Financing smart local energy systems under economic, financial and operational risks: a real options and asset securitisation approach

Novel and complex energy projects are being developed to advance decarbonisation, decentralisation, digitalisation and democratisation of energy systems. However, it remains unclear whether these initiatives can be financed without largely relying on public funds. Drawing on the United Kingdom s experience in testing smart local energy systems, this work proposes a practical methodology for their valuation and financing. This approach combines real options, capital budgeting and asset securitisation to assess and value complex energy projects facing multiple sources of uncertainty and absent cash flow history. This methodology enables the structuring of an asset-backed security as a means of raising funds that, under specific conditions, can be competitive with both equity and conventional debt, thereby supporting project replication and scale-up. This study contributes to the ongoing discussion on pathways to finance intricate energy projects and provides valuable insights into managing and financing such initiatives under uncertainty. It also outlines a research agenda to strengthen procedural aspects for broader application and acceptance. Overall, this article offers a concrete, actionable route for researchers, practitioners and other stakeholders interested in mobilising private capital for more innovative and greener energy systems.