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Module 1: Financing Energy Projects

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Financing Energy Projects - Lesson Summary

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The key points for this module are: This definition is from Kolstad, an externality exists when the consumption or production choices of one person or firm enter the utility of another entity without that entity’s permission or compensation. In most of the cases when we are talking about environmental economics, we are usually dealing with negative externalities. In many cases, when we talk about externality, when we look at our marginal costs, we have a private marginal cost, which is not looking at the impact that it is having or the adverse impact it is having on society. The Coase theorem says in the absence of transaction costs, the allocation of resources is independent of the initial assignment of property rights, which means that if there are no transaction costs involved, then it is immaterial who has the rights, whether the polluter or the victim has the rights and the result, we would get the same economic solution.The proper assignment of property rights, even if externalities are present will allow bargaining between parties such that an efficient solution will result regardless of who holds the right and this assumes costless transactions and it assumes that damages are accessible and measurable. A project is a well-defined entity then you can look at the investment and there will be a profile of risks and returns that means there are some uncertainties or risks involved, especially if we are talking about new technologies. Then based on the risks, based on making the investment, you will get returns based on the benefits that you get from the project. The actual environmental impacts or the perceived environmental impact may result in the project actually getting installed, it may go to the courts and the courts may go against it. So, there could be various issues and that is another risk, which was the company or the project developer has to take. In general, we can decide whether to choose between debt or equity and then we can see a way in which we can calculate and find out which ratio of debt-equity is good for us for a particular project. There could be financial risks and the risks could be in terms of some of the companies which are financing having problems, some of the companies which were participating in the project having a lot of outstanding funds. And there will be risks in terms of payments, especially this is true for many of the distribution companies which have large accumulated losses. If it is not possible to actually add that much-generating capacity, then it is quite possible for the company to actually buy from other companies which have supplied that much and buy the renewable energy certificate, and that renewable energy certificate will enable it to meet its RPO requirement, Renewable Purchase Obligation requirement.