Energy sectors Project finance ( in the  is driving innovation and the green transition, providing reliable power generation and gradually reducing the carbon footprint of the global economy.

Project finance schemes are enabling an increasing number of companies to switch to renewable energy sources such as wind farms, photovoltaic plants, biogas power plants and others.

At the same time, access to high financial leverage facilitates the implementation of large conventional energy projects as a bridge to a sustainable future, including the modernization of coal-fired thermal power plants, the construction of gas-fired combined cycle thermal power plants and other facilities.

It is becoming increasingly difficult for companies specializing in energy projects to implement capital-intensive projects without a high share of equity capital, especially against the backdrop of increasingly tight regulation in the banking sector.

Innovative project finance mechanisms, long-term investment loans, mezzanine capital, reliable loan guarantees and comprehensive consulting support allow our clients to implement large energy projects with 90% debt financing.

Contact CP Finance UK Finance to find out more.

Project finance in the renewable energy sector

Project finance refers to a method of raising long-term debt financing for large projects through financial engineering tools based on loans provided against the future cash flow generated by the project.

A distinctive feature of project finance is the participation of the SPV (special purpose vehicle), which is engaged in attracting the resources necessary for the implementation of the investment project, ensures its construction and makes payments on loans issued to energy sectors project finance  from the funds received through energy generation.

Securing the return of borrowed funds attracted to finance an investment project is the cash flow generated by the project. In addition, assets created during the implementation of the RES project can be provided as collateral. In other words, PF schemes do not require sponsors to provide their assets to ensure the return of received borrowed funds at the initial stage of the investment stage of the project. This makes project finance a fairly risky tool for capital providers.

Project finance in renewable energy is characterized by the following features:

• Comprehensive analysis of projects.
• Rational sharing of risks between project stakeholders.
• High requirements for the margin of safety of projects.
• Tender approach to the selection of suppliers and contractors.
• Complex contract structure of RES projects.
• Strict monitoring and control at all stages.

An important aspect of the implementation of energy projects, in addition to technology development, is the diversification of financing sources, in particular, the issuance of various types of securities.

The evolution of the financial market over the past decades has led to an increase in interest and the formation of a high demand for project finance bonds, opening up wide opportunities for financing renewable energy projects.

It has become profitable for commercial banks to refinance long-term investment loans in the bond market through the additional issuance of PF bonds or securitization.

At a certain point, the assets of the renewable energy sectors project finance had one of the highest potentials for securitization.

Starting around 2015, financial market participants began to actively use green bonds, which allowed energy companies to finance renewable energy assets by issuing bonds, the proceeds of which are directed to projects or activities with environmental goals. The growth in renewable energy funding has had a positive impact on the construction of photovoltaic power plants, offshore wind farms and other environmentally friendly energy projects in Europe and beyond.

Solar power plants

For project finance, solar energy projects are more suitable than wind generation projects, which are considered more technically complex and risky.

The commissioning of new photovoltaic power plants creates significant potential for the issuance of project finance bonds in the field of solar generation around the world. The specificity of solar energy technologies is such that continued investment in this sector is accompanied by a significant reduction in the cost of technologies and an increase in the competitiveness of the energy produced due to economies of scale.

Skyrocketing prices for natural gas, fuel oil and coal, caused by geopolitical tensions on the European continent in 2021-2022, are also boosting investor interest in energy sectors project finance.

It is one of the most well-studied and predictable sources of energy, making entire industries independent of fossil fuels.

Thanks to changes in the fossil fuel market and active support from governments, energy sectors project finance  has become very attractive.

Compared to other renewable energy facilities, solar energy projects are the most typical from an engineering point of view, since the technologies and equipment used in the construction of solar power plants are largely identical in projects implemented around the world. Low risk and predictable performance are some of the reasons why project finance models are extremely widespread in the construction of solar power plants.

Today, there are dozens of large solar power plants of various types around the world built using project finance.

