In our previous article on project finance , we discussed the key steps for successfully financing renewable energy projects, such as solar, wind, or geothermal energy and recycling. We highlighted how project financing works and the crucial role of solid contracts, grants, and permitting requirements to provide investors with certainty. We referenced 5 crucial features that are often overlooked:
Special purpose vehicle (SPV).
For project financing, a separate project company (SPV) is often established. This makes it possible to place debts and income of the project in a separate legal entity, separated from the assets of the shareholders of the SPV. In the run-up to a project, agreements are often already entered into or the SDE subsidy is applied for, while the SPV has not yet been established.
The project financier requires that all relevant agreements and the SDE grant be in the name of the SPV. It is advisable to establish the SPV as soon as possible. If not, it is important to prepare in advance for the possibility of an unconditional transfer of the relevant documentation to the SPV.
Distribution of risk and liability
In every agreement there is a division of risk and liability between the parties involved. For the SPV, it is important to minimize those risks and potential liability, or fix them at fixed prices. A project financier will attack agreements that may lead to ongoing price increases or decreases. This is because these have an impact on the expected future cash flows on which the project financier provides financing.
Duration
Project financing often has a term slightly longer than the term for which the SDE subsidy is provided. This is because much of the cash flow used to repay the project financing comes from the proceeds of the SDE subsidy. For example, the SDE subsidy is a payment for the kilowatt hours generated, which of course must also be purchased. It is desirable that the off-take contracts have at least the same duration as the duration of the project financing. Where this is not possible, it should be possible to demonstrate that there is sufficient demand from other customers with whom new off-take contracts can be concluded under the same conditions.
Price adjustments or indexation
The ability of contracting parties to adjust prices from time to time during the term of an agreement should be limited as much as possible, as it impacts the SPV’s business model. Given the long duration of a project financing, some form of price indexation in the project documentation is common. Pay attention to the standard chosen for indexation and the frequency. Annual indexing can have a significant impact on prices during a 15-year agreement. The SPV should ensure that such increases are sealed “back to back” as much as possible so that price adjustments can be passed on equally and the bottom line for the SPV is zero.
Choice of law and forum
Project documentation should be governed by Dutch law. The choice of forum (choice of, for example, the “ordinary” Dutch court or arbitration) in project documentation often depends on the agreement in question. For example, arbitration before the Board of Arbitration for Construction Disputes is generally chosen in construction contracts. It is important to thoroughly consider with each agreement what is an appropriate choice of forum. Consider also the duration of the resolution of a dispute at that forum and what the costs are associated with litigation at that forum.
Six important criteria come into play when choosing between project finance or regular corporate finance. We have listed them here.
If you have other questions about financing, either regular or for a project, please do not hesitate to contact Onno Hakvoort or Bart Wilton.
