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 focal points and main interests of many companies who are interested  developing capital-intensive projects to exploit the internal heat of different parts of the globe is geared towards Geothermal power plants financing 

According to research, 99% of the planet has temperatures above 1000°C, with temperatures over 5000°C prevailing in the interior of the Earth.

The heat content of our planet is 1010 exajoules.

This energy is theoretically sufficient to cover the energy needs of mankind for 250,000 years.

Nevertheless, despite the enormous economic potential, geothermal energy still covers no more than 1% of all our needs. In 2020, the world produced about 90 TWh of electricity from geothermal sources (excluding thermal energy), which corresponds to only 0.3 exajoules.

Geothermal energy, unlike solar and wind energy, is constant throughout the day and is not subject to weather fluctuations that require support from other energy sources. 

An important advantage of geothermal power plants is a high capacity factor, often exceeding 90%, which is significantly superior to other renewable energy technologies.

The growing popularity of geothermal heat pump heating systems is driving the rapid development of technology in this area, making pumps more efficient and profitable.

Geothermal power plants financing cost

Many governments are supporting these investments by setting preferential conditions for financing geothermal energy. Some market experts predict that the number of geothermal power plants in Europe will double in the next 5-6 years.

Geothermal energy projects today are in the process of intensive development, continuing to change based on new research around the world.

The construction of a medium-sized geothermal power plant usually requires an investment of several tens of millions of euros.

The cost of such facilities reaches 5.5 million euros per megawatt of installed capacity, but this figure can vary greatly depending on the technology used, geological features, temperature and other factors. Easily accessible heat sources located at a shallow depth underground make it possible to reduce the cost of a geothermal power plant to 2.5 million euros per megawatt of installed capacity and even lower.

Factors that affect investment costs for Geothermal power plants financing :
Research and exploration work.
Location selection and development of the site.
Choice of technology and engineering solution.
Labor costs and related costs.
Operating and maintenance costs.

An analysis of the costs of building geothermal power plants shows that equipment costs are linearly related to installed capacity. The cost of the above-ground part of a geothermal facility is on average 1 million euros per 1 MW, although this figure is dependent on the technology chosen.

Significant funds are needed initially for the purchase of land, since each megawatt of installed capacity requires an average of 2000 to 3000 square meters of land, not counting the surrounding “safety belt” around the power plant.

All this, together with the huge costs of engineering services, licenses and permits, means that only serious companies with significant financial resources or government support can afford the construction of geothermal power plants.

Meanwhile, the cost of electricity produced by geothermal power plants built after 2020 averages 2.5 euro cents per kilowatt. This makes geothermal energy quite competitive even when compared to more common renewable energy investment alternatives.

Financing geothermal projects from planning to launch

In the vast majority of cases, the construction of large geothermal power plant takes 6-12 years from the planning and exploration stage to launch. However, the construction phase can take 18 months or more depending on the chosen technology, equipment availability and funding.

Geothermal power plants financing can be technically complex and multifaceted, which depends on the natural conditions in a particular area.

The successful development of geothermal power plants and related investments requires significant funds at the stages of exploration and evaluation of thermal resources, which leads to the widespread use of long-term debt instruments.

In the vast majority of cases, the construction of large geothermal power plant takes 6-12 years from the planning and exploration stage to launch. However, the construction phase can take 18 months or more depending on the chosen technology, equipment availability and funding.

This industry is highly dependent on the results of exploration work, which requires uninterrupted funding in the very early stages of the project. Since it is difficult to predict the results of a future project at this point, companies usually have to start with internal financial resources rather than relying on borrowed funds. At the initial stage of any geothermal project, participants must ensure access to significant financial resources and develop an optimal insurance model to cover the high geological risks associated with exploration.

The following scheme for the construction of a geothermal power plant worth 90 million euros gives a good idea of the stages and scale of financing an investment project at different phases:

Initial capital costs are the biggest concern for any large geothermal project, especially one located in a so-called new geothermal area. In particular, the planning and permitting phase can cost up to 10% of the total capital costs, while drilling wells can cost up to half of the project budget.

If we add to this the costs of consulting, engineering services and insurance, then by the time the construction site is cleared and the foundation is poured, the project initiators can bear much more than 50% of the total costs of the project.

Providers of corporate debt may require company assets as collateral, which reduces the risk of this type of investment and makes debt instruments more accessible. In this case, financing terms and risks are assessed taking into account the financial health of the borrowing company, and not a specific project. Companies with good financial prospects can raise additional capital on attractive terms through the debt markets.

This capital can be directed to any existing need, including the development of projects at an early stage (exploration, permitting, engineering).

Mezzanine capital providers offer rather expensive financial resources, which may be required at the stage of drilling geothermal wells. This debt is secured by the project’ assets, allowing the lender to gain control of the land, equipment, and wells in the event of bankruptcy.

Mezzanine financing of geothermal projects usually also requires the initiator’s participation at the level of about 25-30%.

Loans for the construction of geothermal power plants

Given the very high costs of building geothermal power plants, the high cost of purchasing equipment and developing customized engineering solutions, syndicated loans play an important role in the development of geothermal energy.

In favorable conditions, loans for the construction of a geothermal power plant cover up to 80-90% of the total cost of the project.

However, this can be achieved mainly after a successful exploration phase, when the company can confirm the high production potential of a particular project and the key performance indicators look attractive and reliable.

In this case, refinancing is also appropriate, which allows the owners to extend the use of borrowed capital for the required period.

A typical construction loan is issued for a period of 7-8 years, including 2 years of construction and 5-6 years of subsequent debt repayment during the operation of the geothermal facility. Usually this period is enough to return the loan funds, especially given the rising cost of energy and the unstable situation in the hydrocarbon markets. Complex financial schemes using bridge loans are also used.

Financing geothermal projects across the EU

The right combination of financing instruments is critical to the success of geothermal investment projects.

This is proved by the practical experience of European countries, which is mainly based on attracting private capital with effective government support.

As we have said, unlike other renewable energy technologies, “deep” geothermal energy requires a huge initial investment. Only completed wells can prove whether a project will be successful or not. For this reason, the initial costs are in the tens of millions of euros, but there is no guarantee of success. Some European countries are trying to reduce this barrier with innovative tools, such as risk guarantees in the event of project failure, which allow the state to bear some of the costs.

In Europe, geothermal energy is being promoted in many ways and with great variety.

For geothermal projects, these include feed-in tariff costs, risk guarantees, subsidies, long-term loans, tax breaks, municipal investment funds, and even a wage subsidy for builders and employees of geothermal power plants.

Practice shows that where governments and municipalities provide innovative tools, geothermal sector is booming, as in France and Germany. On the other hand, Switzerland has for many years held one of the last places in such areas as financial support for drilling, soft loans and research grants.

If you need geothermal power plants financing / heating systems in the European Union, please contact our team.

CP Finance UK will find the best solution for your investment project.

Email:finance@cpuk-financeltd.com
Website:https://c-pfinanceuk.com/