Bankability: what it is and why it is a key factor in the financing of energy projects
Bankability refers to a project’s ability to secure financing from banks, financial institutions or institutional investors. In the energy sector, this concept is one of the key indicators used to assess whether a renewable energy facility offers sufficient technical, economic, legal and commercial guarantees to be financed on competitive terms.
Although the term ‘bankability’ does not have a universally accepted legal definition, in practice it refers to the level of confidence a project inspires in the institutions that will provide the capital required for its development. The greater a project’s bankability, the lower the perceived risk and, consequently, the easier it will be to secure funding and obtain more favourable financial terms.
At present, bankability is one of the cornerstones underpinning the development of the international renewable energy market. The construction of a solar power plant, a wind farm, a BESS system or a renewable hydrogen facility requires very substantial investment which, in most cases, cannot be covered solely by the developer’s own funds. The involvement of financial institutions makes it essential to demonstrate that the project will be able to generate sufficient revenue to repay the debt and provide an adequate return throughout its operational life.
For this reason, bankability does not depend solely on the technical quality of a facility. A project may be perfectly designed from an engineering perspective and yet have low bankability if there are regulatory uncertainties, difficulties in selling the energy, technological risks or an unbalanced financial structure. Within the energy sector, bankability is analysed from a holistic perspective. Lenders simultaneously assess the technology used, the contractors’ experience, the developer’s creditworthiness, the stability of projected revenues, the quality of contracts, the applicable regulatory framework, the risk analysis and the project’s economic viability before deciding whether to provide funding.
The importance of bankability in renewable energy
Over the last decade, the growth of renewable energy has profoundly transformed the way in which energy investments are structured. The development of large-scale solar, wind and energy storage facilities has given rise to projects whose budgets can easily exceed several hundred million euros. In this context, bankability has become an essential requirement for any investment to go ahead.
High bankability helps to reduce the cost of capital, improve financing terms and increase the project’s appeal to commercial banks, infrastructure funds, insurers, export credit agencies and other specialist investors. Conversely, low bankability increases the perceived risk, limits access to credit and may even prevent a facility from ever being built. The growing professionalisation of the market has meant that bankability is now taken into account from the earliest stages of development. Currently, developers design their projects with the criteria in mind that financial institutions will subsequently apply during the process of due diligence. De esta forma, aspectos como la selección de proveedores, la elección de la tecnología, la firma de contratos EPC, los acuerdos de operación y mantenimiento o la negociación de un PPA se orientan también a mejorar la bancabilidad del proyecto.
Bankability also plays a key role in the sale and purchase of renewable energy assets. Investment funds and strategic buyers analyse this factor before acquiring a plant under development or an operational facility, as greater bankability usually translates into lower future risks and a higher economic valuation.
What factors determine a project’s bankability?
Bankability does not depend on a single factor, but rather on the balance between numerous technical, financial, legal and commercial factors which, taken together, determine a project’s risk profile. Each financial institution applies its own assessment criteria, although there is broad consensus on the factors that determine a project’s ability to secure funding.
The main factors influencing bankability are as follows:
• Technological maturity
Financial institutions prioritise projects that incorporate widely proven technologies with a proven track record. The use of photovoltaic modules, wind turbines, inverters, BESS systems or electrical equipment supplied by internationally recognised manufacturers reduces technical uncertainty and instils greater confidence in banks and investors.
Conversely, the use of emerging technologies or those with little commercial track record tends to increase the perception of risk and make it more difficult to secure funding.
• Quality of the contractual framework
The robustness of contracts is one of the cornerstones of bankability. A properly structured project minimises risks during the construction and operational phases through clearly defined agreements between all parties involved. The most important contracts include:
- EPC Contract (Engineering, Procurement and Construction).
- Operation and Maintenance (O&M) Contract.
- Manufacturers’ technical and performance guarantees.
- Power Purchase Agreement (PPA).
- Connection and network access contracts.
- Insurance cover and financial guarantees.
A robust contractual framework provides stability for revenue streams and significantly reduces the risk perceived by lenders.
• Regulatory framework
Regulatory stability is another key factor in assessing the bankability of an energy project. Investors particularly value markets that offer:
- Legal certainty.
- Stable and predictable energy regulation.
- Clear administrative procedures.
- Ease of obtaining permits and licences.
- Transparent pay scales.
- Low political risk.
Conversely, frequent regulatory changes or legislative uncertainty can jeopardise the financial viability of an investment and restrict access to credit.
• Financial soundness of the project
From an economic perspective, financial institutions carry out a detailed analysis of the project’s ability to generate sufficient revenue throughout its lifetime. The main financial indicators assessed include:
- DSCR (Debt Service Coverage Ratio), which measures the ability to service debt.
- IRR (Internal Rate of Return), used to assess the profitability of an investment.
- NPV (Net Present Value), which determines the economic value generated by the project.
- LLCR (Loan Life Coverage Ratio), used to analyse debt coverage over the repayment period.
- Capital structure and level of leverage.
- Revenue and operating cost forecasts.
- Sensitivity of the financial model to different market scenarios.
The greater the project’s ability to maintain positive results even under conservative scenarios, the higher its level of bankability will be.
• Experience of the developer and the contractors
The developer’s track record also has a significant influence on the assessment carried out by banks and investors. A developer with a proven track record inspires greater confidence because they demonstrate the ability to:
- To carry out projects with similar characteristics.
- Manage technical and financial risks.
- Meet construction deadlines.
- Operate the facility efficiently.
- To ensure maintenance throughout the asset’s useful life.
Similarly, the involvement of contractors, manufacturers and operation and maintenance companies with a solid track record boosts the confidence of financial institutions and improves the project’s overall bankability.
• Quality of technical studies
The funding decision also depends on the reliability of the technical information used during the project’s development. Funders routinely review documents such as:
- Studies on solar or wind energy.
- Engineering design.
- Geotechnical surveys.
- Environmental studies.
- Studies on evacuation and grid connection.
- Energy production estimates (P50, P90 and P99).
- Reports on Due Diligence independent.
The more rigorous and comprehensive these studies are, the lower the technical uncertainty will be and the greater the confidence in the project’s ability to deliver the expected results.
The bankability analysis process
The assessment of a project’s bankability begins long before a formal application for funding is made. As the project progresses from its initial phase to the final investment decision, numerous analyses are carried out to identify risks and demonstrate the feasibility of the facility.
Firstly, technical feasibility is assessed through resource studies, engineering design, energy production estimates and the selection of the most suitable technology. Subsequently, the legal and regulatory aspects are analysed, verifying that the project has the necessary permits, land rights, grid access and compliance with all applicable regulations. Once this phase is complete, the economic analysis takes centre stage. Financial models are used to estimate projected cash flows over the asset’s entire lifespan, calculate the expected return on investment and verify the project’s ability to service its debt even under adverse scenarios.
This entire process normally culminates in technical, financial, legal, tax and environmental due diligence carried out by independent consultants engaged by the financing institutions. The outcome of these reviews is one of the key factors used to determine the project’s bankability and to establish the final terms of financing.
