How are big energy projects actually financed?

Stack the money for a wind farm and a battery, size the loan as a lender does, and see why contracts let a project borrow more

X5 of Energy Systems, Step by Step: build the capital stack of a fictional wind and battery project (senior debt, tax equity, the sponsor’s equity and a grant), size its loan from a coverage ratio, and see why lenders value contracts.

Analyst · L2
12 min
After A1 and A2
Completed

One wind and storage project, one typical year, 2025 dollars (illustrative)

150 MW of wind and a 50 MW, 4-hour battery cost $325.4M to build. A typical year's cash:

Wind sales	444,132 MWh × $50/MWh	$22.2M
Battery earnings after charging	73,000 MWh discharged × $42.53/MWh margin	$3.1M
Remaining operating costs	fixed upkeep of the wind farm and the battery	− $7.9M
Cash available for debt service	what is left to pay the loan	$17.4M

The four layers of the capital stack, in the order they are paid

Senior debt
- Who: Banks and other lenders.
- Gets: Fixed loan payments: interest, plus repayment of the amount borrowed (the principal).
- Paid: First, right after operating costs; the project's assets pledged as security (collateral) and rules the borrower must follow (covenants) protect it, so it asks the lowest return.
Tax equity
- Who: Large firms with tax bills to cut, such as banks and insurers.
- Gets: Most of the tax credits (cuts to its own tax bill) and the tax deductions for the equipment's wear (depreciation), plus some cash.
- Paid: After the loan and ahead of the sponsor, on terms set in advance; it carries less risk than sponsor equity.
Sponsor equity
- Who: The developer or owner: its own money.
- Gets: What is left after everyone else; often the highest return asked.
- Paid: Last: the first to lose when cash falls short.
Grant
- Who: A public program, for example DOE's program for communities of 10,000 people or fewer.
- Gets: Nothing back in cash; the project meets the program's conditions.
- Paid: Never: it lowers what everyone else must put in.

This example assumes project-level debt, paid before either equity investor: operating costs first, then the loan, then tax equity, then the sponsor. Other deal structures order the cash differently.

Sold under contract	Largest loan	Share of the cost	Sponsor's share with no tax equity or grant	Bad-year coverage
100%	$125.7M	39%	61%	1.13
50%	$103.7M	32%	68%	0.96
0%	$81.7M	25%	75%	0.68

The lender asks 1.30 times the payment from contracted cash and 2.00 from market cash; loan at 6.5% over 15 years, no inflation. Bad year: 10% less wind and market prices 40% lower. Illustrative settings.

With JavaScript on, you build the stack step by step: tap its layers, size the loan, sell less under contract, add tax equity and a grant, and see who loses first in a bad year.

Illustrative. Prairie Town's wind farm (fictional) with lesson A2's battery; the lender's settings sit inside the dated ranges of NREL's 2025 ATB. One typical year in 2025 dollars stands for every year.
Anchored. Building costs, upkeep and output come from lessons 7 and 13 (EIA and NREL data); the contract price from lesson A1.

Need a refresher? A1 on cash flows and the cost of capital; A2 on contracts and who carries each risk.

What you just did, as diagrams

A capital stack: A big project's money comes in layers: senior debt, tax equity, the sponsor's own equity and sometimes a grant.
Order of payment: With project-level debt, as here, cash pays operating costs, then the loan, then tax equity, then the sponsor; the sponsor is paid last and loses first.
Coverage: A lender sizes the loan so the cash available for debt service covers each payment by a margin, the debt-service coverage ratio.
Why contracts matter: With the same expected revenue, this project supports $125.7M of debt fully contracted and $81.7M fully merchant.
Illustrative: One typical year in 2025 dollars with no inflation, settings inside the dated ranges of NREL's 2025 ATB; no taxes, flips or reserves.

Where we stop

This side topic stops at the capital stack

Finance enters the course as who puts in money, who is paid first and why lenders value contracts; structuring deals is a profession of its own.

This side topic covers

The four layers of a capital stack and the order in which they are paid.
How a lender sizes a loan from cash flow and a coverage ratio.
Why contracted revenue supports more debt than revenue sold at market prices.

Left to specialists

Structuring a deal: partnership flips, back-leverage, reserve accounts, term sheets.
Tax law, eligibility for credits and accounting standards.
Investment advice: this lesson rates no project and no investor.

Check yourself

Two quick checks.

Myth or fact? “Debt is the most expensive money in a project's capital stack.”

Myth
Fact

Answer

Myth. Debt is paid first and protected by the project's assets pledged as security, so it asks the lowest return: the 2025 ATB assumes 6.5% for term debt and more for equity.

A project's cash available for debt service is $17.4M a year and its loan payment is $13.4M. What is its debt-service coverage ratio?

About 0.77
About 1.30
About 2.30

Answer

$17.4M ÷ $13.4M = 1.30: the cash covers the payment 1.30 times. The ratio is cash over payment, not payment over cash (0.77).