Among them we can mention Benban Solar Park (Egypt), Noor Power Plant (Morocco) and others. Major financial institutions and companies such as Acciona Energy are actively involved in the development of innovative solar projects, making an invaluable contribution to the energy transition.

Wind farms

Project finance, being one of the priority tools for stimulating economic growth, allows the implementation of large-scale wind projects such as the construction of offshore wind farms.

The latter, having enormous development potential, are considered as one of the main sources of green energy for coastal regions, in particular for European consumers near the North Sea and the Baltic Seas. This is confirmed by the achievements of Germany, Denmark, Poland and other countries.

In Germany, using the project finance tool, the Nordsee ONE and Butendiek wind park projects were successfully implemented.

For their implementation, independent companies were established, the purpose of which was the development, financing, construction and operation of wind farms.

For example, Nordsee One GmbH was established for the Nordsee ONE park, while Western Power Distribution became the co-owner, operator and developer of the Butendiek wind farm.

International experience shows that global climate issues and rising fossil fuel prices are leading to an increase in project finance activity in the wind energy industry, especially in Europe and North America. The trend towards increased use of project finance schemes in the EU can be largely attributed to government programs, in particular targeted efforts to attract investment in renewable energy sources.

These government efforts are complemented by leading wind turbine manufacturers such as Siemens Gamesa and Vestas, who are investing hundreds of millions of euros to improve equipment capacity, reliability and reliability.

Hydropower plants

The top ten countries in terms of installed hydropower capacity remain unchanged over a long period of time.

China, Brazil, Canada, USA, Russia, India, Norway, Turkey, Japan and France remain the leaders, together accounting for more than two-thirds of the world’s installed capacity. These are countries that, due to the abundance of water resources, are able to develop hydropower projects on a sufficient scale and with high economic efficiency.

However, there are fewer and fewer suitable sites for new HPPs, which, along with tightening technical requirements, increases the cost of engineering and construction of such facilities.

Due to financial and technical reasons, hydropower is inferior in terms of investment attractiveness to other sources of renewable energy, especially solar and wind energy. This has a negative impact on the investment in the industry.

Between 2015 and 2019, the global average annual growth in installed hydropower capacity was 2.1%, which is considered a very modest figure. The need for increased funding for hydropower projects is felt almost everywhere, from greenfield projects to capital-intensive modernization of existing HPPs.

Energy sectors project finance has traditionally played a critical role in this sector due to the huge initial costs and long payback periods of such projects.

Few companies, even in partnership with government organizations, are willing to bear such costs without external support.

The cost of building a hydropower plant varies widely, depending on the specific location and natural conditions, the technology used and the scale of the project.

Previously, such facilities could build about 500,000 euros per 1 MW of installed capacity, but now the construction of hydroelectric power plants in hard-to-reach river sections in compliance with the strictest environmental requirements can easily exceed 4 million euros per 1 MW of installed capacity.

The establishment of a special purpose vehicle, isolation of project assets from its initiators, high financial leverage and rational distribution of project risks create the most favorable conditions for attracting financing for the construction of hydropower plants in the current environment.

Project finance in the conventional energy sector

Thermal power plants at the initial stage of construction are generally considered to be a cheaper solution compared to energy sectors project finance of similar installed capacity.

However, the exorbitant prices of natural, gas and coal make these plants quite costly to operate, so the cost of electricity produced can rise substantially during times when fossil fuel supplies are scarce. As a controversial energy source with an uncertain future, conventional energy facilities are now considered risky investments, which explains the difficulty of financing such projects.

Since thermal power plants are directly dependent on the availability of fossil fuels, in many cases these facilities are built near energy sources such as coal fields, liquefied natural gas terminals, large pipelines, refineries, and so on. Usually these are very large projects with an installed capacity of 1 to 3 GW or more, consisting of several multi-megawatt power units and a developed infrastructure.

The cost of such facilities can run into many hundreds of millions of euros, which poses serious long-term financing problems for sponsors.

Project finance is now widely used in the thermal power industry, providing companies with the effect of high financial leverage and convenient financing mechanisms with minimal risk.

