Getting sufficient funding to complete the project of a power plant is challenging for large as well as small-scale energy companies. Thus, today, we will talk about the main finance models. They are distinguished by which party or parties are responsible for funding the upfront costs of a project. Each of them has its distinct advantages and disadvantages based on timing, cost, and complexity of structuring and implementation.
The four primary finance models are:
• Host-government financing
• Developer financing
• Resourced-based infrastructure financing
• Project Financing
1. Host-Government Finance Model
In this finance model, the government of the host country uses the strength of its balance sheet to fund a project. It lends funds to or contributes additional equity to the offtaker so that the offtaker can complete the project.
The funds may be derived from the sovereign’s cash reserves or from funds that it borrows for its own account from third-parties, such as capital markets, bilateral institutions, and multilateral development banks.
The amount of funding varies based on the source of funding and the credit-worthiness of the sovereign. