Abstract

A Smart Local Energy System (SLES) represents a promising pathway for the energy transition through the integration of decentralised, multi-vector energy assets. However, its inherent novelty and complexity pose valuation and financing challenges that are particularly acute in riskprone emerging economies. This work proposes a transition finance mechanism for valuing and financing such energy systems in the short and medium term. The above entails an extension of a well-known real-options, capital-budgeting model through the incorporation of a stochastic default rate, modelled via a stochastic geometric Poisson process linked to macroeconomic unevenness. This mechanism also comprises the integration with asset securitisation, yielding a potentially tradable SLES-backed bond. Using real data on energy assets and financial metrics, a Chilean case study is developed to assess the viability of a hypothetical SLES as an underlying asset or collateral for asset securitisation. Our results suggest that the proposed mechanism can competitively value and finance SLESs, with relatively low bankruptcy probabilities and securitisation costs for both issuers and investors, in line with typical energy project financing costs. Nonetheless, there are several points of interest that may be still addressed through further research, which can help strengthen the opportunities for financing, scaling up and replicating SLESs.