An Insider’s Take on Renewable Energy Financing
By Brett Schultz ’26 Associate
Introduction:
In the first half 2023, total investment in the renewable energy industry rose to $358 B, the highest ever in a six month period. Recent legislation and initiatives have created billions of dollars in government incentives for renewable energy projects, which has led to sharp increases in the industry’s deal count. With an array of mechanisms being used to fund new projects and further research and development, investors now have one question in mind: What is the best way to finance a renewable energy project?
Option One: Equity
Similar to other industries, one mechanism that investors use to finance renewable energy projects is through equity. Investors are able to purchase ownership in the company, where they expect a 10x return on their investment once the company exits, most often through a merger and acquisition. In 2023, there were over 2,000 equity-based deals in the renewable energy industry, but this investment strategy has drawbacks for both the entrepreneur and the investor. For the entrepreneur, this investment mechanism forces them to give away a share of their company, and the investor only receives a return on their investment if the company exits. In 2023, there were only 600 exits in the renewable energy industry, showing how difficult it is for investors to profit with this method.
Option Two: Power Purchasing Agreements
In recent years, Power Purchasing Agreements (PPAs) have become increasingly common in the renewable energy industry. Through this mechanism, investors are compensated based upon the project’s electrical generation in a contractual agreement. Deal terms are created on a project-by-project basis, and are typically 10- to 20- years in length. In some cases, projects can be funded through a singular PPA, with the financier having rights to the project’s entire output.
As consumers continue to place pressure on large organizations to improve their sustainability efforts, companies such as Amazon have funded over 100 renewable energy projects in 2023 alone, mainly through this strategy. Countries with ample access to renewable energy resources, such as Iceland, have been able to leverage this mechanism to attract foreign investment and grow their economy through creating long-term, low-cost PPAs.
One company that has been able to leverage this investment mechanism extremely well has been ENGIE, a multinational utility company. Last January, the company was able to source a corporate power purchasing agreement with Amazon that will fund an 882 MW offshore wind farm in Scotland. This strategy has sharply increased the company’s notability while simultaneously allowing them to expand their reach in the European market.
Similar to the equity-based approach, this investment mechanism has drawbacks for both the project developer and financier. The project developer gains a relatively smaller share of the project’s revenue, while the financier has to contribute more capital up front.
Option Three: Green Bonds
Another investment mechanism that has increased in popularity over the last decade has been green bonds. Similar to traditional bonds, green bonds are a debt instrument used by project developers designed to fund environmental-related projects. Their structures are very similar, but in some cases can have a variety of tax incentives designed to encourage investment.
This investment mechanism also has downsides for both the project developer and the investor. If the project developers have to default on their bonds, their business becomes insolvent, and the investor is only compensated for the coupons issued before the default. Despite these risks, roughly $270 M of green bonds were issued in 2020, proving their feasibility and viability.
Summary:
In all, these three renewable energy investment mechanisms all have their pros and cons, and there clearly is no one size fits all solution in this space. The choice to pursue a debt- or equity-based approach depends on a variety of factors such as the company’s financial health, capital needed, or founders’ preferences. As the US government continues to pass tax credits and other legislation designed to grow this industry, time will only tell which investment mechanism creates the most benefits for both the entrepreneur and investor.
Brett Schultz is a sophomore who is pursuing a degree in Business Administration with options in Finance and Entrepreneurial Studies, while completing a second major in Sustainability. This last summer, he finished an internship with UNH’s Sustainability Institute where he helped regional businesses create ESG Framework and conduct environmental supply chain analysis. Brett is also the sole founder of College Connector, an early-stage startup that is designed to revolutionize traditional social media and e-commerce platforms while simultaneously optimizing the college experience for students across the country. During his freshman year, Brett was able to fund most startup costs through competing and winning prizes in the Maurice Prize Competition, UNH Wildcat Tank Competition, and Holloway Competition. Brett also serves as a student lead for the UNH Wind Energy Team, where he is working alongside a team of engineering students build a fixed-bottom offshore wind turbine, create a site plan, and conduct community outreach for a competition sponsored by the U.S. Department of Energy. Brett hopes to leverage these experiences to provide unique insights to the fund, while simultaneously learning more about the realm of private investing. Outside of academics, professional work, and competitions, Brett is actively involved on campus as a Shaw Explorer, Changemaker Coach, Mentor for the Idea & Innovation Society, President of Founders Club, Paul Scholar, and member of the University’s Honors Program.
