Power project
Power project inception phase. Pic credit: Shutterstock
What financial institutions look for, how to make projects more appealing, equity firm options
Lungile Mashele
Lungile Mashele, energy specialist, Development Bank of Southern Africa (DBSA)

Lungile Mashele, energy specialist at the Development Bank of Southern Africa (DBSA), offers ESI Africa insight into how power projects can make themselves appealing equity firm options, which are more likely to attract financial interest and support.

Power projects come in various forms, sectors and sizes however the requirements are generic. Lenders will always look for project readiness, which will usually be in the form of a Project Information Memorandum (PIM) or a bankable feasibility study.

A good project will detail who the sponsors, developers or borrowers are; their relationship to each other and the project as well as the share structure, this will form part of the institutional appraisal.

Considerations to note for power projects

What is also important are the technical, economic, environmental, social, country risk and legal considerations of the projects. Developers should be prepared to answer some of the following questions:

Technical

  • Wind speed, solar resource, coal stocks
  • Technology type
  • Transportation of resource to site (trucking or pipelines)

Economic

  • Demand and supply
  • Cost benefit analysis
  • Integration of the project into the local infrastructure and economy
  • Macroeconomic impact

Environmental

  • Possibility of oil spillage and the impact on marine life
  • Impact on wildlife and species endangerment
  • Air quality and emissions

Social

  • Possible resettlement and compensation
  • Social pacts i.e. skills development, job creation, local content
  • Social impact assessment and mitigation
  • Community participation

Country Risk

  • Political risk and possibility of sabotage
  • Political changes or upcoming elections

The offtaker is a vital element for project viability, the offtaker needs to have a healthy balance sheet as well as an appetite for the supply for a minimum PPA of 20 years. A government backed utility has for a long time been the preferred offtaker; however, trends are starting to indicate the emergence of private offtakers such as mines and industrial development zones.

Creditworthiness is another critical element, for this the first step is a viable financial model that will detail projected cash flows, ROI and adequate debt service coverage ratio. Based on the technical input and the financial model, the bank will use this to determine a credit rating for the entity that will determine its interest rate. A good credit rating is determined by strong, predictable cash flows that have the ability to adequately service the debt as well as provide a suitable return to equity holders.

Part of creditworthiness is determining whether or not a borrower has sufficient equity for a project, most lenders require equity of between 5 – 20% of the project value. For a typical PV plant in South Africa this could be upwards of R200 million ($14 million) as an equity injection.

Most lenders however battle with the project readiness component as very few projects are ready to be banked. As a result various lenders now provide project preparation facilities, which can either be grants or recouped during the financing of the project.

Overall a project should address a community or country need with quantifiable development impacts, this is especially important for DFIs. The project should provide engineering solutions whilst meeting its social and environmental pacts and honouring its debt and legal obligations.

 

Lungile is also an Advisory Board member for The African Power Elites: Projects and People 2017 publication.