Numbers, sources and what’s next

Numbers to remember

Number	What it means	Source
1.275 to 2.0	Minimum debt-service coverage ratios the 2025 ATB assumes: 1.275 utility solar, 1.375 land-based wind, 1.45 gas, 2.0 utility batteries.	NLR, 2025 Electricity Annual Technology Baseline, Financial Cases and Methods · 2025 edition (tax law as of 10 July 2025), read 7 November 2026
30–50%	Share of a wind project's capital that tax equity typically provided where federal tax credits applied (2017).	Schwabe, Feldman, Fields and Settle, Wind Energy Finance in the United States: Current Practice and Opportunities, NREL/TP-6A20-68227, p. 13 · August 2017, read 7 November 2026
48% · 29% · 9%	Of the new U.S. wind capacity of 2023: at least 48% sold to direct retail buyers (corporations among them), 29% bought or owned by utilities, at least 9% merchant or quasi-merchant.	Wiser, Millstein et al., Land-Based Wind Market Report: 2024 Edition, Executive Summary, Lawrence Berkeley National Laboratory, p. 3 · August 2024, read 7 November 2026
$13 to $60/MWh	Estimated regional wholesale market value of wind output in 2023, from SPP to CAISO, in 2023 dollars; one project's receipts depend on its contracts and market arrangements. About $14 to $63/MWh in 2025 dollars.	Wiser, Millstein et al., Land-Based Wind Market Report: 2024 Edition, Executive Summary, Lawrence Berkeley National Laboratory, p. 6 · August 2024, read 7 November 2026

Keep going

Back to the course map

Sources and further reading

Finance:

NLR, 2025 Electricity Annual Technology Baseline, Financial Cases and Methods. Link. 2025 edition (tax law as of 10 July 2025), read 7 November 2026.
- Nominal term-debt interest rate of 6.5% for land-based wind, utility PV and utility batteries; 18-year amortization.
- Minimum DSCR: 1.375 wind, 1.275 PV, 2.0 batteries, 1.45 natural gas; leverage set by the minimum DSCR.
- The tax-equity partnership flip in its financial cases.
Schwabe, Feldman, Fields and Settle, Wind Energy Finance in the United States: Current Practice and Opportunities, NREL/TP-6A20-68227. Link. August 2017, read 7 November 2026.
- Sources of capital (pp. v, 11); tax equity typically 30%-50% of the total (p. 13).
- Sponsor equity paid last (p. 14); debt senior and lower risk (pp. 15-16); project-level debt and back-leverage (pp. 15-18).
- The DSCR box (p. 18); risk and return of each source (p. 20, Figure 3 p. 21).
Wiser, Millstein et al., Land-Based Wind Market Report: 2024 Edition, Executive Summary, Lawrence Berkeley National Laboratory. Link. August 2024, read 7 November 2026.
- Who bought 2023's new wind capacity (p. 3).
- Wind's estimated grid-system market value in 2023 by region, in 2023 dollars (p. 6).
U.S. Department of Energy, Office of Clean Energy Demonstrations, Energy Improvements in Rural or Remote Areas (ERA). Link. Page undated, read 7 November 2026.
- For communities with 10,000 or fewer people; a $400 million funding opportunity issued October 2024.
U.S. Bureau of Economic Analysis, NIPA Table 1.1.9, Implicit Price Deflators for Gross Domestic Product, line 1. Link. Read 7 November 2026.
- Index, 2017 = 100, annual: 2023 122.451, 2025 128.893 (read through FRED's copy of the BEA series, updated 30 September 2026).

The project's costs and output, read from other lessons' data:

EIA, Assumptions to the Annual Energy Outlook 2026: Electricity Market Module, Table 3. Link. April 2026.
- Wind farm: building cost and fixed upkeep (lesson 7)
EIA, Electric Power Annual, Table 4.08.B. Link. Final 2025 data, October 2026.
- Wind farm: capacity factor (lesson 7)
Cole, Ramasamy and Turan, Cost Projections for Utility-Scale Battery Storage: 2025 Update, NREL/TP-6A40-93281. Link. June 2025.
- Battery: building cost and upkeep (lesson 13)
U.S. Bureau of Economic Analysis, NIPA Table 1.1.9, Implicit Price Deflators for Gross Domestic Product, line 1. Link. Last revised 29 Oct 2026; accessed 5 Nov 2026.
- Battery: 2024 to 2025 dollars (lesson 13)
Battery size, daily cycle and margin: lesson A2's illustrative plant and simulation. Contract price: lesson A1's illustrative $50/MWh. Wind farm size: Prairie Town (fictional, illustrative).

Spotted an error, or stuck? Write to hlli@ksu.edu. Corrections are made in place and dated here.

Text licensed CC BY 4.0, code MIT: teachers and students may reuse and adapt it, with credit to Honglin Li.