Project finance

Large companies (e.g., power utilities or major energy companies) may choose to develop small wind-farm projects using their own capital resources. The costs of the project are met from the general equity raised by the company with the liabilities of the project secured against the main corporate assets. The cost of borrowing, which influences the required discount rate for the project, depends on the financial strength of the company and it is possible to avoid the considerable expense involved in raising external finance. Hence this approach may allow cash-rich companies to develop projects at low cost.

Larger projects, and those developed by entrepreneurs, will tend to be based on project financing with a loan obtained from a bank or other financial institution. This has the advantage of reducing the requirement for capital from the developer but the loan repayment will have the first call on the income of the project. Project financing is also likely to offer tax advantages. If the loan is secured only on the project cash flow itself, this is referred to as 'limited recourse' financing. Alternatively, if the developer has a large parent company willing and able to provide suitable guarantees then the loan may be secured against the assets of the parent company which then appears as a liability on its balance sheet. Clearly the lenders of the debt will prefer to guarantee their loan against the assets of a large stable company rather than the project alone and this will be reflected in the repayment terms that are available. The debt/equity ratio can be as high as 80 percent but all risks must be identified and manageable if a suitable financial arrangement is to be made. If a limited recourse loan is made before a project is constructed then interest rates of 10-20 percent would be typical while these would be significantly reduced if the loan is re-financed after the project is commissioned and many of the construction risks are no longer significant.

Figure 9.17 shows a typical commercial structure of a wind-farm project. This is very similar to any other power project developed by independent power

Figure 9.17 Typical Commercial Structure of a Wind-Farm Project

producers (IPPs) where the Project Company is merely the vehicle by which a large number of agreements are made. In order to limit risk, construction of the project does not start until all the agreements are in place and so-called 'financial close' is achieved.

The power purchase agreement is to sell the output electrical energy of the wind farm. To reduce risk, this should be at a defined price for the duration of the project. Under the UK Non Fossil Fuel Obligation or the German 'Electricity Feed-in-Law' this was reasonably easy to achieve but with the continuing liberalization of markets for electrical energy throughout the world it will become increasingly expensive to avoid exposure to varying energy prices.

The loan agreement is for the bank(s) to provide the debt finance for the project. An accurate and verifiable assessment of the wind resource is an essential prerequisite for this agreement although there is also likely to be a 'due diligence' investigation of the whole project to ensure all major risks are addressed.

The construction agreement is to purchase the wind turbines and construct the wind farm. To reduce risk this may be done on a 'turn-key' basis with the windturbine manufacturer taking responsibility for the entire wind farm.

The O & M agreement is to operate and maintain the wind farm for the life of the project.

The site agreement is to define the relationship with the landowners and to ensure access to the site and the wind resource for the duration of the project.

The connection agreement is to allow the wind farm to be connected to the electrical power system and so export its output. In a deregulated power system this is separate from the power purchase agreement.

The shareholder agreement is between the owners of the Project Company to define their rights and obligations.

It may be seen that a large number of agreements are required and it will typically take a year from project inception to financial close. During this time the developer is operating at risk, expending considerable resources, and so full development of this administrative/financial phase of the project is only commenced once feasibility has been demonstrated.

Renewable Energy 101

Renewable Energy 101

Renewable energy is energy that is generated from sunlight, rain, tides, geothermal heat and wind. These sources are naturally and constantly replenished, which is why they are deemed as renewable. The usage of renewable energy sources is very important when considering the sustainability of the existing energy usage of the world. While there is currently an abundance of non-renewable energy sources, such as nuclear fuels, these energy sources are depleting. In addition to being a non-renewable supply, the non-renewable energy sources release emissions into the air, which has an adverse effect on the environment.

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