Access to Financing Renewable Energy in
Nigeria – introduction of different models
and requirements
June 4, 2013
Lagos
OBJECTIVE
To give an overview of renewable energy project
finance and how they can be accessed bearing in
mind renewable energy related risks
Monday, 13 April 2015
Access to Renewable Energy Financing
© 2013
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Why Renewable Energy?
• Global Warming/Climate Change – UNFCCC Kyoto Protocol
• Depletion of fossil fuels (petroleum, coal, etc) – Energy
Security;
• Escalating costs of conventional sources of energy;
• Environmental protection;
• Need to achieve key Millennium Development Goal (increased
access to electricity).
• Africa has the lowest per capita consumption of energy in the
world;
• Africa’s average energy consumption per capita: 0.66 Tons of
Oil Equivalent (TOE) vs 1.8 TOE world average (est. 2008)
RE Project Finance
Project Financing:
 The International Project Finance Association (IPFA)
define project Finance as:
“The financing of long-term infrastructure, industrial
projects and public services based upon a
non-recourse or limited recourse financial structure
where project debt and equity used to finance the
project are paid back from the cash flow generated
by the project.”
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Financing Renewable Energy Training
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Financing Models/Sources for RE
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Adopt a Village Model (RESC-PD, MFI, AtRE/Sp)
Public Private Partnership (PPP Models)
Build Operate and Transfer (BOT)
Micro Financing Model (BoP)
Bank of Industry Window (Equipments Only)
Commercial Banks (e.g. Ecobank)
Carbon Credit
Other Financing Alternatives
• Government Loan Funds – e.g. Green Fund managed
by the Federation of Canadian Municipalities
• Investment capital from venture capital organisations,
socially responsible corporations, stock markets etc
• Community funds and bond issues
• Sale of environmental attributes such as greenhouse
gas emission reduction credits, renewable energy
(green) certificates or energy efficiency (white)
certificates
• National and international funds set up to provide
grants or interest-free loans to developers of RE and EE
projects e.g. GEF, GVEP, REEEP, etc
Renewable Energy Projects Challenges
• Underutilized potential:
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Only 5% of the continent’s potential of hydropower developed
Only 0.6% of the continent’s potential of geothermal developed.
• High cost of technology;
• Uneven distribution of resources on the continent:
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Northern Africa and South Africa account for 30% and 45% of total
electricity generated in Africa, respectively;
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Sub-Saharan Africa (outside South Africa) accounts for 25% of the
total electricity generated but 80% of Africa population resides in
the Sub-Sahara.
• High initial projects and related infrastructure costs;
• Trade-off between “on-grid” and “off-grid” projects;
Monday, 13 April 2015
Access to Renewable Energy Financing
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Renewable Energy Challenges
• Low purchasing power against the cost;
• Resistance to economic tariffs (capacity to pay versus
willingness-to-pay);
• Limited demand-side management;
• Political & regulatory environment;
• Socio-environmental issues;
• Trade-off between bio-fuels and food production;
• Lack of adequate infrastructure to effectively capture
urban and rural waste.
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Access to Renewable Energy Financing
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Financing Renewable Energy Projects
• AfDB has reserved US$ 547 billion to fund cleaner
electric power in all the 53 countries in Africa by 2030.
• Challenges of mobilising finance:
- Many economies in Africa are performing badly;
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Lack of government support (Political Will);
Little interest from private sector (equity) and
(debt):
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Long implementation period;
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High relative investment requirement (debt &
equity) compared to non-renewables;
Higher risk than non-renewables;
Lack of asset mobility;
Relatively higher tariff requirement
compared to non-renewables.
Monday, 13 April 2015
Access to Renewable Energy Financing
© 2013
lenders
Objectives of Project Finance
• Facilitation of Project Development
• Public Debt Reduction
• Reduce/Eliminate Impact on Balance Sheet (Limited
Recourse/Non-Recourse)
• Optimisation of Risk Allocation (Structured Finance)
• Management of Project Costs (Fixed Time/ Fixed
Price/Lump Sum Contract)
• Value for Money
• Optimisation of Return on Investment
• Attraction of Private Sector in Public Goods & Services
Investment
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Access to Renewable Energy Financing
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Key Elements of Project Finance
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The Project
Project Sponsor/Promoter/Developer
Government (Concession/PPP)
Special Purpose Vehicle (SPV)
Equity Provider(s)
Lenders
Offtake (Buyer) Contract(s)
Supply Contract(s)
Engineering, Procurement, Construction( EPC) Contract(s)
Operation & Maintenance (O & M) Contract
Insurance
Cash Flow
Security Package
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Access to Renewable Energy Financing
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Analytical Tools
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Risk Analysis (Political/Financial/Commercial)
Financial Modelling
Discount Rate
Discounted Cash Flow (DCF)
Free Cash Flow
Internal Rate of Return (IRR)
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Financing Renewable Energy Training
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Analytical Tools
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Project Rate of Return
Sensitivity Analysis
Ratio Analysis
Debt Service Coverage Ratio (DSCR):
- Loan Life Cover Ratio
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Project Life Cover Ratio
• Weighted Average Cost of Capital (WAC)
• Pay Back Period
Monday, 13 April 2015
Access to Renewable Energy Financing
© 2013
Funding Mix in Project Finance
• Equity:
- Shareholders’ Contribution
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Preference Shares
• Debt:
- Senior Debt
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Subordinated Debt
• Hybrids:
- Mezzanine
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Shareholders’ Loans
Access to Renewable Energy Financing
© 2013
Sources of Funds
• Equity:
- Shareholders (Individuals / Institutional Investors)
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Preference Share Investors
Venture Capital Funds
• Debt:
- Development Financing Institutions (DFIs): Bilaterals
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/ Multilaterals
Commercial / Investment Banks (Domestic /
International)
Underwriting (Hard vs Soft)
Financing Renewable Energy Training
© 2013
Uses of Funds
• Project Preparation
• Advisory Services (Financial, Legal, Technical)
• Permits / Licenses (Environmental, Water Usage,
Operational, Way leave, etc.)
