Introduction to Project Finance in Renewable Energy Infrastructure : Including Public-Private Investments and Non-Mature Markets

"What is project finance? What makes project or structured finance so relevant for large renewable energy infrastructure? Which vocabulary do I need to know in order to speak the same language during meetings with lawyers, investors, bankers and engineers? These questions and many more are answered throughout this book, offering real world examples to bridge the gap between theory and practice. The book details the role of each stakeholder in the development of renewable energy projects, the interconnection between all the agreements, the financial process from fundraising to financial close, the processes of due diligence, risk analysis, project investment valuation and much more. It also provides with an introduction to Portfolio Management using renewable energy assets and an explanation of the role of Climate Finance in green energy investments. The commented glossary enables readers to unpick the jargon used in project finance for renewable energy, and the numerous creative figures and comprehensive tables aid with understanding. Offering a complete picture of the discipline, Introduction to Project Finance in Renewable Energy Infrastructure will be of value to professionals, engineers and academics alike interested in understanding the process and components of project finance in renewable energy infrastructures, in both private and public-private contexts."-- Provided by publisher Preface Acknowledgements Introduction Contents Abbreviations List of Figures List of Tables 1 Introductory Concepts 1.1 Renewable Energy Infrastructure 1.2 Non-mature Markets 1.3 Public–Private Context References 2 Developing Renewable Energy Projects 2.1 Simplified Project Development Timeline 2.1.1 Business Development in Non-mature Markets 2.1.2 Poor Development, Poor Financing 2.2 Development and Investment Phase Versus Operational Phase 2.2.1 Match Between Sources and Uses 2.3 Debt and Equity According to the Project Phase 2.3.1 During the Investment and Development Phase 2.3.2 During the Operation Phase 2.4 Project Funding Timeline 2.5 Evolution of the Project Value Over the Time 2.6 Debt Refinancing 2.7 Equity Sale Versus Asset Deal References 3 Difference of Interest Between the Stakeholders 3.1 Government’s Interest Versus the Rest’s 3.2 Government’s Proactive Planning 3.2.1 Transparency 3.3 Renewable Energy Policy 3.4 Public Tendering 3.4.1 Forms of Auction Design 3.5 Agency Conflict and Asymmetry References 4 Project Company and Perspective of Each Player 4.1 The Stakeholders’ Interests 4.2 The Project Company’s Relationships 4.2.1 Legal Restrictions of the Project Company Reference 5 Project Finance and Other Financing Forms 5.1 Financing Forms 5.1.1 Characteristics of Project Finance 5.1.2 Characteristics of Corporate Finance 5.1.3 Characteristics of Market Finance 5.2 Relevance of the Future Cash Flow 5.3 Investment Volume Versus Risk and Return 5.4 Investment Time Versus P-Case 5.5 Unsecured Loans References 6 Public-Private Partnerships and Concessions 6.1 Advantages of the PPP Schemes 6.2 Value for Money 6.3 Contingent Risks 6.3.1 Risk Optimum 6.3.2 Typical Risk Allocation in PPP 6.4 Social IRR and Social NPV 6.5 Realistic Expectations of the Public Sector 6.6 Unsolicited Proposals 6.7 Direct Procurement 6.7.1 Financial Closing 6.7.2 Complexity in the Offers Comparison 6.8 Hidden Costs 6.9 Corruption and Collusions 6.10 Consortia References 7 Contracts in Project Finance 7.1 Main Contracts 7.2 The EPC Contract 7.2.1 Contractual Key Aspects 7.2.2 Compliance: A Wicked Issue 7.2.3 Back-to-Back Clauses 7.2.4 Counterparty Issues 7.2.5 Inconsistency in the Dates 7.2.6 Interfaces Issues 7.2.7 Insurance 7.3 The O&M Agreement 7.3.1 Types of Service Programs 7.3.2 Difference Between OEM Warranty and O&M Guarantee 7.4 The Offtake Agreement (e.g., PPA) 7.4.1 Market Factors for the Attractiveness and Competitiveness of PPAs 7.4.2 Type of Contracts in PPPs or Following Public Auctions 7.4.3 Contract for Differences (CfD) 7.4.4 Spot Demand and Price Forecast 7.4.5 Financial Power Purchase Contracting 7.5 The Concession Agreement (Case of Public Procurement) 7.6 Cooperation Agreements and Mergers and Acquisitions 7.7 The Shareholders Agreement 7.7.1 Share Purchase Agreement: Selling Shares to a Third-Party 7.7.2 Typical Project Data Room 7.8 The Loan (Facility) Agreement 7.8.1 Undertakings and Events of Default 7.8.2 Sponsor Support Agreement 7.8.3 Debt Restructuring After Insolvency 7.8.4 The Support from Export Credit Agencies 7.8.5 De-risking Through Political Risk Insurance (PRI) 7.8.6 The Support of Development Banking 7.8.7 Model Auditor 7.8.8 Financial Adviser 7.8.9 Individual Roles Within the “Club” of Lenders 7.8.10 