Global energy transition initiatives are bound to be a major social, cultural, economic and political shift. Companies worldwide are under increasing scrutiny to lower their impact on the environment, whether by decarbonizing their operations, reducing reliance on fossil fuels, or aligning with sustainability goals. However, energy finance barriers continue to remain a major hurdle for businesses looking to invest in renewable energy projects.
Global investment in the energy transition has seen a significant increase since the Paris Agreement in 2015. Despite this increase, current investment levels are insufficient to meet the global climate targets outlined by the International Energy Agency (IEA). To align the energy sector with net-zero emissions by 2050, annual investment needs to increase to approximately €4.05 trillion per year, indicating a substantial gap between current and required funding. Energy finance solutions are important in bridging this gap and ensuring the necessary funds can be made available for the transition.
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Energy producing, energy infrastructure, energy efficiency and energy consuming assets require substantial upfront investments, typically recouped over 10 to 20 years. Businesses - whether industrial manufacturers, logistics providers, or commercial real estate firms - often struggle to finance renewable energy assets while maintaining cash flow and operational flexibility.
In this blog we will dive deeper into the most common energy finance barriers and how to overcome them with the right partner and flexible options.
What is energy finance?
Energy finance refers to the financing for purchase, development, deployment or maintenance of equipment, infrastructure or projects across the entire energy value chain. This field encompasses a variety of energy finance tools and structures aimed at overcoming the high upfront costs associated with renewable energy investments and ensuring long-term financial stability. It may include everything from innovative financial solutions to energy project investments and addressing energy financing barriers.
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Key energy finance barriers for businesses investing in renewable energy
High upfront costs
Requirements for significant upfront costs associated with renewable energy projects can discourage private investors, especially smaller players, and governments from engaging in large-scale initiatives. For instance, the expense of installing solar panels or wind turbines or an energy storage system can appear to be excessively higher, posing a challenge for smaller companies or emerging markets to afford these technologies. Energy finance is crucial in addressing these financial barriers and enabling broader participation in renewable energy projects.
“The energy transition is not just a technological challenge; it is a financial one too. We must mobilize and channel investments and forge partnerships across regions and sectors,” Anna Borg, Chief Executive Officer, Vattenfall.
While large corporations may have the financial reserves to make these investments, small and mid-sized enterprises (SMEs) often face difficulties securing affordable financing. Even for well-funded companies, committing large sums to energy transition projects may end up diverting resources away from core business operations with such large investments. Effective energy finance strategies can help mitigate these challenges and support the energy transition.
Long payback periods and uncertain ROI
Payback periods for renewable energy projects can vary significantly depending on the type of technology, scale of the project, and location. For example:
- Utility-scale solar PV systems: Energy payback times range between 0.5 and 1.2 years; carbon payback times vary from 0.8 to 20 years.
- Rooftop PV systems: Energy payback estimates for solar PV systems vary, with current technologies generally taking a few years and anticipated advancements potentially reducing this to just one year.
- Battery energy storage systems (BESS) installed for medium voltage (MV) customers: Payback times range from 8.4 years (ideal case) to 27.3 years (conservative case).
- LED retrofit tubes: Payback periods can be as short as four months. For general lighting LED lamps, the payback can be instantaneous or just a matter of weeks when compared with tungsten-filament light sources and compact fluorescent lamps (CFLs).
These payback periods highlight the importance of energy finance in making renewable energy projects feasible through long-term pricing changes, regulations, and future demands. Proper budgeting and access to reliable energy financing solutions is important for overcoming the high upfront costs and ensuring the successful launch and operation of renewable energy projects in the longer run.
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Complexity in financial structuring
Unlike traditional business investments, renewable energy financing often requires a mix of funding sources, such as loans, leases, and power purchase agreements (PPAs). Businesses may lack the internal expertise to structure these deals effectively, leading to delays or missed opportunities. Moreover, cross-broader deals often become complicated from legal aspects arising out of regional regulations. While each region faces its own challenges in terms of market dynamics, there are common solutions around how to accelerate energy finance and implement transition projects.
Balance sheet and liquidity constraints
For businesses, capital expenditure on renewable energy projects can impact financial flexibility. If a company buys solar panels or wind turbines outright, these assets appear on the balance sheet affecting debt ratios and potentially limiting access to securing financing for any other areas. Therefore, businesses with high capital expenditures may struggle to obtain additional credit for growth initiatives.
Energy financing solutions to overcome barriers
Operating lease with no ownership obligation
One of the most effective ways businesses can finance renewable energy projects without large upfront costs is through operational leasing. This form of energy finance, with no ownership obligations, can allow businesses to manage cashflow while developing and deploying energy transition projects. While the financial provider retains ownership of the assets, the business makes regular, fixed term payments as part of the leasing contract, thereby avoiding large upfront payments and inviting balance sheet constraints. At the end of the lease term, the business may choose to extend the lease, upgrade the equipment, return it or opt for ownership.
For example, a logistics company looking to install solar panels on its warehouse rooftops could opt for an Operational Lease. Instead of purchasing the panels outright, the company enters into a lease agreement with a financial institution to preserve its cash reserves for other business-critical activities while maintaining predictability of payments for a fixed term. With this type of energy finance solution, it benefits from lower electricity costs without the burden of owning or maintaining the solar equipment.
Power Purchase Agreements (PPAs) for Business Energy Users
In addition to leasing, businesses can enter into Power Purchase Agreements (PPAs), where they commit to buying electricity from a renewable energy provider at a fixed rate over a long-term contract. PPAs can provide businesses with price stability and hedge against energy market fluctuations.
Blended finance for renewable energy projects
For large-scale energy projects, blended finance — where public and private funds are combined — can reduce financing costs and de-risk investments. Financial institutions work with development banks and investors to structure financing solutions that enable businesses to adopt renewable energy with reduced risk exposure.
How asset financers can enable energy finance
Asset financers play a crucial role in bridging the energy finance gap for businesses investing in renewable energy. By offering flexible leasing solutions, these institutions can enable companies to transition to renewable energy without compromising their financial stability.
However, certain energy transition projects require specialized expertise, backed by experience, stability, and a global presence.
Enter DLL!
With over 50 years of experience in asset-based financing and a presence in 25 countries, DLL can help you design, and access energy finance solutions tailored to your business needs. Whether it's cross-border financing of projects or leveraging industry experts' insights to guide your energy finance strategies, DLL is your trusted financial partner in the renewable energy journey.
Expert Perspective from DLL
“The energy transition presents financial challenges, particularly due to the high upfront costs and long payback periods associated with renewable energy projects. We understand these barriers and can offer flexible financing solutions, to help businesses manage cash flow and maintain operational flexibility. By providing tailored financial structures, we enable companies to invest in energy assets without compromising their financial stability.” - Heddi Khatib, New Business Development manager, Energy Transition
Conclusion
By leveraging innovative energy finance mechanisms, businesses can transition to renewable energy sustainably reducing costs, improving operational flexibility, and aligning with long-term business goals. DLL Energy Transition can facilitate this shift by providing tailored solutions that remove financial barriers and accelerate the adoption of renewable energy technologies.