Some features of PF model are listed below:

• Flexible application of a wide range of financial mechanisms, including long-term investment loans, the issuance of corporate securities and others.

• Using future financial flows as collateral for debt, as well as providing assets of a special project company created as part of a specific thermal power plant project as collateral.

• Energy project financing is carried out through a specially established legal entity (SPV, SPE, SPC), which is formally independent of the initiators and has separate assets.

• Adequate level of financial participation of the project sponsors, which can reach 10-20% of the estimated project cost or more, depending on the agreements. Thus, 80-90% of project costs are covered by banks / investors, which allows using the effect of financial leverage.

• Given the complete absence of collateral or its limited nature, the reliability of the PF model is ensured by a complex multilateral contractual structure with a rational distribution of risks and responsibilities of the parties.

In fact, the project finance (PF) is justified only by the high reliability of the project and the high confidence in the technologies, which can be achieved with sufficient experience and professional approach of the contractors.

Obviously, this is much more applicable to traditional energy sources than to little-studied alternative technologies.

Combined cycle power plants

Project finance, based on the repayment of project debts from future cash flows, has been considered for several decades as one of the best solutions for conventional energy facilities.

This is especially true when it comes to large capital-intensive projects built on proven and reliable low-risk technologies. Highly efficient and reliable Combined Cycle Gas Turbine (CCGT) power plants are now considered mainstream in the thermal power sector. This is an area where the potential benefits of project finance models are fully realized.

World experience in the construction and operation of thermal power plants has shown that the generation of electricity and heat at them is most effective in combined-cycle gas turbine power plants, which include a gas turbine and a steam turbine.

As a result of this combination, the heat is fed into the gas turbine (the cycle at a high initial temperature of the combined system), and the unused heat is removed to the steam turbine, which operates at a relatively low temperature.

This technology provides the maximum efficiency that can be achieved by burning fossil fuels.

As an important bridge between conventional energy and a carbon-free future, gas turbine combined cycle power plants powered by natural gas are now regarded as one of the most important sources of electricity for industry and households in developed countries.

Despite the problems caused by the explosive growth in hydrocarbon prices, highly-efficient CCGT projects continue to be seen as one of the pillars of the global economy for the coming decades.

Project finance plays an important role in modernizing and improving the efficiency of the European energy sector, supporting local economies against the backdrop of rising hydrocarbon prices. One example is the recent 560MW CCGT plant project in Grudziadz, which is being developed jointly with MYTILINEOS and Siemens Energy Global GmbH.

The power plant, an EPC contract for the construction of which has been signed since May 2022, will be financed through a special purpose vehicle on a PF basis.

Modernization of coal-fired thermal power plants

 

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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The development and prosperity of agribusiness is impossible without attracting credit resources, since agriculture is a capital-intensive industry with a high level of risk. Investments in agriculture and financing of agribusiness and enterprises are increasingly in need of attracting long-term financial resources for the modernization of equipment, the construction of new facilities, and the introduction of innovative technologies.

Due to the uncertainty of external factors, low creditworthiness, low quality and liquidity of the collateral that enterprises can offer, the lack of mortgage lending mechanisms in the sector, as well as due to the imperfection of legislative mechanisms, obtaining these loans can be quite problematic. This is especially true of developing countries.

the key problems of investments in agriculture and financing of agribusiness, If we narrow down the recent situation on the market of long-term financing, includes the following:

• Borrowers lack liquid collateral for loans, as the assets of most agricultural enterprises are limited to land and equipment.

• High loan interest rates and a long procedure for reviewing loan applications from agribusinesses that require state support.

• The strong impact of seasonality on agricultural production and dependence on climatic conditions, which are largely unpredictable and pose a certain risk.

To improve the financing of agriculture in a highly competitive environment, it is necessary to create an adequate financial infrastructure aimed at large-scale agricultural lending.

The financial infrastructure should include not only commercial banks, but also credit unions, credit cooperatives and other institutions operating with the financial support of the state and/or supranational bodies. In the countries of the European Union and beyond, there are many successful examples of building such a financing system that contributes to the stable development of agribusiness.

