Erb students build their understanding of project finance for renewable energy

Renewable energy developers commonly use project finance to find funding to build their portfolios, including solar farms, wind assets and energy storage. Project finance is a method of financing for capital-intensive infrastructure projects that depend on project cash flows to cover operating expenses and pay outstanding debt. 

A group of graduating Erb students recently completed a renewable energy project finance course through Pivotal180, thanks to Erb Institute educational funding.

Two key elements that differentiate project finance from traditional financing are the specific purpose vehicle (SPV) structure and non-recourse loans. In a project, the developer (often referred to as the sponsor) creates a project company in the form of an LLC or partnership, which owns the project. The developer has partial equity in the project company, which has 100 percent ownership of the project. The structure shields the developer from legal liabilities, and the non-recourse loans prevent investors from claiming against the developer in the event of default. The risk-proofing setup encourages developers to take on risks to build infrastructures, but the legal structure and the financial terms built on it make project finance complicated.

Why should business and sustainability professionals at the Erb Institute take the time to learn the fundamentals of project finance? For starters, because project finance is widely used in renewable energy projects, renewable energy development firms are constantly hiring project development managers and project finance associates, roles well-suited for graduating MBAs. Building energy project finance skills at a more advanced level than what is available in traditional MBA finance courses helps people interested in these roles stand out.

Also, investment tax credits have been a critical driving incentive for renewable energy developers for decades, and they are an important component in understanding and predicting industry trends. The Inflation Reduction Act (IRA), passed in August 2022, greatly expands the availability and longevity of these tax credits, so they will continue to be an important strategic component of renewable energy development for years to come. The IRA also created new mechanisms for project developers to monetize their tax credits, called tax equity financing. An understanding of project finance can be helpful in understanding and interpreting the IRA’s monumental implications, as well as the intricacies of tax equity finance.

The Pivotal180 Renewable Energy Project Finance course moved quickly from a simple project finance introduction into advanced energy project finance modeling. The course consisted of video lessons covering the fundamentals of key topics, followed by walk-throughs of certain sections of a project finance model. This structure provided a robust enough introduction to each section that the modeling exercises could be attempted independently, and the walk-throughs could be used to correct errors or learn where the attempt deviated from best practices. 

The course went beyond the expected topics—such as how to sculpt debt to maximize expected returns for equity investors—by including additional helpful lessons, such as how to incorporate probabilistic analysis of provided wind forecasts into a financial model, and an overview of items commonly covered in operations and maintenance contracts. The course even encouraged the use of a whole host of Excel shortcuts, so we have newfound wizardly modeling skills.

Corporate finance is built on the backbone of Excel, which is ubiquitous in the business community. Proficiency with Excel is a massive boon for candidates seeking full-time roles and internships, and it ultimately will help them “excel” on the job. Many of us will use the skills taught in the Pivotal180 Renewable Energy Project Finance course directly in our day-to-day work in the energy industry. 

Some of us graduating students secured offers while taking the course, and all of us see clear benefits to getting this head start on how to forecast returns to equity investors for various types of energy infrastructure.