In the first part of the article we told you about the differences between grant and grant funding and outlined some of the options for EU and bank funding.
We now continue by looking in detail at leasing and ESCO contracts and answering key questions on financing.
5. Leasing is an alternative mechanism for financing energy projects. This is a long-term contract under which the lessee company operates a solar power plant, paying the leasing company an amount that will cover the value of the asset plus interest. This model is typically applied to finance small and medium-sized solar energy projects. As a rule, it is focused on the duration of payments of 7-8 years on average. Under the terms of the lease agreement, the lessee is typically responsible for insuring the power plant against damage, including natural disasters, equipment theft and the like.
Leasing, as a form of financing for renewable energy projects, covers only the equipment and actually finances between 40-50% of the total project costs. We recommend it only in case the investor does not wish to provide other collateral (i. e. when the project is not separated into a separate legal entity).
6. In a guaranteed outcome contract (ESCO contract), the client does not need to invest its own money as the contractor finances the investment. The construction company provides the engineering, supply, installation and commissioning of the PV plant, as well as a financial scheme whereby the investment risk is assumed by the ESCO company. The investment is repaid over a term according to a repayment plan agreed in advance between the parties, with an added percentage of interest charged on the monthly repayments. The cost of the investment is recovered from the guaranteed savings resulting from its operation. Esco companies are highly specialised companies that have good engineering capabilities and usually have a stable financial partner – a bank or other financing institution. They are often divisions and subsidiaries of well-known manufacturers of energy efficiency equipment, lighting for buildings and outdoor spaces, etc. Esco companies can implement this type of services not only through their own investments, but also through funds raised from financial institutions. This financing mechanism for PV projects relieves the site owner of the risk and liabilities of project implementation and maintenance. This, of course, comes at the expense of a certain appreciation of the investment with the cost of covering the credit risk and profit for the company that made the investment.
Other benefits of energy efficiency contracts with guaranteed results include:
- work with only one source of services and equipment;
- work with only one source of services and equipment;
- an opportunity is created to secure project financing (access to capital);
- access to the technical expertise of the energy services company;
- technical and financial guarantees are provided for the achievement of project results;
- ensure accountability throughout the life of the contract;
- environmental benefits are achieved from reduced energy consumption and the use of renewable energy sources.
How much is the financial resource worth?
The cost of raising capital ranges widely from 2%-3. 5% (for bank financing) and 4%-7% (for EERSF) depending on:
- the assessment of the risk profile of the applicant;
- the amount of the investment;
- the amount of the deductible;
whether the interest rate is fixed; - the security of the transaction;
- additionally contracted business.
What is the maximum repayment period?
The maximum term is normally 7 years (fund) and 10 years (banks), in some cases up to 15 years (BDB); leases – (7 years – 10 years).
What is our added value in 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 PV 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.
We are a trusted partner from Idea to Financial Success.
