Financing Energy Projects

This free online course in basic project finance introduces you to the concepts of risk, return and debt-equity in the context of energy projects. Energy projects are capital-intensive and require a high level of investment. Like any such undertaking, such projects also face uncertainty in dynamic political, economic, ecological, technological, socio-cultural or legal environments. It is thus imperative to understand how to assess risks and calculate the return on investment. This course explains positive and negative externalities associated with the production or consumption of any product or service. Externalities arise when an economic actor does not receive or ‘face’ the ‘correct’ price (or the marginal social cost) for a specific action. This is caused by factors beyond the control of any actor. Ronald Coase challenged the prevailing economic reasoning on externality in his 1960 paper ‘The Problem of Social Cost’ and we unpack his theorem that addresses social cost and externality. We also analyze the calculations behind private marginal cost and marginal external cost and probe the ethical issues surrounding property rights. 

The course breaks down the challenge of seeking investment and financing a large energy project. Basic project finance entails calculation of return on investment and assessing various risks and you have to know how to evaluate the trade-offs between risk and return. There might be a credit risk when you have no guarantee whether the individual or company will return your money once they receive revenue. There could be commercial risk where a technology might become obsolete. This course illustrates these risks with relevant examples and cases. We then move on to the environmental problems faced by certain projects, operational maintenance requirements and some available financing instruments. We examine different kinds of financing offered for green energy. This means exploring the kind of investments required to reduce CO2 emissions and mitigate climate change as we investigate the sources and nature of available funding. 

When financing a project or a business, the measurable expense of obtaining capital is called 'cost'. The interest that the business pays on the debt is the cost of debt. When the cost of capital refers to the claim on earnings offered to the shareholders on the basis of their ownership stake in the business, it is known as ‘equity’. Debt financing is usually obtained at a lower effective cost if the project is implemented successfully. We explain how much debt and equity should be taken on and demonstrate how to configure it in your calculations. We provide a step-by-step explanation of the calculation for loan repayments and the duration of the loan, its tenure and the capital recovery factor. We conclude with the detailed calculations of energy project financing, the overnight cost and the internal rate of return. Financial literacy is useful for all mid to senior level professionals who are expected to make key decisions. Understanding the key concepts of project finance may open up new career paths for those with technical knowledge. This course suits anyone looking to expand their project management portfolio and has an interest in green energy and its crucial role in protecting the planet.