Introduction to Project Finance in Renewable Energy Infrastructure: Including Public-Private Investments and Non-Mature Markets

Preface
Acknowledgements
Introduction
Contents
Abbreviations
List of Figures
List of Tables
1 Introductory Concepts
	1.1 Renewable Energy Infrastructure
	1.2 Non-mature Markets
	1.3 Public–Private Context
	References
2 Developing Renewable Energy Projects
	2.1 Simplified Project Development Timeline
		2.1.1 Business Development in Non-mature Markets
		2.1.2 Poor Development, Poor Financing
	2.2 Development and Investment Phase Versus Operational Phase
		2.2.1 Match Between Sources and Uses
	2.3 Debt and Equity According to the Project Phase
		2.3.1 During the Investment and Development Phase
		2.3.2 During the Operation Phase
	2.4 Project Funding Timeline
	2.5 Evolution of the Project Value Over the Time
	2.6 Debt Refinancing
	2.7 Equity Sale Versus Asset Deal
	References
3 Difference of Interest Between the Stakeholders
	3.1 Government’s Interest Versus the Rest’s
	3.2 Government’s Proactive Planning
		3.2.1 Transparency
	3.3 Renewable Energy Policy
	3.4 Public Tendering
		3.4.1 Forms of Auction Design
	3.5 Agency Conflict and Asymmetry
	References
4 Project Company and Perspective of Each Player
	4.1 The Stakeholders’ Interests
	4.2 The Project Company’s Relationships
		4.2.1 Legal Restrictions of the Project Company
	Reference
5 Project Finance and Other Financing Forms
	5.1 Financing Forms
		5.1.1 Characteristics of Project Finance
		5.1.2 Characteristics of Corporate Finance
		5.1.3 Characteristics of Market Finance
	5.2 Relevance of the Future Cash Flow
	5.3 Investment Volume Versus Risk and Return
	5.4 Investment Time Versus P-Case
	5.5 Unsecured Loans
	References
6 Public-Private Partnerships and Concessions
	6.1 Advantages of the PPP Schemes
	6.2 Value for Money
	6.3 Contingent Risks
		6.3.1 Risk Optimum
		6.3.2 Typical Risk Allocation in PPP
	6.4 Social IRR and Social NPV
	6.5 Realistic Expectations of the Public Sector
	6.6 Unsolicited Proposals
	6.7 Direct Procurement
		6.7.1 Financial Closing
		6.7.2 Complexity in the Offers Comparison
	6.8 Hidden Costs
	6.9 Corruption and Collusions
	6.10 Consortia
	References
7 Contracts in Project Finance
	7.1 Main Contracts
	7.2 The EPC Contract
		7.2.1 Contractual Key Aspects
		7.2.2 Compliance: A Wicked Issue
		7.2.3 Back-to-Back Clauses
		7.2.4 Counterparty Issues
		7.2.5 Inconsistency in the Dates
		7.2.6 Interfaces Issues
		7.2.7 Insurance
	7.3 The O&M Agreement
		7.3.1 Types of Service Programs
		7.3.2 Difference Between OEM Warranty and O&M Guarantee
	7.4 The Offtake Agreement (e.g., PPA)
		7.4.1 Market Factors for the Attractiveness and Competitiveness of PPAs
		7.4.2 Type of Contracts in PPPs or Following Public Auctions
		7.4.3 Contract for Differences (CfD)
		7.4.4 Spot Demand and Price Forecast
		7.4.5 Financial Power Purchase Contracting
	7.5 The Concession Agreement (Case of Public Procurement)
	7.6 Cooperation Agreements and Mergers and Acquisitions
	7.7 The Shareholders Agreement
		7.7.1 Share Purchase Agreement: Selling Shares to a Third-Party
		7.7.2 Typical Project Data Room
	7.8 The Loan (Facility) Agreement
		7.8.1 Undertakings and Events of Default
		7.8.2 Sponsor Support Agreement
		7.8.3 Debt Restructuring After Insolvency
		7.8.4 The Support from Export Credit Agencies
		7.8.5 De-risking Through Political Risk Insurance (PRI)
		7.8.6 The Support of Development Banking
		7.8.7 Model Auditor
		7.8.8 Financial Adviser
		7.8.9 Individual Roles Within the “Club” of Lenders
		7.8.10 Lead Manager or Arranger
		7.8.11 Inter-creditor Issues
		7.8.12 Hedge and Investments Funds
		7.8.13 Brokers and Other Advisory Boutiques
		7.8.14 Bank’s Terms Sheet
	References
8 Risks Definition and Analysis
	8.1 Terminology
	8.2 Commercial Risks
		8.2.1 Risk Allocation: The “Golden Rule”
		8.2.2 Commercial Risks Matrix
		8.2.3 Refinancing Risk
		8.2.4 Quantity (AEP) Risk
		8.2.5 Social and Environmental Integration
		8.2.6 Life Cycle Assessment
		8.2.7 The Equator Principles
	8.3 Macroeconomic/Financial Risks
		8.3.1 Inflation
		8.3.2 Interest Rate
		8.3.3 Exchange Rate
		8.3.4 Catastrophic Devaluation
	8.4 Political/Country Risks
	8.5 Risks Versus Project Phase
	8.6 The Importance of Post-COD Monitoring
	8.7 Contracts Negotiation
