Global investment in the energy sector in 2020 decreased by about $ 400 billion compared to 2019, while Financing of electrical substations amounting to just over $ 1,500 billion.

An electrical substation is a key node in a power system where energy is converted to adequate voltage levels for transport, distribution or consumption.

The development of any sector of the economy that consumes electrical energy, be it heavy industry or mining, requires additional investment in the construction of electrical substations and other elements of the power system.

Growing competition requires businesses to implement more efficient solutions in various areas, including generation, transformation and transmission of energy.

In recent years, companies in the power sector around the world have been challenged to implement new technological developments at their facilities to improve customer power services while striving for better quality and price conditions. The cost of electrical substations is also rising, given the stringent requirements for energy quality, safety and facility automation.

CP Finance UK FINANCE, a financial specialists perform a full range of works on the design and calculation of technical and economic parameters of electrical systems and networks, including the development of individual energy projects for power plants, industrial facilities, transport hubs, and so on.

We offer financing for electrical substations and construction of the facilities in Europe, the USA, Latin America, North Africa, the Middle East, as well as in the countries of South and East Asia.

The offerings of our finance company include the organization of project finance (PF), long-term investment loans and much more.

Determination of the cost of financing an electrical substations

Engineering design and financial calculations of electrical systems are based on a detailed analysis and feasibility study of the initial parameters and data collected at the pre-investment research stage.

The chosen option for the implementation of the electrical substation project should ensure the supply of energy to consumers with the lowest investment costs while maintaining optimal quality, reliability and flexibility of the facility.

Multi-stage work to determine the cost of financing an electrical substations includes the search for structures, equipment, materials and methods for their connection, which ensure the achievement of the planned economic indicators of the project with the obligatory compliance with the technical standards of the host country. These works should be an important part of all projects for the construction, modernization, expansion or reconstruction of electrical systems of any scale.

After the approval of a specific list of equipment, materials and technical solutions, our technicians begin stage-by-stage work on the development of technical documentation.

At the same time, the CP Finance UK Finance legal team is working to obtain the necessary approvals from local authorities, licensing authorities, representatives of electricity supplier companies, etc.

The electrical substations planning stage usually includes, but is not limited to:

• Analysis of the existing power system of the region including determination of its load, regulation conditions, as well as the potential for further development.

• Assessment of the requirements of key consumers to ensure optimal operating conditions for the equipment and substantiation of the parameters of the future power substation.

• Analysis of the parameters of the connected power plants and the selection of suitable operating modes for each facility to ensure their balance and dynamic stability.

• Performing professional calculations of power grid operating modes in order to develop an optimal scheme of electrical equipment including transformers, automation, protection systems, compensating devices and other units.

• Estimation of the required costs, including the purchase of materials and equipment, site preparation and the cost of professional services, including the services of construction contractors, independent consultants, etc.

• Preparation of a detailed report with technical and economic indicators of the future system, stages of construction, funding requirements.

The engineering design and financing of electrical substations in general covers an extremely wide range of practical issues.

Along with a systematic approach, which should be aimed at solving strategic business problems, the engineering team is faced with numerous narrow technical problems, such as the most rational choice of protection and automation devices.

There are many techniques used to estimate project costs in the early stages of development. These methods, widely used in areas such as electrical engineering, include Phased Estimating, Multi-Element Estimating, Factoring Estimating, and Parametric Estimating, among others.

In general, the cost of electrical substations today can reach several tens of millions of euros, which depends on the type of facility, capacity, location, the degree of technical complexity of the project and a number of other factors.

The schedule of financing  for the electrical substations and the amount of funds received at each stage of construction should be drawn up individually, taking into account the conditions of a specific project and the requirements of stakeholders.

Factors affecting the cost of an electrical substation

When starting the engineering design of an electrical substations, it is necessary to clearly define its place in the power system, to determine the function that it should perform today and tomorrow.

When determining the parameters of a substation under construction, it is important to clarify the investment efficiency indicators. Investment decisions are made on the basis of analytical information obtained from various sources.

