Combined project finance, investment loans,  (PF) schemes, bond issues – financing  for large-scale energy projects are extremely diverse.

Most energy companies require some form of financial support, especially renewable energy projects.

Banks are showing strong interest in investing in the renewable energy sector amid a clear decline in interest in coal projects around the world.

However, each business has unique requirements, which is why our team is open to any project.

CP Finance UK offers a full range of financial and engineering services for energy companies, including financing of energy projects, construction of power plants, substations and power lines under an EPC contract.

At CP Finance UK, we provide funding for the following projects:

• Construction and modernization of thermal power plants.
• Construction of solar power plants of all types (PV and CSP).
• Construction and modernization of hydroelectric power plants.
• Construction of geothermal power plants.
• Construction of electrical substations.
• Laying of transmission lines, etc.

Contact our consultants at any time for details. 

Traditional sources of financing for large-scale energy projects

Over the past decades, the energy sector, due to its strategic nature, has attracted significant private investment and bank loans. Most large companies in the sector raise funds primarily through project finance instruments or investment loans.

Traditional corporate financing is used when the amount of investment is adequate to the current scale and activities of the company.

In this case, the net debt / EBITDA ratio usually does not exceed 3 throughout the entire financing period.

Corporate finance is considered the most cost effective financing option. It also gives more flexibility and reliable access to funds, since the bank guarantees the repayment of the debt based on the results of the analysis of the financial performance of the borrower.

The 2008 crisis has increased the caution of commercial banks in providing loans, including investment loans to finance large energy projects. Caution is still expressed in increased requirements for borrowers, higher interest rates and shorter loan terms.

Currently, due to a slowdown in the economy and uncertainty due to the pandemic, financial institutions are still wary of large-scale projects with a long funding period.

However, in cases where the financing period exceeds 7-8 years, certain elements of project finance are usually integrated into the corporate finance structure, and in some cases, financing is carried out according to the PF formula.

The high risk of investors associated with the preparation of project finance models contributes to the attractiveness of traditional methods of business financing.

There are currently few energy projects in the world that exceed the recommended net debt / EBITDA ratio.

Therefore, both energy companies and banks prefer a corporate finance model that avoids complex PF procedures and reduces costs.

To a large extent, the choice depends on the specific company. For example, young companies with large ambitious projects cannot obtain sufficient loans under the traditional scheme, therefore they are forced to use PF.

The possibility of traditional financing largely depends on the borrowing company.

The more assets a company has, the higher its ability to generate EBITDA.

Thus, large energy groups have much more opportunities to obtain loans. European experience shows that very large funds can be obtained in this way. Large companies in Poland, Spain, Germany and other countries are announcing multi-million dollar bond programs.

Corporate finance instruments are now relatively cheap and simple whiles financing a large-scale energy projects

This is evidenced by the fact that the current supply of banks in financing the energy sector based on the borrower’s balance sheet exceeds the needs.

However, banks to protect their interests use separate contractual provisions, to some extent limiting the activities of the borrower. Restrictions usually apply to lending, guarantees, collateral, ownership structure, etc. These restrictions usually apply to the entire energy group.

The situation is completely different with project finance. Although the structure of the PF contractual relationship is much more complex, the restrictions mainly apply to special purpose vehicles (SPVs) and to a lesser extent affect the activities of the initiating company.

Sometimes a loan is considered as bridge financing for a specific investment period.

Ultimately, the part of the enterprise that has already been put into operation can be classified as an SPV and refinanced with a long-term loan provided by the bank directly for the SPV.

From the point of view of financial institutions, this practice minimizes the risks associated with the investment process. This ensures the safety of lenders and allows investors to save time and costs associated with bank supervision of the investment process and risk assessment of contractors. In addition, since the loan refinances a finished project, which does not entail additional risks associated with the investment process, it can be provided on much more favorable terms compared to standard contracts.

As mentioned earlier, the ability to obtain financing based on traditional models is limited by the ratio of net debt to EBITDA.

In the short to medium term, energy companies should have no problem with such financing.

However, as the need for financing large-scale energy projects is increasing, this model will soon fail to provide the required investments in the energy sector to maintain sustainable power generation and modernize distribution networks.