		8.7.1 Reputation is Key
	References
9 Termination: Change in Law, Default, and Dispute Resolution
	9.1 Change in Law
	9.2 Default by One of the Parties
	9.3 Force Majeure
	9.4 Insurable Events
	9.5 Dispute Resolution Mechanisms
		9.5.1 International Arbitration
		9.5.2 UN Convention on Contracts for International Sales of Goods (CISG)
	References
10 Due Diligence
	10.1 Financial Due Diligence
	10.2 Legal Due Diligence
	10.3 Technical Due Diligence
	10.4 Further Due Diligence
	10.5 Managing the External Advisors
		10.5.1 Think Global, Act Local
	Reference
11 Basics of Financial Modeling
	11.1 Inputs and Outputs
	11.2 Detail of the Relevant Inputs
		11.2.1 Macroeconomic Assumptions (A)
		11.2.2 Project Costs or CapEx (B)
		11.2.3 Operation Revenues and Costs (C)
		11.2.4 Loan Drawings and Debt Service (D)
		11.2.5 Taxation and Accounting (E)
	11.3 The Cash Flow Model
	11.4 Inputs for a Renewable Energy Project
		11.4.1 Capital Expenditures (CapEx)
		11.4.2 Operative Expenditures (OpEx)
		11.4.3 Cost of Capital (CoC)
		11.4.4 Annual Energy Production (AEP) or Quantity
		11.4.5 Losses from the Future Quantities
	11.5 Further Relevant Notions for Inputs and Outputs
		11.5.1 Levelized Cost of Energy (LCoE) or Present Value of Energy Cost
		11.5.2 Notion of Residual (or Salvage) Value
		11.5.3 The Cash Flow Cascade
		11.5.4 Collateral Agreements
		11.5.5 Cash Sweep
		11.5.6 Cash Clawback
		11.5.7 Mini Perm
		11.5.8 Covenants
		11.5.9 Derivatives to Fix Interest and Exchange Rates
		11.5.10 Interest Rate Swaps
		11.5.11 Hedging and Currency Swaps
	References
12 Quantitative Evaluation of Renewable Energy Projects
	12.1 Minimum Profitability Indicators
	12.2 Notion of Present Value (PV)
	12.3 Notion of Net Present Value (NPV)
	12.4 Notion of Internal Rate of Return (IRR)
	12.5 Notion of Blend IRR
		12.5.1 Project Versus Equity IRR
	12.6 Notion of Modified IRR (MIRR)
	12.7 NPV Versus IRR Versus Project Size
	12.8 Payback Time
	12.9 Notion of Cost of Capital (CoC)
	12.10 Notion of Levelized Cost of Energy (LCoE)
	12.11 Notion of Cash Flow Available for Debt Service (CFADS)
	12.12 Debt Cover Ratios
		12.12.1 When Interest Rates Differ Over Time
	12.13 Debt Sizing
		12.13.1 Tax Issues While Calculating DSCR
		12.13.2 Average Life
	12.14 Importance of Leverage
	12.15 Linear Versus Annuity Repayment Schedule
	12.16 Sculptured (or Cash Flow-Based) Repayment Schedule
	12.17 Types of Repayments and Interest Payments
	References
13 Qualitative Evaluation of Renewable Energy Projects
	13.1 Qualitative Questions
	13.2 Sensitivity Analysis
		13.2.1 Building Scenarios
		13.2.2 Longer Tenor
		13.2.3 Longer Grace Period
	13.3 Project Structuring
	13.4 Absolute Versus Relative Attractiveness
	13.5 External Factors
		13.5.1 Project Competitiveness Ranking
	References
14 Asset and Portfolio Management
	14.1 Asset Management
		14.1.1 Commercial Management
		14.1.2 Technical Management
		14.1.3 Asset Management
	14.2 Portfolio Management
		14.2.1 Mean-Variance Portfolio Theory
		14.2.2 List of Diversification Factors for Renewable Energy Assets
		14.2.3 Portfolio Efficiency Frontier
		14.2.4 Beta and Non-diversifiable Risk
		14.2.5 Further Ratios
		14.2.6 Limitations
		14.2.7 Types of Investors in Renewable Energy
		14.2.8 Forms of Investments
	References
15 Trends and Technology Development
	15.1 Technology as a Risk Factor
	15.2 Technology as an Enhanced Efficiency Factor
	15.3 Role of OEMs and ISPs in the Improvement of the LCoE
	15.4 Oligopoly and Equipment Price Evolution
	15.5 Diversification to Reduce Dependency
	15.6 Enhanced Integration of “Variable” Renewable Energy
	References
16 Climate Finance at a Glance
	16.1 Global Warming and Environmental Issues
		16.1.1 Inherent Climate Change Risks for the Lenders
	16.2 The UNFCCC
	16.3 Focus on the Green Climate Fund (GCF)
		16.3.1 The Role of the Private Sector
	16.4 The Clean Development Mechanism (CDM)
	16.5 The Role of Blended Finance
	16.6 From Macro to Micro
	References
17 Case Studies: Auction Bid (I) and Shares Purchase Offer (II)
	17.1 Case of a Preparation of an Auction Bid
	17.2 Case of Preparation of an Offer to Acquire Asset Shares
	17.3 Caveat Both in Method and Results
18 Financial and Technical Glossary
	18.1 Financial Glossary
	18.2 Technical Glossary