The successful development of wind farms is not only dependent on efficient technology and available wind resources. In the current market price scenario for electricity, and as discussed under separate heading in this Update, the availability of sufficient subsidies will be a key parameter. Further, the availability of project financing from investors and banks will be a main prerequisite. As discussed in this Article, project financing of wind farm developments poses particular challenges which need to be dealt with in an adequate manner.
Introduction
Wind farm developments have a long horizon, are capital-intensive, and entail a range of risk elements. These projects require authorizations and often financial support from public authorities, who then become part of the stakeholder group in such projects. Future production volumes and power prices are difficult to estimate and fluctuate widely, making it difficult to estimate revenues and cashflow for servicing debt. On the positive side, however, public support schemes could reduce the funding requirements, thereby reducing risks for equity providers and lenders.
Financing structure
As for development projects in general, the financing of wind farm developments must be tailored based on the features of the individual project, taking into account specific capital requirements and project specific challenges. In some cases, the financing may be based on the balance sheet of the developer, possibly including the balance sheet of the group of companies to which the developer belongs. In our experience, however, most wind farm projects will be structured based on project specific financing. Regularly, the development company is established as a single purpose company (SPC).
The project SPC will often be owned by two or more individual investors, of which at least one possesses technical knowledge and project experience while the others will be financial investors providing the bulk of required funding. As in other project financings, a certain level of equity contribution or investor loans will be required before bank financing will be available.
Security for lenders
Lenders will normally be able to protect their investment by requiring security from the SPC against the assets of the company. In order to maintain project value in an insolvency situation, lenders require liens on all production critical assets.
The security package will normally include security against the company's owned or leased real estate rights, inventory, machinery and plant and insurances. The project requires transmission lines for the transfer of power to the market, and lenders will investigate whether these assets can be used to secure their loans. In Norway, high voltage transmission lines are registered in a separate asset register allowing for separate establishment of security rights in such assets. Other project critical factors will be project contracts with suppliers (during the development phase) and power off-take arrangements with customers (in the production phase). Where assignable under the laws of the relevant jurisdiction, lenders will take collateral assignments in such contracts. To mitigate future price risk, the lenders could require the SPC to enter into power price hedging agreements. Lenders will also typically take a security interest in the SPC's bank accounts and claims for receivables, as well liens over all shares in the SPC.
In addition to such security rights, lenders could require guarantees from the investors for specific risks in the development phase, for example, to ensure equity financing of potential cost overruns or to mitigate other specific project-related risks.
Further, where several loan facilities will be established, whether investor loans or bank loans, such investors and banks must coordinate their respective rights, for example, by use of separate coordination agreements.
For wind power developments, public consent could be required to enforce security rights in an insolvency situation. This issue cannot always be bypassed by enforcing a pledge of SPC shares rather than security interest in project assets. In a Norwegian context, requirements for public consent could apply both in respect of outstanding public grants and in respect of the further operation or divesture of secured assets. In our experience, however, the risks related to public consent requirements can be mitigated.
Drawdown requirements
A typical wind farm project demands cash during the development phase and only generates cash flow after start up of the production phase. Drawdowns on loan financing will normally be subject to the fulfilment of certain conditions, such as evidence of milestone achievements or the documenting of project cost. Further, lenders would be willing to finance only a percentage of the development costs under the loan facility. If the project has obtained public support, the loan drawdowns could also be linked to the availability of such funds. Finally, the establishment of required security and corporate/ project authorisations will be a condition precedent to all drawdowns under any loan facility.
Repayment during the production phase
After successful completion of the development phase, the SPC enters the production phase and starts earning revenues. At this stage, the loan will be repaid pursuant to an agreed repayment plan, tailored for the relevant project and the forecasted cash flow. The repayment plan should take account of operating and maintenance costs as well as any necessary capital expenditures during the life of the power plant. The lenders will want to control the receipt and disbursement of cash, normally through a cash sweep account, in which reserves would be established to cover the operating expenses and debt servicing costs.
During the production phase, an SPC is most likely to default due to inadequate production volumes or power prices, but the loan agreement should also be tailored to meet more extraordinary events, such as turbine damage, lapse of consents or public authorisations, and the lapse of long-term off-take/hedging arrangements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
