Impact and Mitigation of Financing Risks for Non-Conventional Renewable Energy Projects (ERNC) – Analysis of the Chilean Case (Part 2/2)
Written by: Adolfo Rojas
Dated: 30/01/2017
SECOND PART
This second part will focus more on the specific risk mitigation mechanisms for each type of technology. Other relevant aspects of the projects will be addressed according to the actual cases that have been presented in Chile to date.
Analysis of the Chilean Case (Continued)
Specific Risks by type of technology
The main specific risks for some technologies are listed below:
Hydroelectric
Wind
Biomass
Geothermal
Solar Photovoltaic
Concentrated Solar Power (CSP)
Financing Funds
Some funds that provide preferential terms are:
• CTF: Clean Technology Fund
• KfW German Development Bank
• IFC: International Finance Corporation
• JICA: Japanese International Cooperation Agency
• World Bank
• EIB: European Investment Bank
• CAF: Corporación Andina de Fomento
• US EXIM: United States Export-Import Bank
Key Considerations for Financial Assessment
Characteristics of the projects of NCRE (Non-Conventional Renewable Energies) that influence the analysis of the financial risk:
• Profile of the developer (sought with good financial support, experience and prestige).
• Project size (for projects with an investment greater than one hundred million USD $ mostly faced by international investors and for projects with an investment smaller than one hundred million USD $ more focused for local investors) and have a very marked relation with the internal transaction costs.
• Purchase and Sale of Energy (strength is sought, certainty of the regulatory framework and guarantee the remuneration of the project or payment of debt).
Financial and Insurance instruments
Some available financial instruments are:
• Forwards and Cross Currency Swaps, which are used when funding is in dollars (e.g. IDB Funds)
• Interest rate swaps, which are used when the funding is in dollars (e.g. KfW funds through CORFO).
Insurance for the construction stage as:
• CAR (Construction All Risks)
• Transportation (both with ALOP clauses) and import
• Civil Liability
Insurance for the stage of operation as:
• OAR (Operation All Risks) with physical damage clauses
• BI (Business Interruption)
• Civil Liability
Conclusions and recommendations:
Conclusions:
1. DEBT PAYMENT: The available cash flows from the project to be financed must be able to repay the debt. This process is done through a debt-sizing that consists of analyzing the debt service payment coverage ratio (DSCR).
2. MECHANISMS: One of the most recommended funding mechanisms for these cases is PROJECT FINANCE.
3. DETAILS OF THE PROJECTS: Each project to be financed has scope, requirements, limitations and risks UNIQUE. No two projects are the same.
4. SCALE OF PROJECTS: Small-scale projects can be made feasible with options that enable debt commitment to surpass the level of optimal leverage.
5. INTEREST RATES: Credit financing can be given at a fixed rate and variable rate, howeveris these rates have a direct impact on the project profitability and require specific financial instruments.
6. PERIOD OF GRACE: The optimal grace period should be at least six months in addition to the period of the construction of the new power plant.
7. TERM OF FINANCING: The term of the financing must be associated with the duration of the contract of sale of energy or PPA (Purchase Power Agreement) but always must be less than the time of the useful life of the assets.
8. GAPS: The main gaps found go hand in hand with the management capacity of the project developers (mainly in the evaluation of the financial back resource and in obtaining the PPAs), and on the other hand the perception of risk that the Institutions that provide financing.
9. DUE DILIGENCE: More diffusion, knowledge, experience, planning, analysis and tools are required as a good and correct methodology for the evaluation of projects with Renewable Energies to be financed.
10. ACCESS TO FINANCING: Access to financing for LATAM projects remains very limited, as some financial instruments are not provided directly by local banks in each country, forcing them to take alternative forms of international institutions at a higher cost.
Recommendations:
1. Monitor and sustain cash flows to facilitate the evaluation of projects.
2. All projects must be submitted for evaluation with at least one teaser, cash flow, detailed staged schedule, risk identification and mitigation analysis and sensitivity analysis (Tornado and Monte Carlo) of a very high level.
3. Guarantee that the development of the project will be executed on suitable and freely available lands to avoid future conflicts with third parties or generate delays and / or paralysis of the project.
4. The favorable reports issued by the rating agencies are vital to sustain the financial backing of the companies involved (owner, developer, etc.).
5. Efficient and proven due diligences must be executed by specialists in the energy sector and on a case-by-case basis.
6. Technically speaking, the greatest effort and should be concentrated on achieving PPAs, land search, resource measurement, preliminary socio-environmental studies, and exploring how evacuation can be ensured. Energy to generate
Final Message:
Hopefully this article has been useful. I do not want to say goodbye without first leaving this message that I consider of great interest:
IN LATIN AMERICA THERE ARE MANY RENEWABLE ENERGY PROJECTS, BUT THE COMMON DENOMINATOR IS THAT THE GREAT MAJORITY OF THESE PROJECTS DO NOT SECURE FINANCING AND THEREFORE ARE UNABLE TO COMMENCE AND UNDERTAKE THE PROJECT.
THE PRINCIPAL REASON IS THAT TOO MUCH PRIORITY IS PLACED ON THE TECHNICAL SIDE OF THE PROJECT, AND NOT FOCUSING ON OBTAINING ECONOMICAL AND FINANCIAL SUPPORT IN ORDER TO ATTRACT AND SECURE INVESTORS.
REMEMBER IT IS NOT ENOUGH THAT THE PROJECTS APPEAR TO BE VIABLE, THEY MUST HAVE ADEQUATE FINANCING TO BE SUCCESSFUL … THANK YOU VERY MUCH
Source: This article contains excerpts from the document prepared by POCH Ambiental (BASE) “DIAGNOSIS, ANALYSIS OF FINANCING MODELS AND RECOMMENDATIONS OF RISK AND / OR RISK MITIGATION INSTRUMENTS FOR NON-CONVENTIONAL RENEWABLE ENERGIES (ERNC) IN CHILE” .