Renewable Energy Project Financing: Basic Structure & Key Players!
Renewable energy transformation continues to gain pace in Australia with Government’s increasing focus on tranforming the national grid through increasing the share of renewables in the nation’s energy mix. Let’s take a “high level” look at some salient aspects of Project Financing structures for renewable power projects.
Financing Structure: Typically the financing structures can vary marginally depending on the project company structure (trust/ SPV) , regulatory regime applicable and the stakeholders involved, however the key premise of project financing lies in sponsors/ developers employing turnkey solutions to outsource key construction and operational risks to third party contractors while at the same time locking in long-term cash flows through a Power Purchase Agreement (PPA) with an off-taker. The image below reflects the key aspects of a PF Structure encompassing:
- Developer / Sponsors setting up a Project SPV and obtaining requisite regulatory approvals and funding initial equity investments.
- Project SPV is project specific entity that owns the underlying project (land and project installations).
- Project SPV enters into development contract (with EPC Contractor), operational contracts with third parties (Operations & Maintenance Contractor, Network Operator ) and typicall a Power Purchase Agreement with an Off-taker.
- Lenders provide funding to the project after assessing the risk profile of parties involved whereas the funding is secured through provision of tripartite agreements with third parties and through security over the Project.
Key Parties
Project Company / SPV: Developers/ Sponsors set up a special purpose Project Company which is solely established to develop and maintain the project as its sole asset. This entity is typically the Borrowing entity responsible for all risks associated with the project investment as Project financings are typically on a non-recourse basis. Depending on the jurisdiction and sponsors’ tax preferences, trust structures are also common in this space.
Developers & Sponsors: Developers/ sponsors are equity investors in the Project Company. As noted above their investments are in Project Company typically on a non-recourse basis. Sponsors can comprise of a consortium of sponsors with the same or different backgrounds e.g. public-private partnerships offer cooperation opportunities between public sector players and credible private investors/corporations. The Sponsors in a Solar Project usually also have some relevant experience in the implementation and operation of the Project that is being undertaken.
EPC Contractor: The Project Company will enter into EPC contract thereby engaging an EPC Contractor for the design and engineering, procurement of equipment, and execution of work, services and activities for the construction of the Project. Typically for solar/ renewable projects, there is also a Supply Contractor which ensures supply of key solar project equipment to the EPC Contractor to complete the Project.
The EPC contracts are an important structural element in PF transactions as they embed key protections for the Project Companies (and indirectly the Lenders) during construction phase and typically benefit from security in the form of bank guarantees provided by the contractor and provision of performance guarantees and associated performance liquidated damages. EPC contract also covers comprehensive insurance requirements as mititgants to cover the risk of developments not going according to plan. All these securities are typically assigned (in a back to back arrangement) for the benefit of Project Companies and the Security Trustees.
Operations & Maintenance Contractor: O&M Contractors remain an integral part of the plant operations post Commercial Operation Date and contributes significantly to the efficient operations of the plant to ensure ongoing economics of the energy projects. Having an effective O&M strategy can enhance the competitiveness and ensure the viable investment case for renewable energy projects.
Off-taker: An off-taker is a party who enters into a long term “Power Purchase Agreement — (PPA)” with the Project Company and agrees to purchase the product being produced by the project ( power generated by the project in a solar project transaction) typically on a take/ pay basis. Understanding strength of the off-taker and details embedded within the PPA are key aspects of PF risk mitigation during operational phase.
Network Owner: Project Company will also enter into arrangements with the relevant Network owner in its intended geography to ensure the supply of output to the grid in target market.
Agency / Security Trustee: PF transactions will usually involve more then one lenders whereby the lenders will appoint an Agent to carry out administrative functions, including managing payment flows and communications; and a Security Trustee to hold the security package on Lenders’ behalf.
Lenders: Lenders to PF transactions include local as well large international banks. Multilateral agencies including organizations such as the World Bank (WB) and the International Finance Corporation (IFC) also play a key role in development of projects considering transition to renewables remains a key focus . Role of Multilateral organizations becomes even more critical in the developing world.
The above write up provides a brief overview and framework of PF structures and the key stakeholders involved however as noted earlier the structures and key stakeholders can vary for each project depending on the regulatory regime and the stakeholders involved.