• EPC Contractor
• Working Capital
• Cash Sweep
• Contingencies
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Financing Renewable Energy Training
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Risk Management in Project Finance
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Financial (Including Cost over runs, Underwriting, etc)
Commercial (Including Pricing, Quantity, Marketing)
Partner Selection
Economic (Macro – Economic Aggregates, Infrastructure,
etc)
Technical
Legal
Environmental
Social
Political
Climatic
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Financing Renewable Energy Training
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Risk Mitigation in Project Finance
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Identify Pertinent Risks
Develop a Risk Inventory
Develop a Risk Matrix
Undertake Due Diligence
Develop Risk Mitigation Strategy (Covering All Pertinent
Risks)
• Allocate Risks to Various Parties
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Financing Renewable Energy Training
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Risk Mitigation in Project Finance
• Develop & Agree a Security Package
- Key Project Agreements
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Key Commercial Agreements
Payments Mechanism
• Recourse to Sponsors:
- Limited
Management Fees Forfeiture
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Dividends (Current and Past) Forfeiture
Cost over runs
More Equity Injection
• Management of Contractors
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Financing Renewable Energy Training
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Key Legal Elements
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Project Contracts
Shareholders’ Agreement
Joint Development Agreement
Concession/Implementation Agreement
Environmental and Social Impact Certification
Loans Agreement
Common (Lenders) Agreement
Force Majeure Issues
Termination Clause(s)
Conditions Precedent (CPs)
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Financing Renewable Energy Training
© 2013
Project Bankability
• Contentious Issues:
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Tariffs
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Price Adjustments
Termination Clauses
Compensation
Step-In Rights
Direct Agreement (with Government)
Government Support
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Financing Renewable Energy Training
© 2013
Project Bankability
• Security Package:
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Key Drivers:
Concession Agreement
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Off-take Agreement (from Project)
Supply arrangements (to Project)
Government Support Agreement
Escrow Account
Tariff adjustment Mechanism
Insurance Arrangements (Policy)
Performance Bonds
Step-In Rights
Financing Renewable Energy Training
© 2013
Constraints for Funding of RE
• The process of arranging financing is time consuming
• The technical, contractual and consent aspects of a
project all affect financing
• Lack of proper dimensioning of perceived risks by
funding institutions coupled with general lack of
information, skills and incentives for deal-makers
• Project developers not carefully scrutinising every
aspect of the project and anticipating the concerns of
lenders
• A developer may believe the project will ‘sell itself’
based on merits, but in reality the developer will have
to adhere to the strict terms and conditions applied to
project financing
Sources of Financing
• Bank loans secured against assets or guarantees
• Co-development with a financially strong jointventure partner
• Limited recourse project financing, with bank
loans secured against future cash flows and
involving a series of complex contractual
arrangements (equity, senior and subordinated
debt)
• Leasing
• Capital markets – local and international
• Development institutions
Other Financing Alternatives
• Government Loan Funds – e.g. Green Fund managed
by the Federation of Canadian Municipalities
• Investment capital from venture capital organisations,
socially responsible corporations, stock markets etc
• Community funds and bond issues
• Sale of environmental attributes such as greenhouse
gas emission reduction credits, renewable energy
(green) certificates or energy efficiency (white)
certificates
• National and international funds set up to provide
grants or interest-free loans to developers of RE and EE
projects e.g. GEF, GVEP, REEEP, etc
Government Policies in RE
• Financial Incentives – such as production or user tax
credits, standing-offer contracts that provide a fixed
higher tariff for renewable power or efficiency gains,
and direct financial assistance in form of rebates or
free installation
• Regulation – removing inefficient and conventional
investments options from the market through
performance requirements in building codes and
equipment standards
• Market Support – certification and training,
information and technical assistance to users, market
transformation and other programs that remove
investment barriers.
Financing Issues in RE and EE
• Sources of financing – loans, investment capital,
environmental markets, international facilities and
partnerships;
• Policies that leverage increased investment – financial
incentives, standing offers, market transformation,
training and infrastructure development; and
• Financing mechanisms – micro-finance, on-bill
payment, leasing/rental, local improvement charges.
Key Legal Documentation
• Financial Documents
• Project Documents
• Support Documents
• Security Documents
• Expert Opinions
Power Purchase Agreement (PPA)
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Should involve a creditworthy buyer
Defined term and price
Acceptable operational and transmission risks
Acceptable security, default and termination
provisions (including lender’s rights)
• Wind PPAs usually don’t have capacity payments
because of their intermittent natures
• Damages for failure to perform
• Feed-in Tariffs
Project Risk Matrix
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Construction
Operating
Transportation
Environmental
Financial
Political
Contractual
etc
Principal Parties in a Project
• Shareholders
• Lenders
• Contracting parties
– Turnkey construction contractor
– Subcontractors, equipment suppliers
– Power purchaser
– Fuel/waste/feedstock supplier (if applicable)
– Network operator
• Operator
Conditions Precedent
• All project contracts and agreements being
executed and in full force and effect
• A satisfactory report from an independent
technical consultant (usually retained directly by
the bank)
• All permits, consents etc being in place
• A report from an insurance consultant, and all
insurances in place
• Execution of loan and security documentation,
and registration of security
Thank You
Monday, 13 April 2015
Access to Renewable Energy Financing
© 2012
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