Draft for an "Appendix N Financial Evaluation" to the SolarPACES Guideline for Bankable STE Yield Assessment

Kurzfassung

Project finance is a specific form of the more general term structured finance. As a financing approach, it became popular during the liberalization and privatisation in the 90’s in the UK and USA, when governments decided to privatise many state-run sectors and companies, such as power, telecoms, roads, ports or airports. After that, project financing also became popular for emerging markets, when so-called Structural Adjustment Programs of the World Bank and IMF were applied to achieve economic turnarounds for Central and Eastern Europe, Latin America and Asia. Since the 90’s, Project Finance has been an ever growing industry until the 2007-08 financial crisis. In 2008 the global project finance loans market reached a peak at USD 247 bn. In 2013 the project finance market reported an amount of USD 204 bn. [Della Croce, 2014]. In the renewable and in particular in the solar industry, project financing structures have not only been able to mobilise high percentages of inexpensive, long term debt, but also created new types of equity investors in addition to the "usual suspects" like utilities, IPPs or EPC's: a new landscape of financial investors like asset managers, infrastructure and pension funds as well as private individuals of all types have invested into solar as one of the main renewable assets classes. They all appreciate long term cash flows with stable dividends over long terms. As a consequence, both debt and equity of project financing have reduced the capital cost for solar PV to a large extent. This is one of the main factors for the increasing competitiveness of solar power in many countries. As one of the key requirements for the bankability of a power generation technology, lenders are requesting a so-called "proven technology" status. In the PV sector, many equipment suppliers and EPC's have reached this status today. Track records of many thousands of MWs in operation can be looked at. For CSP technologies today, this cannot be claimed in a similar dimension. Parabolic trough projects have successfully operated in GW amounts for many years today. As a consequence, this is the technology most relied upon or considered as most trustworthy. Yet due to dynamic technological developments, most of CSP projects that are being presented to lenders to seek financing have significant technological improvements or design innovations that cause lenders to raise doubts in the reliability and performance predictability. Even small items can severely endanger the project performance and impact cash flow. Hence, banks often find it difficult to concede the "proven technology" status. As a consequence, in order to reach bankability, commercial lenders require extensive guarantees from equity investors to cover identified risks, in excess of equity contributions. Further, the technology has significant effects also on the equity investment appetite: As long as a technology does not qualify as "proven", the investor landscape remains sparsely populated: only strategic investors such as utilitites, IPP's, large developers or EPC's would be willing to look at accepting risks resulting from innovations. In project finance, they do not only have to assess the risks for their own equity invested, but in addition need to be prepared to provide comfort to lenders, mainly as additional guarantees. Financial investors instead would shy away from getting involved for both reasons. The financial section of this guidebook has the following line of argument: initially, in section N.2 we describe the basic characteristics of project finance, such as definition, involved parties, structures, methods, mechanics and key figures, to help understand the project finance approach. In N.3, we explain the various approaches to financial evaluation, key figures, perspectives such as Investor's, Lender's, or EPC's. In section N.4 the factors for risk assessment and success are given, and the main issues for CSP financing are elaborated. Eventually, in section N.6, we give a practical example from an emerging market, South Africa, which is one of the most attractive emerging markets for CSP. This case study gives us a good overview of real life project finance with all key elements and issues.