Conference Agenda

Meeting rising global electricity demand requires financing large-scale investments in power generation. While they produce the same electricity output as fossil fuel plants, renewable energy plants are financed differently: they typically rely on "project finance" and long-term Power Purchase Agreements (PPAs) that lock in electricity prices. We develop a framework that links power generation technology and financial structure in the presence of financial frictions. We calibrate it to micro-data to show how project finance can help mobilize private funds through a capital structure channel. Due to near-zero marginal costs, PPAs significantly reduce cash-flow risk. This allows greater use of bank debt relative to equity financing, which lowers discount rates and increases investment. This financing channel is technology-specific: project finance is much less attractive for fossil fuel projects with volatile input prices. However, we also highlight a downside of PPAs: the amplification of macroeconomic shocks, leading to higher investment volatility over the business cycle. We use our framework to explain the slowdown of renewable investment following the 2021-2022 inflationary episode and show that state-dependent investment subsidies indexed to cost shocks can help stabilize private investment.