Agriculture of any country remains the basis of food security, which depends on large long-term investments and lending.

There is a seasonal gap between investment and cash flows from the sale of products.

A significant need for working capital turns bank loans into the main source of replenishment of financial resources for the medium and short term.

However, the study of the finances of agricultural enterprises shows that they mainly work at the expense of internal resources, which are often insufficient. Limited resources force agribusiness to seek support from banks through various forms of lending, hence the need for strong state regulation and support in this area.

The problem of insufficient access to bank financing is particularly characteristic of small and medium-sized businesses. According to international financial organizations, about 80-85% of the financial needs of farmers around the world are not met, including due to the lack of adequate conditions for debt financing. The needs of small farms now exceed $200 billion, while financial institutions invest a little more than $30 billion in their development.

The situation with investments in agriculture and financing of agribusiness is much better, this segment also faces numerous problems when interacting with banking institutions.

Finding and attracting a bank loan for a large-scale agricultural project today is quite a difficult task that should be entrusted to a professional financial team.

Investments in agriculture and bank financing of agribusiness

Agricultural financing currently involves the use of a wide range of sources, mechanisms and tools for the formation of financial resources.

In current realities, agriculture remains one of the most important sectors of the global economy.

Investments in agriculture and financing of agribusiness guarantees food security, creates revenues for the development of rural communities.

To ensure uninterrupted activity of agricultural business, it is necessary to provide several alternative sources of financing, which are not mutually exclusive and can be used simultaneously.

The organization of a rational structure of agribusiness financing is a multifaceted process that depends on many factors, including the rhythm of inflows of funds in a certain period of time, directions of enterprise development, financial health, market structure, and investment prospects.

Internal sources of financing agricultural projects, which are formed using the company’s profit, play an important role in the investment activity of large agricultural companies, which ensures their independence and financial stability.

However, the practice of leading agricultural enterprises proves the need for bank lending, including long-term loans for financing large, expensive projects.

Nevertheless, a dynamic and highly competitive globalized economy requires rapid response of agribusiness to environmental changes, so internal financial sources are often insufficient to ensure effective current activities and investments. Due to its high sensitivity to the influence of various negative factors, agriculture also needs certain state support.

Thus, external debt financing (long-term investment loans, leasing instruments, project finance mechanisms), as well as government subsidies, are important factors in the successful development of agriculture.

Investment opportunities in agriculture

The conflict in Ukraine in 2022 has reminded us of the vital role of an uninterrupted supplies of agricultural products, the disruption of which can cause skyrocketing price increases and shutdown of entire industries.

Today, the global agricultural sector needs huge investments. These should be smart investments that will contribute to the fight against climate change, increase overall efficiency of agricultural production and promote new products. It is difficult to overstate the importance of financing innovation in agriculture, which remains extremely sensitive to adverse environmental factors such as drought.

Investments in agriculture and financing of agribusiness today are considered extremely profitable and critically important for the world economy.

It is worth noting separately the growing financing of the so-called vertical agriculture, which, according to forecasts, will reach $32 billion in 2030. These innovative technologies are actively developing in the USA, Japan, China and a number of other developed countries, where companies are actively attracting venture capital for the commercialization of innovative technologies.

Experts emphasize the importance of financing projects, which are based on the latest technologies and principles of climate neutrality. Agriculture on the current scale is a huge contributor to global warming, and negative climate change is beginning to affect the efficiency of agriculture.

CP Finance UK is ready to help agribusiness in long-term financing of agricultural projects across the world.

OUR services for large businesses are not limited to the below;

• Project finance for capital-intensive initiatives.
• Financial engineering and modeling services.
• Letters of credit and bank guarantees.
• Investment consulting and much more.
• Investment crediting of agricultural projects.
• Commercial and industrial loans.

Our company has united leading investment and financial experts who work side by side with the customer at all stages of the investment project in order to achieve the optimal result. 

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