Project Financing

In FIT countries, project financing makes a lot more sense than in countries where government subsidies come from tax credits or other less secure or longer term mechanisms. In principle then, power plants are quite suitable for off balance sheet financing and the majority of new projects underway are, or will be done with project finance that is to say a non-recourse basis.

Similar to international projects, a typical project finance deal in Europe is characterized by three elements.  First, a project finance deal will be based on the discounted cash flows generated in a given time frame as opposed to a historical financial statement and P&L analysis. Second it is typically viewed from the sponsor’s perspective as a non (or limited) recourse financing. Third a main characteristic is the ring fencing: that is the strict separation of the rights and obligations and the assets of the debtor on one the hand and the other parties involved on the other hand. In order to go off balance, and protect both the sponsors and the lenders, a special purpose vehicle (SPV), which is a company that has no objective other than to develop and operate the asset to be financed. With respect to the establishment of the SPV, the corporate structure of choice in Europe is usually either a limited liability company (S.L., Ltd., GmbH, Srl.) or a limited partnership with a limited liability company as a general partner (GmbH & Co. KG, UTE, L’UTE). Similar to a stock corporation, both types of entities provide for a limited recourse to the sponsors but, in contrast, legally only require relatively low sums of initial capital although this varies depending on the country’s eligibility requirements for licensing.

In a usual transaction the SPV will enter into various project agreements, for instance an O&M agreement, a grid agreement and works and service agreements (the most important being the EPC). The agreement of choice regarding securing the property, in the case that it cannot or should not be acquired, is a heritable building right, according to which the beneficiary is entitled to construct, operate and maintain an asset on foreign premises. If the project is not land intensive then this is not an issue but the same result could be achieved with a land lease agreement but with significant disadvantages, the most obvious being that an asset, according to many European laws, would form an integral part of the premises it is built on and would thus be the property of the landowner. Also, the heritable building right can be loaded with a land charge in favor of financing banks and, therefore, constitutes a security interest of considerable importance. The repayment of the loans is secured by long term agreements: in power plant projects security is achieved through long term power purchase agreements (PPA).

The nature of large power plant project finance deals exposes them to long term EPC contracts which are more and more susceptible to increasing prices of construction, especially as new regulations and cleaner standards require specific materials. Many of the larger contractors (ABB, Siemens, Abengoa, Alstom) are now more reluctant to provide turnkey contracts and tend to focus on selling equipment. If the sponsors however have the sufficient engineering capabilities, banks have on occasion accepted that construction is split up into several smaller contracts to avoid the inflation risk involved in the larger projects. This opens the field, on the other hand, to smaller power plant sponsors and players and governments are acknowledging this by offering FITs into several categories depending on the size and application of the plant in question.

Listen to what Steven Lacey from "Inside Renewable Energy" has to say about the current financial environment surrounding Renewable Energy.

 

 

Comments

[Best Forex Broker 2010]

This seems like a very interesting way to invest money. Isn't the facility then belongs to the country- or does it belong to the financing group?

[Valutahandel]

Finance it 'also a branch of economics that studies the management of money and other assets. You can also determine the management of funds and the capital required for commercial and private.