Module 6: Financing and Economic Model

A PPA (Power Purchase Agreement) is a long-term contract whereby the cooperative sells its energy to a specific buyer — a company, a public institution, or an energy retailer — at an agreed price, providing revenue predictability for 10 to 20 years.

Net billing, regulated in Colombia by CREG Resolution 174 of 2021, allows surplus energy not consumed on site to be credited on the generator's bill at a regulated tariff, without requiring a complex bilateral contract — particularly useful for community collective self-consumption projects.

Carbon credits represent an additional revenue stream (not always the primary one) arising from certifying the CO2 emission reductions achieved by the project against a baseline scenario (typically fossil-fuel generation or the national electricity mix). These credits are sold on voluntary or compliance markets and require verification methodologies (for example, under the Verified Carbon Standard).

RECs (Renewable Energy Certificates) certify the environmental attribute of the energy generated, regardless of whether it is physically sold, and can be traded separately to companies seeking to meet corporate sustainability targets.

A well-designed cooperative does not rely on a single revenue source but combines several to reduce risk.

Beyond operating revenues, every energy cooperative depends on member capital contributions as an initial funding source, especially in the early project stages when access to bank credit is limited or expensive. These contributions can be structured as membership dues, participation certificates proportional to the project investment, or internal member loans to the cooperative at an agreed rate of return.

The design of this contribution structure must balance two objectives that sometimes compete: making participation accessible for low-income members, and raising enough equity to make the project attractive to other external funding sources.

It is important for the board to understand that member capital does not only finance the project: it also demonstrates 'skin in the game' to financial institutions and donors, who see community contributions as a signal of commitment and social viability. A project that seeks external financing without any community equity contribution typically raises doubts about its sustainability and local ownership.

Colombia has several public financing instruments relevant to community energy projects:

• FENOGE (Fund for Non-Conventional Energy Sources and Efficient Energy Management), administered under Ley 1715 of 2014, finances non-conventional renewable energy and energy efficiency projects, including specific lines for off-grid areas (ZNI) and vulnerable communities.
• FAER (Financial Support Fund for Electrification of Interconnected Rural Areas) supports the expansion of electricity coverage in rural areas, which can complement community projects in zones where the grid does not yet fully reach.
• SGR (General Royalties System) allows community energy projects to compete for royalty resources through the departmental or municipal Collegiate Decision-Making Bodies (OCAD), particularly relevant in regions that produce natural resources.

In the private financial sector, Bancoldex offers green credit lines with preferential rates and terms tailored for renewable energy projects. Internationally, the GCF (Green Climate Fund) finances larger-scale programs, generally through accredited entities (not directly to individual cooperatives), meaning that a cooperative's access to these resources normally requires partnering with an accredited intermediary organization.

Knowing these sources and their access rules — eligibility requirements, required technical documentation, call-for-proposal timelines — is essential for cooperative leaders to plan a realistic funding strategy and avoid wasting time applying to funds they do not qualify for.

Blended finance involves mixing different types of capital — grants, concessional capital (with terms more favorable than the market), commercial debt, and own contributions — within a single project's financial structure, so that each type of capital fulfills the role for which it is best suited.

Typically, grant or concessional capital is used to cover early-stage development costs (technical studies, permits, design), which carry high risk and are difficult to finance with commercial debt; once the project is 'ready to build,' commercial debt or development bank lending is introduced to fund construction, backed by the future revenue from the PPA or net billing.

This approach reduces the project's total risk because each financial actor assumes the portion of risk it can best manage: the grant-maker assumes the risk that the project may not materialize, while the bank only enters once that risk has been significantly reduced.

For a Colombian cooperative, this means it should not look for a single large funder to cover 100% of the project; instead, it should design a phased structure: seed capital (own contributions + grant or subsidy) for studies and permits, and then credit or external investment for construction once the project has demonstrated feasibility.

In the Netherlands, the Energie Samen federation developed the Realisatiefonds (Realization Fund), a financial instrument that provides loans to local energy cooperatives specifically during the construction phase of projects, when permits and a signed PPA are already in hand, but before the project generates cash flow.

Complementarily, the Ontwikkelfonds (Development Fund) finances the preceding phase: feasibility studies, technical design, and permitting, which are expenses that no small cooperative could cover solely with member contributions.

This two-fund structure — one for early-stage development, another for construction — recognizes that the risk profile of a community energy project changes dramatically between its phases, and that a single financial instrument rarely serves the project's entire lifecycle.

Every community energy project needs a financial model that projects revenues and costs over its useful life (typically 10 to 25 years) to evaluate its viability. The key indicators are:

• NPV (Net Present Value) — discounts future cash flows to present value using a discount rate and determines whether the project creates value (positive NPV) or destroys it (negative NPV).
• IRR (Internal Rate of Return) — indicates the project's percentage return and is compared against the cost of capital to decide whether the investment is worthwhile.
• Payback period — measures how many years it takes to recover the initial investment from the cash flows generated.
• DSCR (Debt Service Coverage Ratio) — measures how many times the operating cash flow covers debt obligations (principal + interest) in a given period. It is a critical indicator that banks review before granting credit: a DSCR below 1.2 is generally considered risky.

Understanding these four indicators enables a cooperative leader to avoid depending entirely on an external advisor to understand whether their project is financially viable, and gives them tools to negotiate on equal footing with banks, investors, or donor entities.