Rationale
Green energy financing can take many forms. Over the last years securitisation has become an interesting alternative to more traditional forms of financing such as bank loans and debt issuance. Securitisation transfers the risk to the investors and effectively removes part or all of the risk from the promoter and/or credit institution.
Examples of green energy securitisation:
Project financing: The securitisation vehicle issues securities (debt instruments or certificates) and uses the proceed of such issuance to invest into a specific development project with the objective of selling this project in a relatively near future (usually within 3 years). The securitisation vehicle will receive the proceeds of the sale of the project over the coming three years or upon completion and will pay an income to the security holders, either based on fixed interests or a variable interest or a combination of both.
Green energy financing: Existing green energy project/facility can be bought or refinanced using securitisation vehicles. This is usually done in order to replace bank financing, where existing credit lines are needed for new projects. The income generated from energy production generates the income stream for investors. Again the relatively stable coupon associated with this type of financing can be attractive to investors.
Private green energy: Private investors can transfer their investments by using a securitisation vehicle. The profit realised upon disposal of the project (wind farm, water generator and others) can be utilised to develop or buy another green energy project. By using the securitisation vehicle like a fund, they are able to share the risk and potential returns associated with the target project. This allows investors to reduce their risk on a single project and spread the risk between them.
The SPV can issue several types of securities to finance the securitisation transaction:
- Units : “shares” or the equity part of the project
- Notes, Bonds issued by the SPV which yield a fixed interest rate generated by the income derived from the production of the Green Energy for instance
- Certificate : asset backed securities which value and yield are variable and linked with the value of the Green Energy and the income it produces
- Token : security tokens issued on the blockchain (Distributed Ledger Technology)
Functioning
Green energy project may take the form of a “green energy securitisation vehicle” where the investors own part of one or several green energy portfolio through ownership of fund units or debt securities. Each project can be segregated.
Institutions usually issue debt instruments from their securitisation vehicle to attract investors and usually pay a fixed or variable coupon. The securitisation vehicle can either buy the asset or only securitise the risk associated with the development or energy production income in which case they will receive an income linked with the sale of the energy to the grid or a state owned company.
For information on securitisation in general, please request our brochure: Securitisation in Luxembourg
