Model of financing solar energy project
According to the Energy Outlook 2021, the combined market for wind and solar PV technology in Europe could grow by 35 GW during 2021, requiring an investment of 60 billion euros in Solar energy project financing.
The global renewable energy agency has shown steady growth over the past decades.
The International Energy Agency says wind power will grow by 8% and solar power by 13%.
Once completed, the solar power plant becomes the cheapest technology to operate for power generation, since solar radiation is available completely free of charge, and modern equipment requires minimal operating costs.
Thus, renewable energy sources easily displace fossil fuels as soon as they enter the market.
This gap will widen even further in 2021. Positive market trends plus preferential terms persisting in many countries will drive the sector’s growth. This is complemented by technological advances that have made newly built solar power plants cheaper on average than coal or nuclear power plants.
An important point in the context of increasing the competitiveness of solar energy is the correct choice of solar energy project financing.
Among the potential instruments for the implementation of these capital-intensive projects, long-term investment loans and complex project finance instruments are now available to businesses.
CP Finance UK provides optimal financing solutions for major renewables and Solar energy project financing around the world.
Our specialists are ready to provide customized solutions for each project, from long-term financing to the development of technical documentation and the construction of a solar power plant under an EPC contract.
We help numerous clients in the development of solar projects in Europe, the Middle East, USA, Latin America, Southeast Asia and Africa. Contact our representatives and get a free consultation.
Construction of solar energy plants: Long-term bank loans
The implementation of solar project financing can be protected by real guarantees in the form of securities, real estate, movable property and other valuable assets.
If there is not enough collateral, the financial institution may request one or more guarantors to provide debt repayment in the event of a default on the borrower’s company.
Considering that the construction of a large solar power plant with an installed capacity of 100 MW may require about $ 80-100 million or more, some projects are financed by bank syndicates, rather than individual banks.
A bank loan is one of the oldest and most popular business financing instruments that remains in high demand in solar energy.
A significant percentage of the $ 2.7 trillion invested in renewable energy sources in the world over the previous decade came from long-term loans.
Some of the features of the latter are listed below, hence there is no fundamental difference between short-term and long-term loans
• The interest rate can be fixed or variable, the latter being common. Recently, loans with a more complex variable interest rate are often offered.
• Long-term loans for the construction of solar power plants are usually provided for a period of 5-7 years or more, depending on the type of project.
Syndicated loans are provided for the implementation of large projects through one credit operation.
This type of lending helps energy companies reconcile the demand for large volumes of financing with their desire to avoid excessive concentration of risk from financial institutions.
Project financing of solar power plants
Large enterprises making long-term investments today are forced to attract capital from outside, since they rarely have significant amounts of their own funds.
Various financial instruments come to the rescue, which include loans, leasing and project finance. Energy companies that run several expensive projects at the same time or are faced with debts for previously consumed energy need capital for further development and implementation of large projects.
PF opens up new opportunities for business expansion, relying on the prospects of a specific project, and not on the assets of the borrowing company.
Along with the growing popularity of project finance and the development of more and more efficient variants of this method, it is becoming suitable for smaller and smaller projects.
The project finance (PF) method is one of the most advanced methods of raising funds for large solar energy project financing and other capital-intensive energy facilities.
The PF allows a business to attract significantly larger funds in comparison with traditional bank lending.
Borrowers should understand current financial market offerings and carefully analyze individual offers.
CP Finance UK is ready to provide you and your employees with comprehensive advice on the implementation of investment projects.
Benefits of project finance for solar energy sector
PF can be characterized as a method of financing investment projects, separated from the initiators of the project, in which the main source of debt repayment is the cash flow generated by the project, and the debt is secured by the assets of the project, but not by the initiator company.
The basis for the success of project finance for solar power plants is the reliability of financial institutions and an adequate assessment of the profitability of an investment project and its future cash flows.
Benefits of solar energy project finance include the following:
• Ability to involve government agencies, national and international institutions in order to monitor the implementation of projects.
• Off-balance sheet nature of financing, which contributes to maintaining a high creditworthiness of the initiator of the solar project.
• Relief of the public sector from high capital expenditures.
• Attraction of significant borrowed funds that cannot be obtained using traditional financial mechanisms, such as a bank loan.
Potential investors should consider possible hidden costs. In particular, there may be additional costs associated with loans and financial derivatives.
Often there are costs associated with a complex procedure, including diversification of risks and distribution of responsibilities of the parties involved in the project.
Mishaps associated with the implementation of a solar energy project financing using project finance is the risk of conflicts between individual participants involved in the project.
The PF ensures the attraction of adequate resources and diversification of risks.
Disadvantages of Solar energy project financing using project finance:
• Political barriers. Political risks are relevant not only for developing countries with their unstable legislation and high levels of corruption.
Today, some countries are abandoning incentives for solar energy, leaving existing projects alone with market reality.
• Economic barriers. The danger lies in a decrease in demand and a drop in the cost of generated energy after the guaranteed period. Abrupt changes in the structure of the economy can change the market environment. The lack of capital in some markets also creates certain problems for attracting solar energy projects financing.
• Technical barriers. Power generation is difficult to accurately predict due to changing environmental conditions and fluctuations in solar radiation. It is also important to consider that technological progress brings more and more new technologies that can compete with the current project.
Choosing a financial model for a solar energy project
The first business model is to finance the construction of a solar power plant through a long-term bank loan. In many countries, such a loan is not difficult to obtain by holding a successful auction and submitting a serious business plan.
The second business model involves the organization of project finance (PF) with the involvement of an investor who, at a price determined depending on the capacity of a given facility, finances its construction and acquires ownership of this asset. Sometimes the company, in addition to cash injections associated with the completion of the solar power plant, receives a long-term contract for its maintenance.
The transaction is usually carried out as the purchase of shares in a limited liability company whose assets are a photovoltaic installation.
Typically, a long-term contract for the operation and maintenance of the facility is signed between the same parties. The company that is the subject of the transaction receives a guaranteed sales price for the energy produced for 10-20 years and guarantees the estimated costs necessary to keep the installation at the highest level of efficiency.
Companies that succeed in the auction often have limited time to expand their PV capacity.
What is the best financial model for a solar power plant project today?
As mentioned above, there are two main ways.
How much does a 1 MW solar power plant cost?
The cost of building a solar power plant remains a secret, which is revealed to the initiator only as a result of detailed design calculations and negotiations with potential contractors and equipment suppliers.
The cost of each megawatt of installed capacity can be named only approximately, focusing on the specifics of the project and the market of the host country.
What should be consider when planning a solar project
Unfortunately, the photovoltaic industry is a complex business and the greatest risk comes from the investment time horizon.
The investment period is at least 10-15 years from the date of the first sale of energy. During this period, the cash flow for electricity sold is usually guaranteed at the level offered at the auction and indexed for inflation.
After this period, it is necessary to forecast the price for the entire remaining life of the installation.
The use of advanced financial models for the construction of solar power plants (for example, project finance) has transformed renewable energy in the last few decades, making it an affordable business with a low threshold for entry.
Solar energy project financing is becoming an increasingly promising field of investment for investors these days as the market matures and grows across the world.
The project depends on successful planning, engineering design of a solar farm, finding and preparing a suitable site for construction, obtaining licenses, supplying electrical components and metal structures, installation, etc.
If you are planning to build a large solar power plant, contact our consultants.
Our financial and technical team will help you get the expected construction cost estimate, select engineering solutions and determine the optimal financial model for a specific project.
Email:finance@cpuk-financeltd.com
Website:https://c-pfinanceuk.com/
