Are the banks financing “green” projects? Almost never, without PPA contracts
* the article was first published on the 20th of June 2012
As hundreds of investors are checking the possibility of investing in the Romanian Renewable Energy sector, the most important challenge they have to face is the financing of their projects. And the question I constantly hear is…
“Are the banks really financing green investments nowadays?”
“Only a small number of them” is the answer. Bankers are defensive, due to several different reasons and if a “green” investor goes to a bank today, he will have to be ready for:
· Financing between 50 and 70% of the total project value (LTV).
· A special 10 – 15% guarantee for the construction period or other types of guarantees (there is a solution for this).
· Questions regarding the expertise of the EPC, the quality of materials etc.
· Control of every detail pertaining to his project.
· (The most important of all) PPA contracts for at least 5 years, in order for the bank to secure a stable income in the years to come.
Even if you agree with all their demands and your project is perfect, without a PPA you will find it almost impossible to proceed (except if you provide other guarantees).
Are the bankers to blame for this approach? Not really. After their experience with previous investment sectors, they want to be 100% sure that they will not finance projects that will simply… increase their portfolio of non-performing loans.
No financing for “hopes” and “estimations”
If you want to create a firm business plan for your investment, you need to answer this simple question: “What is the guarantee that your cash flow will be exactly the one you mention in your plan?” If the reply starts with “I am hoping that”, “I think …” or “I estimate…”, it will not even be taken into consideration.
The only firm solution to this problem is to sign Power Purchase Agreements for the energy you will produce and also similar contracts for your green certificates. In Real Estate we would call them “forward purchase agreements”, as you enter into an agreement with a big company in advance that it will buy your energy and green certificates once they are available.
Is it simple to find them?
In theory it is not. There are companies that do this, so you can go and talk to them. But the reality is always different. There are so many parameters to take into consideration, with the main one being: Do you assume a level of risk, in order to maximize your potential income, or do you go for the safest (but with a lower price) solution?
Your bank will prefer the safest option, but this means that you will not get the “super high prices” you expect (and several people promised to you). At this stage you will have to choose: Will you go for a fixed (and still very good) income and receive financing or assume the risk to get a higher price, risking a negative answer from your bank?
PPA contracts: The “go / no go” element of your investment
If you want financing, you need to find PPA contracts. Even if everything else is perfect, this will be the “go / no go” element that will determine the future of your project and if it will be constructed or not.
These agreements have many advantages. They will protect not only the bank, but also yourself from future negative surprises.
PS: My company facilitates the finding of a proper PPA contract and it represents several investors in this segment. There is a range of prices but nothing “fixed for everyone”. Everything is customized according to many different parameters.