Project financing and long-term loans for hydropower plants viola-funding July 21, 2023

Project financing and long-term loans for hydropower plants

Hydropower plants project finance
Hydropower plants project finance and long-term loans

Project finance is not a fundamentally new form of financing, its importance for the world economy is steadily increasing. Optimal risk allocation and off-balance sheet investments are very important for investors at the early stage of hydropower plants project finance and long-term loans

Viola funding Limited is ready to offer hydropower plant project finance and long-term loans on attractive terms and flexible rates.

We offer flexible contracts, guarantees, long-term debt repayment and professional support to clients when setting up an SPV and attracting investments especially in the infrastructure and renewable energy sector.

The role of project finance for the construction of hydropower plants

Financial experts offer different definitions of PF, although there is no consensus in the scientific literature on the role of certain characteristics as distinguishing features of PF.

A private investor will start a project if the expected income significantly exceeds the cost of the capital involved. By entrusting the implementation of a hydropower project to a private company, the state benefits from the rapid attraction of large investments, which makes the construction of a hydropower plant independent of the financial condition of the state.

Since the PF is mainly used in areas of strategic importance for the state, in many cases investors join the project only after obtaining licenses and with the participation of government agencies.

Some of the key features of project finance include:

• Project participants such as contractors, managers, lenders, suppliers, electricity users, and often government agencies create a system of contractual relations aimed at identifying and managing risks based on the competencies, resources and experience of the parties.

• A special purpose vehicle implementing an investment project uses high financial leverage, while lenders have limited opportunities to make financial claims to sponsors in the event of a project failure (this is the so-called project finance with limited recourse or no recourse).

Benefits of financing for the construction of hydroelectric power projects

The governments of developing countries are not always able to manage projects of this kind at a sufficiently high level, therefore, attracting more competent partners from the private sector has a beneficial effect on the prospects for an investment project. Limited recourse project finance is a unique mechanism that allows companies to raise significant funds without using their own assets as collateral for debt.

On the one hand, project finance should provide the investments required for the construction of the facility, with flexible terms and a debt repayment schedule that is most consistent with the future financial flows of the project.

However, the obvious drawback of this scheme is its complexity and the need to conclude a complex of multilateral contractual relations to ensure the viability of the hydropower project in any possible business development scenarios.

We at Viola Funding Limited offers financing for large energy projects around the world. We are ready to provide comprehensive professional assistance to your business for the construction of hydropower plants in Europe, USA, Latin America, East Asia, Africa and the Middle East.

Alternative sources of financing for hydropower projects.

Project finance (PF) in its various forms is considered the most appropriate and sources of financing the  investments of hydropower projects. In general, financing of any investment project can be classified into equity financing and debt financing. This classification distinguishes long-term loans, subsidies, issuing shares, and so on.

Equity financing: Unlike traditional lending, business gives creditors the right to participate in the company’s activities and receive dividends. Consequently, this method of financing entails a decrease in the borrower’s share in the business.

Equity financing of hydropower projects involves the transfer of a certain share of the business and future cash flows to the lender. Moreover, this may entail a loss of control over the project, which is unacceptable for energy companies or large energy consumers in the context of a long-term development strategy. Equity financing, in essence, is raising capital in exchange for a certain part of a company or project by issuing shares.

The two distinctive large groups of hydropower equity investors includes;

• Strategic investors. Energy companies and sectoral investment funds, which have significant experience in hydropower, invest large sums in the construction of hydropower plants and are actively involved in the implementation of the project.

 Financial investors. Players such as private investors and mutual funds usually do not specialize in a particular industry.

Despite some risk, the high expected dividend yield continues to attract private and even public investors interested in this sector.

Long-term loans of hydroelectric plants from commercial banks

Debt financing for the construction of hydropower plants includes long-term loans from commercial banks, mezzanine financing, bond issues, grant financing and other instruments. Unlike equity financing, lenders do not have the right to manage the business and make strategic decisions, nor do they share risks and dividends.

Despite all the restrictions, bank financing are often the best option for financing capital-intensive investment projects for which it is difficult to find interested investors. The help of professional financial advisors and financial teams increases the likelihood of obtaining borrowed funds on more favorable terms, therefore, contacting international and national financial institutions requires the support of independent experts.

Also, large loans can be provided by international development agencies, state banks, investment funds and ECAs. But most often, companies have to cooperate with commercial banks such as Spanish Santander, French BNP Paribas, as well as JPMorgan Chase or HSBC Holdings.

Public private partnership for hydropower plants project finance

The role of governments is important in the context of formal guarantees and risk insurance, as government regulatory capacity remains disproportionately large compared to private energy companies.

PPP attracts co-financing from both public and private sources and distributes responsibilities, risks and benefits among these participants. This approach is considered one of the most diverse in terms of the tools used and the involvement of the state and private investors in a particular project.

Unfortunately, the world’s poorest countries do not have sufficient resources and experience to implement large energy projects through public-private partnerships. In these cases, the role of international organizations increases, which help governments in the development of the industry and provide the necessary funding for strategic projects.

The construction of hydroelectric power plants concession

An important element of cooperation between the state and companies that initiate energy projects is payment for the natural resources. Different countries use different approaches to calculating these payments, to which taxes, license fees, concession fees and other costs are added. In a new public-private partnership project, a private company is usually responsible for the engineering design, construction, financing and operation of the hydropower plant. This company offers related services, assuming traditional government responsibilities and adhering to strict quality criteria.

Expanding private capital participation begins with concession agreements for the construction of hydropower plants, which allow local and foreign companies to build, upgrade, expand and operate these facilities, generating a stable income from the use of natural resources. The terms of the concession differ significantly depending on the country that implements the project. In some schemes, such as the BOO contract, a private investor becomes the owner of the facility under construction. However, the BOT and BOOT models remain traditionally popular, which provide for the preservation of ownership of the hydroelectric power plant by the state with mutually beneficial cooperation with investors.

Cash flows from hydropower projects

Financing of large hydropower projects can be carried out against future cash flows, that is, the income that the energy facility should generate in the long term. In this regard, the formation of these flows is especially interesting.

Cash flow guarantee is extremely important for investors.

Can you guarantee that the consumer will buy energy for an extended period (for example, 15 or even 20 years)?This requires detailed study. The stabilization of the power grid is of greater importance for large hydroelectric power plants, while small HPPs mainly earn money from the sale of electricity to small consumers and ensure their autonomy.

In any case, the construction of a hydropower plant today represents a promising investment opportunity for energy companies.

If you are planning to build a large hydroelectric power plant, please contact our representatives. Viola Funding Limited offers hydropower plants project finance and other services.

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