The cost-benefit principle states that value is created when the benefit of a solution exceeds its cost.

The financial cost of the construction of an electrical substation is formed under the influence of the following three variables:

• Cash flow of the investment project.
• Time of project implementation from idea to commissioning.
• Risks and uncertainties associated with the project.

Any financial decisions made by project initiators and investors are closely related to the value of money over time.

The money received the next year is worth more than the same amount when it was received in the fifth or tenth year of construction. Most financial decisions made at the large business level must take into account the change in the value of money over time.

The most important factors affecting the cost of financing an electrical substations are the type of facility and its location in the system.

Finding the optimal solution is often difficult and requires deep economic and technical analysis.

When choosing a specific technical solution for a substation, several factors are taken into account, such as the location of the substation and the length of the associated low voltage circuits, the type and layout of the site, the characteristics of medium and low voltage networks for connection.

Both investment and operating costs are taken into account when preparing an engineering project. The costs of construction of a substation, power lines and installations constitute the main costs incurred from the moment of making a decision on construction until the moment of putting this substation into operation. Operating costs mainly include the cost of purchasing electricity, maintenance, repairs and energy losses. The exact proportions of these costs differ for each project.

It is worth analyzing these costs not only at the construction stage, but also in the context of the long-term operation of the facility.

The substation should be designed in such a way as to ensure the appropriate quality of electricity supplied to consumers at the lowest possible cost. The power quality is determined, among other things, by the level of voltage harmonics, frequency, symmetry of the supply voltages. The substation must be flexible, that is, it must easily adapt to connecting new loads or increasing existing loads. It should also be simple and safe to use.

Factors affecting the cost of an electrical substation are listed below:

• The location of the substation and the length of the MV and LV circuits connected to it, which should be as short as possible.

• The type and design features of the facility that directly affect the use of space and the requirements for the site and premises.

• The power of the step-down transformer in relation to the existing or anticipated future electrical load.

• Investor requirements and operating conditions governing the selection of electrical equipment and ancillary installations.

The investment costs of a substation and transmission line spent during the construction and installation period represent any costs incurred from the moment the decision was made to build a given facility until its normal operation.

Investment costs include the following:

• Material costs (transformer equipment, protection systems, line conductors, supports, cables, fittings and other elements and materials).

• Costs related to construction (operation of equipment used in the construction of the substation, planning of works and hiring of personnel).

• Design and administrative costs (eg development of project documentation, obtaining official building permits).

Operating costs include the following:

• Costs for the purchase of electricity, as well as associated costs to cover energy losses (the latter depend on the resistivity of cables, expected power and consumer demand for electricity).

• Costs associated with the maintenance, repair and maintenance of an existing electrical substation and its equipment.

• The cost of a system failure (in other words, the cost of undelivered energy). The cost of energy not delivered as a result of equipment failures is determined based on the failure rate, taking into account the average number of failures per year and the average duration of failures.

Based on the experience of numerous implemented industrial and energy projects, our professional team can compare alternative options for the construction of electrical substations, choosing the optimal solution for the customer.

The financing of electrical substations requires in-depth knowledge and experience due to the numerous technical and economic factors affecting a project.

For example, the location of the substation close to energy consumers allows to reduce the cross-section of wires due to less voltage drop at a distance. This, on the one hand, reduces investment costs, however, reducing the cross-section of the wires in this case increases the operating energy losses.

When placing transformer equipment inside the premises where energy consumers are located, there is no need for the construction of an overhead power transmission line.

The disadvantage of this option is the need to allocate the appropriate equipped space, which may be associated with additional investment.

When choosing the design of the future electrical substation, our engineering team must find a balanced approach to parameters such as efficiency, loss rate, safety, access and ease of use, compact design, equipment size and weight, initial investment and maintenance costs. The final decision always rests with the investor.

When making calculations for large capital-intensive projects carried out over several years, financiers take into account discounting formulas that translate future flows into current values.

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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.