Financing challenges for agrivoltaic projects

Agrivoltaic projects, which combine solar energy production with agricultural activities, face multiple financial hurdles. These include rising interest rates, uncertainty about electricity revenue, and the need to meet agricultural sustainability standards. These factors make it harder to secure funding from banks and investors.

Banks demand clear project guarantees

Laetitia Limongi, a Structured Financing Manager at Banque populaire du sud, emphasized that banks require agrivoltaic projects to demonstrate both electricity production and sustainable agriculture. This dual requirement makes these projects more complex compared to traditional solar or agricultural ventures.

Rising interest rates increase debt costs

Higher interest rates have increased the cost of borrowing for agrivoltaic projects. Investors are now comparing renewable energy projects with other investments, such as bonds, which may offer better returns with lower risk. This competition raises the bar for profitability and financial stability.

Uncertain electricity revenue adds risk

Jochen Hauff, founder of Think Resiliency, highlighted that unpredictable electricity revenues pose a significant challenge. Factors like production curtailment, negative pricing, grid connection issues, and regulatory changes make it harder to forecast cash flows. This uncertainty affects both the financial viability and the ability to secure loans.

Agricultural costs are also rising

On the agricultural side, rising costs for diesel, fertilizers, and labor are squeezing profit margins. Farmers also need to invest in new equipment, further straining their finances. These pressures make it harder to maintain both agricultural and energy production simultaneously.

Banks assess four key project criteria

When evaluating agrivoltaic projects, banks focus on four main factors: the predictability of revenues, how contractual responsibilities are distributed, the sustainability of agricultural activities, and the project’s resilience in tough scenarios. A drop in income or a rise in costs must not jeopardize debt repayment.

Contract duration affects financing confidence

The length of electricity purchase agreements (PPAs) influences how confident banks are about a project’s future. A 10- to 15-year PPA offers less certainty than a 23-year agreement with a secured support rate. Longer-term contracts help lenders feel more secure and reduce the need for additional guarantees.

Current financing model relies on electricity and debt

Jochen Hauff explained that most agrivoltaic projects today depend on a mix of electricity revenues and commercial debt. A typical model might get 80% of its income from tariffs or support mechanisms, with 20% from market sales. On the financing side, 70% is usually bank debt and 30% equity.

Diversifying revenue sources is key

To reduce risk and attract new investors, agrivoltaic projects need to diversify their income. One proposed model includes 50% of revenue from support mechanisms, 30% from electricity market sales, and 20% from agricultural and environmental services. This approach could also shift the financing mix to include more private debt and equity.

Environmental services could offer new income streams

Farmers might earn additional income by valuing environmental services like soil carbon sequestration. Practices such as intercropping or planting hedges can contribute to carbon storage. Verified results could lead to carbon credits or certifications, such as France’s Low-Carbon Label.

Other ecosystem services may also be monetized

Beyond carbon sequestration, other ecological benefits like biodiversity preservation, improved water quality, and wetland restoration could be monetized. Public programs or ecological compensation mechanisms may offer outlets for these services.

New investors may support natural asset valuation

Specialized funds and impact investors are willing to pay for the valuation of natural assets. These investors can support traditional bank financing without compromising on profitability and risk management, according to Jochen Hauff.

Private debt offers another financing option

Private debt can complement bank loans and equity. However, the key issue remains who will pay for the services, for how long, and with what guarantees. An innovative model is not enough if the buyers are unclear or the revenue assumptions are hard to verify.

Credible cash flows are essential for financing

Laetitia Limongi noted that as more agrivoltaic projects are developed and performance data improves, banks will be able to refine their risk models. This could lead to more favorable financing conditions and help reassure industry participants.