I already wrote about why renewable energy companies are using project finance for their energy infrastructure projects here, be sure to check it out before reading this.
Given the fact that project finance is often an expensive and complicated undertaking, it becomes fundamental to figure whether project finance is a realistic opportunity for a renewable energy project. Keep in mind the following considerations:
- Size: Is the project large enough to make PF worthwhile? Banks won’t go through the hassle of PF for small projects, bear in mind that although project finance size varies from country to country, we’re looking at $50m to $100m as being in the ballpark. If the project is too small, both lenders and sponsors will be put off project finance;
- Establish Realistic Revenue Streams: Since there are two primary sources of revenue for investors, public funds and the other is revenue streams in the form of charges, paid by end users, sponsors and lenders must figure out what that revenue stream will look like. Will the revenue stream be big enough to support the high debt financing taken by the sponsors?
- Length of Project: PF is a long term investment spanning 10-15-20 years so there will be a long payback period;
- Physical Assets: Will there be physical assets (solar panels, wind turbine) sufficient to ensure lender repayment in case of default? Banks are going to want more “guarantees”, what is the above-mentioned revenue streams doesn’t come through will they will be able to foreclose on the project’s assets sufficient in value to “make themselves whole,” either by selling the project outright or operating it until the debt is repaid;
- Tech Risk: Renewable energy is a very innovative and competitive sector, so tech is evolving quickly. While in many project financings, the tech may be relatively new, generally speaking, project finance lenders do not want to be the first to finance an unproven technology. This is not venture capital. A history of successful use in some context will often be necessary to secure project financing;
- Quality of the Contract Network: At the end of the day, project finance is a web of contracts between different parties. It is important to know if the project company has contractual relationships with reputable companies for services key to the success of the project or the technology it employs? Banks will be less keen on lending to a project the success of which depends solely on a few star individuals who may depart, leaving the project unable to meet its potential, so credible contracts are very important;
- Receipt of Revenue: In that regard, will the receipt of revenue be enforceable under contractual rights from a creditworthy party? If there is no contract or if the creditworthiness of the purchaser is not credible, this will trigger concern for banks and set off thorough(er) due diligence procedures regarding revenue projections;
- Exit Options: What are the ultimate objectives of the sponsors? Are they looking for a quick exit option, do they want to jump ship? Know that once the project is “project financed” and the contracts are in place, divestiture opportunities are complicated by the requirement of the bank consent, and potential purchasers will be thoroughly examined by banks for development and operational expertise as well as creditworthiness;
- Risking the Project: In other words, once project financing is completed, the Sponsor will lose the ability to determine how the vast majority of the project’s revenue is spent. In the event a project becomes uneconomic and unable to service its debt, the only option besides refinancing the debt may be to turn over the project to the lenders (voluntarily or involuntarily), with the loss of the Sponsor’s investment in the project.
You may be interested in Part I: Project Finance
For more check out: https://www.wsgr.com/PDFSearch/ctp_guide.pdf