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The views expressed in this presentation are the views of the author and do not necessarily reflect th

e views or policies of the Asian Development Bank Institute (ADBI), the Asian Development Bank (AD
B), its Board of Directors, or the governments they represent. ADBI does not guarantee the accuracy
of the data included in this paper and accepts no responsibility for any consequences.

Financing Small-Scale Green Power Generation

Financing Approaches to Overcome Barriers Inherent in Small-


Scale Renewable Projects

25 June 2018
Nadi, Fiji

KooJung (KJ) Yang


Director
Global Business Development Department
Korea Eximbank
Table of Contents

I. Key Barriers to Making Small Renewable Energy Bankable

II. Financing Product – Discounting Facility

III. Financing Approach – Seven Sisters Solar PV Projects in

Jordan under Simplified and Standardised Financing

Program

IV. Q&A

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Ⅰ. Key Barriers to Making Small Renewable
Energy Bankable

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I. Key Barriers to Making Small Renewable Energy Bankable
Potential opportunities of small-scale renewable energy projects for developing countries,
developers and banks

Potential
opportunities  Small-scale renewable energy projects (“SREPs”) can play a
significant role in deployment of renewables in developing
countries
 SREPs are well suited to conditions in emerging markets as
they would allow developers and banks to gain experience at
a smaller scale and a more limited/contained risk profile
* Small-scale is defined here as projects of generation capacity between
1MW to 20MW

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I. Key Barriers to Making Small Renewable Energy Bankable
Key barriers such as high interest rates, short tenors not matching long-term nature of
SREPs, and high collateral and/or equity requirements

Key barriers  Key barriers include:


• Risk mispriced: less risk embedded in SREPs constructed and have
long-term offtake agreements
• High transaction costs: costs associated with administrative
overhead, legal fees, sector experts and so on
• High equity/collateral requirements: 40% to 50% or more
• Extensive and intensive due diligence

Financing  In spite of potential opportunities and benefits, financing


options out
options available for SREPs in emerging markets are often not
of sync with
financing aligned with the financing needs of them
needs of  Given the high transaction costs, extensive and intensive due
SREPs diligence and long processing periods, SREPs are typically
financed with corporate loans, which are not designed to
finance SREPs

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Ⅱ. Financing Product - Discounting Facility

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Ⅱ. Financing Product – Discounting Facility
Innovative financing product developed by The Global Innovation Lab for Climate Finance
as small-scale renewables financing facility

Developed  The Global Innovation Lab for Climate Change (the “Lab”,
by the Lab www.climatefinancelab.com) has developed a new and
complementary financing product called the Discounting
Facility in 2016
 The Lab is a global initiative that supports the identification
and piloting of cutting edge climate finance instruments.
Development financial institutions (“DFIs”) such as the World
Bank Group, IDB, AfDB and global commercial banks
participate in the Lab and share valuable ideas to make
innovative initiatives realities

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Ⅱ. Financing Product – Discounting Facility
Key features of the Discounting Facility

Premise  Based upon the premise that a renewable energy project that is
built and running and has a long-term power purchase
agreement (“PPA”) carries limited risks

Key features
 Refinances projects post-construction through the Discounting
Facility that “discounts” future cash flows from PPAs to
serve as collateral
 Sponsors are able to take equity out of the project and, as a
precondition of borrowing the Discounting Facility, invest it in
new SREPs
 Allows SREPs to obtain lower priced long-term debts and
higher leverage
 Structured as a blended finance facility with a donor-funded
first loss tranche and senior funding from DFIs and commercial
investors
 Uses a corporate finance approach to simplify financing and
due diligence while financing decision is based upon the cash
flows of the project rather than the balance sheet of its
sponsors 8
Ⅱ. Financing Product – Discounting Facility
Operational structure of the Discounting Facility

Responsible for
interacting with
borrowers, reviewing
documentation, and
disbursing funds

Figure 1. Operational Structure of the Discounting Facility. From Small-scale Renewables Financing Facility
by the Lab (2016, June 27). Retrieved from https://climatepolicyinitiative.org/wp-
content/uploads/2016/12/Small-scale-Renewables-Financing-Facility.pdf
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Ⅱ. Financing Product – Discounting Facility
Eligible projects for the Discounting Facility

Project eligibility criteria

Operating history  Operating for at least one (1) year

Capacity  Nameplate capacity between 1MW to 20MW

Offtake Agreement  Has a PPA or a feed-in-tariff (FiT) with national utilities or


creditworthy entities for at least [10] years remaining after the
refinancing

Technical feasibility  Positive technical appraisal from a contracted engineer


 Equipment sourced from a manufacturer with an acceptable
track record or an experienced and reputable EPC contractor