As a result, even the most powerful companies have to look for alternative long-term financing instruments.

Energy project finance

Projects that are more costly than the company’s current assets require project finance.

This financing formula is also chosen to limit the risk borne by the project sponsor and in case of attracting a large number of investors.

The PF is based on the assumption that the debts will be fully repaid from the funds received from the project. In the European energy market, this approach has been widely used to finance wind farms.

Preparations for financing large-scale energy projects can take up to several years, especially if the initiator invites a wide range of participants.

Financing energy projects includes the following stages:

• Development of a project concept and, in the case of attracting a large number of investors, establishing clear rules for their future cooperation.

• Carrying out a feasibility study taking into account all aspects of the project.

• Obtaining appropriate licenses and permits, negotiating concessions, etc.

• Analysis of the environmental impact of the future facility and obtaining environmental permits, as well as negotiations with the local community.

• Development and approval of technical and commercial documentation, preparation of a tender and signing an agreement with the general contractor (EPC contract).

• Obtaining funding for the project.

In the case of large projects requiring funding from several or even a dozen financial institutions, the initiator usually hires a financial consulting team to make decisions.

Such projects require a lot of research and negotiations with the participants.

CP Finance UK is ready to provide clients with various financing options for an energy project, helping to organize and coordinate financing. Both the initiator of the project and banks and investors cooperate with specialized companies responsible for due diligence.

When it comes to the energy sector, potential investors should additionally conduct technical analysis in accordance with accepted standards.

Investment loans for energy projects

The needs for long-term investment in the energy sector in Europe, East Asia and Latin America are enormous.

The question is how to find the most convenient funding sources for numerous projects.

Technological and regulatory uncertainty, which determines the hardly predictable efficiency of investment projects in the energy sector, remains a very serious problem for the market. The tightening of restrictions in the banking system is also becoming an important obstacle.

Although the best projects will find their place even in adverse conditions, the success of the vast majority of investments will depend on the stability of the regulatory framework and the right choice of financial solutions.

Sources of long-term financing of energy projects, in addition to the issue of securities (shares, corporate bonds) and leasing, is an investment loan. Companies use it as their primary source of funds for capital intensive projects.

An investment loan is a type of bank loan provided to finance investments aimed at increasing the value of a company’s fixed assets.

Typically, this loan is issued for a period of several years to two decades or more.

Funds received under an investment loan can be used in different ways. They are most often used to buy new fixed assets such as cars, machinery, devices or equipment. They can also be used to buy, build, expand, add or upgrade commercial properties, or lease equipment.

Loan funds do not have to be used only for investments in tangible assets.

The cost, interest and conditions for issuing a commercial construction loans differ from bank to bank only in details, because its general parameters are quite typical in all institutions.

Such a loan is provided for a specific purpose, such as the construction and expansion of a commercial property for sale or rent.

Repayment of the loan begins from the moment the facility is put into operation or the property is sold.

When discussing the terms of a particular financial product, it is important to take into account factors such as the bank’s margin, the applicable interest rate (for example, LIBOR), project timeframe, construction cost, assessment of the project’s profitability and creditworthiness of the client.

Typically, funds are offered for commercial construction loans for a period of 3-5 years or more, amounting to no more than 80% of the investment value.

To apply for a loan, a company must submit an application to the bank along with the documents listed above. Financing commercial construction involves large amounts of money over a short period, which also means high risk. It should be borne in mind that it can take up to several months for bankers to review the application and evaluate the project.

Obtaining a development loan for a new company that cannot yet demonstrate any construction experience can be difficult.

Banks offer loans only to companies that meet certain requirements, including financial stability, long experience in construction investments (usually at least 2-3 years), as well as collateral (for example, land plot) and initial contribution of at least 20% of the cost of construction. A commercial construction loan can also be provided to developers who will create a special legal instrument (separate legal entity) for the implementation of specific investments based on project finance.

It is generally easier to get a commercial construction loan for new companies that decide to set up a special purpose vehicle (SPV).

Banks are more favorable to such applicants, since it is easier for them to control the implementation of investments. In this case, however, the project documentation and partners’ credit history will have a big impact on the final decision.