Lead Manager or Arranger 7.8.11 Inter-creditor Issues 7.8.12 Hedge and Investments Funds 7.8.13 Brokers and Other Advisory Boutiques 7.8.14 Bank’s Terms Sheet References 8 Risks Definition and Analysis 8.1 Terminology 8.2 Commercial Risks 8.2.1 Risk Allocation: The “Golden Rule” 8.2.2 Commercial Risks Matrix 8.2.3 Refinancing Risk 8.2.4 Quantity (AEP) Risk 8.2.5 Social and Environmental Integration 8.2.6 Life Cycle Assessment 8.2.7 The Equator Principles 8.3 Macroeconomic/Financial Risks 8.3.1 Inflation 8.3.2 Interest Rate 8.3.3 Exchange Rate 8.3.4 Catastrophic Devaluation 8.4 Political/Country Risks 8.5 Risks Versus Project Phase 8.6 The Importance of Post-COD Monitoring 8.7 Contracts Negotiation 8.7.1 Reputation is Key References 9 Termination: Change in Law, Default, and Dispute Resolution 9.1 Change in Law 9.2 Default by One of the Parties 9.3 Force Majeure 9.4 Insurable Events 9.5 Dispute Resolution Mechanisms 9.5.1 International Arbitration 9.5.2 UN Convention on Contracts for International Sales of Goods (CISG) References 10 Due Diligence 10.1 Financial Due Diligence 10.2 Legal Due Diligence 10.3 Technical Due Diligence 10.4 Further Due Diligence 10.5 Managing the External Advisors 10.5.1 Think Global, Act Local Reference 11 Basics of Financial Modeling 11.1 Inputs and Outputs 11.2 Detail of the Relevant Inputs 11.2.1 Macroeconomic Assumptions (A) 11.2.2 Project Costs or CapEx (B) 11.2.3 Operation Revenues and Costs (C) 11.2.4 Loan Drawings and Debt Service (D) 11.2.5 Taxation and Accounting (E) 11.3 The Cash Flow Model 11.4 Inputs for a Renewable Energy Project 11.4.1 Capital Expenditures (CapEx) 11.4.2 Operative Expenditures (OpEx) 11.4.3 Cost of Capital (CoC) 11.4.4 Annual Energy Production (AEP) or Quantity 11.4.5 Losses from the Future Quantities 11.5 Further Relevant Notions for Inputs and Outputs 11.5.1 Levelized Cost of Energy (LCoE) or Present Value of Energy Cost 11.5.2 Notion of Residual (or Salvage) Value 11.5.3 The Cash Flow Cascade 11.5.4 Collateral Agreements 11.5.5 Cash Sweep 11.5.6 Cash Clawback 11.5.7 Mini Perm 11.5.8 Covenants 11.5.9 Derivatives to Fix Interest and Exchange Rates 11.5.10 Interest Rate Swaps 11.5.11 Hedging and Currency Swaps References 12 Quantitative Evaluation of Renewable Energy Projects 12.1 Minimum Profitability Indicators 12.2 Notion of Present Value (PV) 12.3 Notion of Net Present Value (NPV) 12.4 Notion of Internal Rate of Return (IRR) 12.5 Notion of Blend IRR 12.5.1 Project Versus Equity IRR 12.6 Notion of Modified IRR (MIRR) 12.7 NPV Versus IRR Versus Project Size 12.8 Payback Time 12.9 Notion of Cost of Capital (CoC) 12.10 Notion of Levelized Cost of Energy (LCoE) 12.11 Notion of Cash Flow Available for Debt Service (CFADS) 12.12 Debt Cover Ratios 12.12.1 When Interest Rates Differ Over Time 12.13 Debt Sizing 12.13.1 Tax Issues While Calculating DSCR 12.13.2 Average Life 12.14 Importance of Leverage 12.15 Linear Versus Annuity Repayment Schedule 12.16 Sculptured (or Cash Flow-Based) Repayment Schedule 12.17 Types of Repayments and Interest Payments References 13 Qualitative Evaluation of Renewable Energy Projects 13.1 Qualitative Questions 13.2 Sensitivity Analysis 13.2.1 Building Scenarios 13.2.2 Longer Tenor 13.2.3 Longer Grace Period 13.3 Project Structuring 13.4 Absolute Versus Relative Attractiveness 13.5 External Factors 13.5.1 Project Competitiveness Ranking References 14 Asset and Portfolio Management 14.1 Asset Management 14.1.1 Commercial Management 14.1.2 Technical Management 14.1.3 Asset Management 14.2 Portfolio Management 14.2.1 Mean-Variance Portfolio Theory 14.2.2 List of Diversification Factors for Renewable Energy Assets 14.2.3 Portfolio Efficiency Frontier 14.2.4 Beta and Non-diversifiable Risk 14.2.5 Further Ratios 14.2.6 Limitations 14.2.7 Types of Investors in Renewable Energy 14.2.8 Forms of Investments References 15 Trends and Technology Development 15.1 Technology as a Risk Factor 15.2 Technology as an Enhanced Efficiency Factor 15.3 Role of OEMs and ISPs in the Improvement of the LCoE 15.4 Oligopoly and Equipment Price Evolution 15.5 Diversification to Reduce Dependency 15.6 Enhanced Integration of “Variable” Renewable Energy References 16 Climate Finance at a Glance 16.1 Global Warming and Environmental Issues 16.1.1 Inherent Climate Change Risks for the Lenders 16.2 The UNFCCC 16.3 Focus on the Green Climate Fund (GCF) 16.3.1 The Role of the Private Sector 16.4 The Clean Development Mechanism (CDM) 16.5 The Role of Blended Finance 16.6 From Macro to Micro References 17 Case Studies: Auction Bid (I) and Shares Purchase Offer (II) 17.1 Case of a Preparation of an Auction Bid 17.2 Case of Preparation of an Offer to Acquire Asset Shares 17.3 Caveat Both in Method and Results 18 Financial and Technical Glossary 18.1 Financial Glossary 18.2 Technical Glossary