context of the need to acquire more energy resources by the different giants of the world. Still, the recent credit crunch and financial crisis pushed utilities into cash shortages. Therefore, the private equity investors investing in these companies and their projects met their requirements for quick cash and other capital investments in new renewable energy projects. However, the main focus has remained on investing in more mature projects such as those related to wind and solar energy.

UK-based private equity fund Bridgepoint recently invested nearly $ 850 million in wind power projects in Spain. Likewise, other global private equity investment firms also dramatically increased their activity to invest in almost all future projects. The largest industry groups include KKR and Blackstone (Schäfer, 2011).

However, other companies also participate in the financing of these projects, which have lower downside risks and higher upside returns. Typical projects that are funded by these private equity firms include only those in the renewable energy sector that move away from traditional fossil fuels. These projects include solar, wind, biomass, biofuels, geothermal energy and other projects related to energy storage and efficiency. Furthermore, these investments are mainly characterized by very high-growth, asset-based, capital-intensive investments (Hudson, 2012).

Private equity financing of renewable energy projects

Like other private investors, including commercial banks, pension funds, and others, private equity companies are also actively investing in renewable energy projects. These companies and groups specialize in financing renewable energy projects around the world. These companies typically have a private equity pool that is generated through investments made by institutional investors and other high-net-worth individuals. These funds are distributed throughout the world and invest in renewable energy projects primarily globally.

Currently, their funding method is such that they take advantage of the upside potential of these risks while avoiding downside risks. This upside potential is only available in the most mature technology and in projects such as solar and wind power. Then these investors also have a quick exit strategy whereby these investors finish their investments in about 3 to 5 years. Your expected returns are calculated using traditional project finance methods. They use the IRR (Internal Rate of Return) of the project to calculate the performance of your project. The current rate of return for these private equity investors for these mature renewable energy projects ranges from 25% to 35%. However, these are said to only represent the range of minimum rates, while the actual returns earned by these fund groups should be even considerably higher.

While these private equity investors look at your upside potential, they are also required to minimize their downside risks. These risks are primarily related to financial and country risks, regulatory and policy risks, technical and project-specific risks, and market risks. Individual risks in the financial and country risk category include economic risk, security risk, sovereign risk (which includes political and country risks), and currency risks.

On the contrary, political and regulatory risks are very relevant considering the drastic policy changes that are taking place in the renewable energy sector, especially in Europe. Regulatory risk is related to the laws and regulations related to the financing of the sector and those related to the operations of these projects.

Technical and project risks are related to construction, environmental, management and technological risks. Finally, market risk is related to the exit of the renewable energy product or service and other price risks, which are related both to the prices of these products and to those of their underlying derivatives that are traded on the different exchanges ( Justice, 2009).

Conclution

Venture capital firms are increasingly specializing in financing renewable energy projects emerging around the world. These projects are mostly related to more mature energy projects such as wind and solar energy. These private investors finance only those projects that have a very high upside potential and a lower downside risk potential. Consequently, they are able to realize their very high profitability rates, which range between 25% and 35% of IRR. Furthermore, these global private equity investors and others also exit the project in approximately 3 to 5 years, thus effectively maximizing their returns.

The downside risks of these renewable energy projects continue to exist, although they are less than those of early stage financing or lifetime financing of these projects. These risks relate to financial and national risks, regulatory and policy risks, technical and project risks, as well as various market risks.

However, there are also other firms that invest in other renewable energy projects in addition to the more stable wind and solar energy projects. These include those renewable energy projects such as biomass, biofuels, geothermal energy, and renewable energy storage and efficiency projects.

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