Environmental  In compliance with local environmental laws and regulations or


sustainability IFC Performance Standards

Reinvestment  Sponsors to commit to reinvest the freed-up equity in a new


SREP
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Ⅲ. Financing Approach - Seven Sisters Solar
PV Projects in Jordan
under Simplified and Standardised Financing Program

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Ⅲ. Seven Sisters Solar PV Project in Jordan
Jordan’s shift to the direct proposal scheme for renewable energy procurement in 2010

Background
 The Government of Jordan (the “Government”) shifted to the
direct proposal scheme for renewable energy procurement
in 2010
• The direct proposal process allowed developers the freedom to
choose project sites, technology and certain specifications rather
than these being imposed through specific tender processes
 The Government further launched an aggressive strategy to
increase production of privately financed, commercial scale
renewable energy and to address such challenges as:
• Persistent domestic growth in power demand;
• Ongoing dependence on expensive imported fossil fuels for power
generation;
• Sudden disruption of natural gas supply from Egypt at the outset
of the Arab Spring; and
• Increased costs of expensive diesel substitutes, leading to
significant losses for the National Energy Power Company (the
“NEPCO”) as costs were not proportionately passed through to
end user tariffs
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Ⅲ. Seven Sisters Solar PV Project in Jordan
Jordan’s shift to the direct proposal scheme for renewable energy procurement in 2010
and the launching of subsequent aggressive national strategy to promote renewables

Background
 The Government launched Round 1 calling for expression of
interest in June 2011 and qualified 34 wind, solar PV and
concentrated solar power developers on 23 April 2012
• Given relatively simple technology and fast construction times
of solar PV projects, the Government chose to fast-track
solar PV group
 12 direct proposals for the development of solar PV
totalling 190MW – comprising eight 10MWs, three 20MWs
and one 50MW – were eventually approved and successfully
entered into respective PPAs with NEPCO
 During this process the Round 1 developers were faced
with scepticism from the broader lender community

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Ⅲ. Seven Sisters Solar PV Project in Jordan
Key challenges the 12 small solar PV projects were faced with

Key challenges

 Small PV
projects  12 small solar PV projects ranging 10MW to 20MW
installations
 Due diligence
 As lenders are usually less interested in small ticket
 Transaction sizes and “cherry-pick” the best and largest deal,
costs attracting competitive financing on a stand-alone basis
may be very challenging
• Too small on an individual basis to be able to attract
long-term financing
• Hard to justify the relatively high transaction costs
and intensive adviser dependence (in terms of
financial, legal, technical, environmental & social,
insurance, market, etc.) in the context of project of such
a limited scale

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Ⅲ. Seven Sisters Solar PV Project in Jordan
Key challenges the 12 small solar PV projects were faced with

Key challenges

 Sponsor risk
 New to the industry or the region
 Lacked international project finance experience and
strategic relationship with the usual project finance
lenders
 Equity raising not completed

 Scepticism  Lenders were sceptical of the Government’s


towards the commitment
Government’s
commitment • to renewables generally; and
• to the 12 small solar PV projects which together only
represented a small proportion to Jordan’s generating
capacity

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Ⅲ. Seven Sisters Solar PV Project in Jordan
Similarities existing in the 12 solar PV projects led to a proposal of a common financing
programme – simplified, standardised and fast-track ‘one-size-fits-all’ approach

Similarities
 Remarkable similarities – such as identical 20-year PPAs,
guarantees from the Ministry of Finance of Jordan,
interconnection and land lease agreements, similar PV
technologies and all but three of the 12 projects located side-
by-side in the Ma’an Development Area – existed
 Inspired by these similarities, the International Finance
Corporation (“IFC”), the private sector arm of the World Bank
Group, developed a proposal to unify as many of the 12
similar projects that were willing to buy in to the
common financing programme

 Although all 12 projects were invited to join the programme,


the developers of seven projects (dubbed the “Seven
Sisters”) appointed IFC as their sole and common
mandated lead arranger (“MLA”)

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Ⅲ. Seven Sisters Solar PV Project in Jordan
Financial solution to overcome barriers to making small solar PV project bankable

Key barriers Financial solution

Small solar PV
projects

Extensive/ Simplified,
intensive standardised,
due diligence fast-track
“one-size-fits-all”
High approach
transaction costs

Sponsor
risks
Similarities
existing
Scepticism
in
towards
‘Seven Sisters’
the Government’s
Solar PV projects
Commitment
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Ⅲ. Seven Sisters Solar PV Project in Jordan
Overview of the Seven Sisters solar PV projects

Seven Sisters solar PV projects

Project Value ($mil)


