A new June 2021 report from the International Energy Agency (IEA) outlines a major shortfall in investment in clean energy, energy efficiency and other decarbonisation measures at a critical time for the climate. The head of the IEA, Faith Birol, says that “much greater resources need to be mobilised and directed towards clean energy technologies for the world to reach a zero-emission economy by 2050.
Based on our new roadmap to net zero, investment in clean energy will need to triple by 2030,” while noting that there has been a small increase in both total energy investment and investment in carbon-free energy sources in recent months, Reneweconomy reports. *
This reflects the desire of governments and businesses to reduce dependence on fossil fuels and ensure energy security and environmental sustainability in the long term.
What kinds of financing are available?
НFinding cheap sources of financing for PV projects is becoming an important challenge for the development of renewable energy. In Bulgaria, financing opportunities for renewable energy projects are still scarce compared to those in the rest of Europe. This is largely due to the cautious interest in this area, mainly because of the complex administrative procedures and the uncertainty in meeting deadlines at each stage.
For the purposes of today‘s review, we would summarize the sources of funding into two main groups: grant (EU program funding) and debt (investment loans, escrow contracts, leases, project finance).
1. European funds are grants and their amount varies according to the objectives and conditions of the respective programs established to implement European Union policies. Funding is only available if the project is developed in accordance with the guidelines, regulations and principles of the relevant program. Usually, the grant awarded is a fraction of the total project cost, with the client having to provide funds for the rest. In most cases, the client carries out the project activities first with its own funds and only after submitting documents for the costs incurred and they are approved by the funding institution, a certain part of these funds is reimbursed by the European Union. Depending on the specifics of the program, the percentage of the grant of the total project cost, the maximum amount of aid and the eligible costs are determined.
In 2022, the new grant funding period associated with the Green Deal is expected to start. xFigureFinance works with specialists in the preparation and management of projects under various funding programs.
2. Bridge financing under EU programs is a short-term financial instrument (usually for up to 1 year) that is used temporarily as a “bridge” to the provision of a longer-term type of financing. It provides additional flexibility and ensures quick access to liquid funds. Bridge financing is more expensive than other traditional methods of raising funds because of the additional risk the lender takes on. In most cases, the interest on this type of loan is on a monthly basis, with the monthly payment covering only the interest costs and the full principal due at the end of the contract. Usually, a deductible of 10-15% is required, but can be up to 100% of the amount of financial assistance approved. The collateral sought by the Bank in these cases is a specific pledge of the receivable under the Grant Agreement; mortgage and pledge of assets subject to the investment.
3. Bank loans remain the most common way to finance renewable energy projects. This is a debt financing mechanism and is best suited for small PV projects (up to 5 MW installed capacity) where the loan amount is relatively small and usually covers all investment costs. Under the loan agreement, one party (the lender) transfers the agreed amount of project funds to the other party (the borrower). The amount advanced, plus a specified interest rate, must be repaid by the borrower within the agreed period. The financial terms are negotiated between the interested parties individually, depending on the amount requested by the project investor. When it comes to applying for a bank loan to finance the construction of a PV plant, a company can turn to one of the many commercial banks that finance renewable energy projects. If the project meets certain bank parameters, the administrative procedures for the borrower are simplified and the financial conditions become much more favourable (lower interest rates). In the case of banks or financial institutions, the term bankability is used to summarize the multiple criteria used to assess the feasibility of financing PV projects of different types and sizes.
Bank financing typically covers 70-90% of the total investment costs. The term varies between 8-10 years, collateral: the plant (PVPP, and for some banks that finance more than 70%, a mortgage of the entire property or a pledge of the TP (commercial enterprise) is required.
4. Project financing is a financial instrument, through which capital is injected into large investment projects (usually with an installed capacity of more than 5 MW). Unlike standard bank financing, applicants for project financing can be both existing companies with a credit and financial history, as well as newly created project companies. A characteristic of this type of financing is that debt and interest payments are repaid only from the cash flows of the investment project. The topic of project financing will be detailed in a future article.
What is our added value at the process?
Negotiating funding is perhaps the most flexible stage of the whole investment process. The result may take the project to additional passive income with maximum return or, in the opposite case, burden the investor’s current business as a result of an unrefined risk analysis and subsequent ineffective terms negotiated with the financing company. Our project finance services for PV power plants are not limited to financial modelling and professional advice. We are ready to find interested partners for your project using our extensive business contacts at every stage of the investment. After defining the project profile and the number of participants, as well as their tasks and obligations, our financial experts will propose the optimal financing structure for the PVPP project. The choice of financial instruments depends on many factors, such as project risks, SPV structure, investor expectations of return and risk, project scale, political and economic conditions in the country, and investor preferences in the project.