Project Sponsors Site Capacity
(Debt : Equity)
Zahrat Al Salam
Ma’an 10MW $32 (77%:23%)
(Adenium 1)
Adenium (60%)
Al Ward Al Joury
Kingdom Electric Co (30%) Ma’an 10MW $32 (77%:23%)
(Adenium 2)
Bank Al Etihad (10%)
Al Zanbaq
Ma’an 10MW $32 (77%:23%)
(Adenium 3)
Ennera, Hanwha
Arabia One Ma’an 10MW $30 (70%:30%)
Arabia Trading & Consulting
Catalyst Private Equity (50%)
Falcon Ma’an Maccaferri Industrial Group (25%) Ma’an 21MW $50 (66%:34%)
Desert Technologies (25%)
Jordan Solar One Adenium, JC, Bankia Dhat Mafraq 20MW $68 (88%:12%)
Samer Judeh (Jordian Businessman)
Shamsuna Aqaba 10MW $20 (75%:25%)
Forsan Capital (85%)

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Ⅲ. Seven Sisters Solar PV Project in Jordan
Financing approach – engagement of a common set of advisers and agents to facilitate
lenders’ due diligence and keep transaction costs proportional to the project size

Independent
 A common set of advisers retained for lenders’ due
advisers
retained diligence into the Seven Sisters:
for • Legal: White & Case (International), Obeidat Freihat (Local)
lenders’ • Technical: DNV-GL
due diligence
• Environmental & Social: Mott MacDonald
• Insurance: INDECS
 Agency roles in connection with the financing, such as
security agents and account banks, were negotiated on a
programme basis to ensure bulk discounts and
efficiencies for each developer

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Ⅲ. Seven Sisters Solar PV Project in Jordan
Financing approach – setting uniform financing terms as well as a uniform set of key
project documents

Project  The principle was to set a uniform set of key project documents
documents across all projects – the only exception being the engineering,
procurement, construction (“EPC”) and the operations and
maintenance (“O&M”) arrangements

Finance
 IFC provided a standard set of financing and security
documents
documents to minimise the need for extensive and time-consuming
negotiations
• A template set of common terms (including commercial terms
such as pricing and tenor) to be applied uniformly to each project,
together with the actual form of template documents were
drafted and provided by IFC and lenders’ legal advisers
 A common information memorandum and data room were prepared
for the programme as a whole and distributed to interested banks

Final  Upon receipt of final comments and queries following the face-to-face
Documentation bilateral meetings (a maximum of two days for each developer), the
template documents were locked and finally spun out into tailored
sets customised for each project’s unique details
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Ⅲ. Seven Sisters Solar PV Project in Jordan
Successful financial close and construction of the Seven Sisters solar projects

Project
sites

Figure 2. Toukan, K. (2018, May). Jordan’s Energy Figure 3. Falcon Ma’an Solar Plant. From Jordan Confirms
Profile: In Transition. Retrieved from Its Lead Role in Solar Energy Among the Arab Countries
http://www.climatechange2018.org/wp- with the Falcon Ma'an Plant (2016, Dec 1). Retrieved from
content/uploads/2018/05/4.-K.-Toukan.pdf https://www.pressrelease.com/news/jordan-confirms-its-
lead-role-in-solar-energy-among-the-arab-50401
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Ⅲ. Seven Sisters Solar PV Project in Jordan
Potentials and the future – whether this fast-track ‘one-size-fits-all’ model can be
replicable

Potentials
 The model demonstrated the huge potential of the
coordinated ‘one-size-fits-all’ approach to future small to
medium-sized renewable energy projects
 The simplification of documentation, the pooling of
transaction costs between multiple projects and a
successful syndication with very competitive pricing
demonstrated the great value that such an approach can bring
to developers

The Future  This model could become a model for future small-scale
renewable programme in Jordan, Egypt (as evidenced in 13
solar PV Nubian Sun Projects closed in October 2017) and
elsewhere in the emerging markets

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References

1. Escalante, D. et al (2016, June 27). Small-scale Renewables Financing Facility. Retrieved from
https://climatepolicyinitiative.org/wp-content/uploads/2016/12/Small-scale-Renewables-Financing-
Facility.pdf

2. Pace, J. (2016, September). Seven Sisters: Accelerating Solar Power Investments. Retrieved from
https://www.ifc.org/wps/wcm/connect/0ff0525c-77c5-41f3-bb03-065932a8a143/EMCompass-Note-
18-Seven-Sisters-Solar-Final-4-10.pdf?MOD=AJPERES

3. Cantelmi, C. & Wood, M. (2015) The Innovative Seven Sisters. Project Finance International, PFI
Yearbook 2015

4. Cantelmi, C., Lama, N. & Becker, E. (2018). Nubian Suns Turn to Gold. Project Finance International,
PFI Yearbook 2018

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KooJung (KJ) Yang

Work. +82 (0) 2 6255 5243


kjyang@koreaexim.go.kr / kj.go.yang@gmail.com

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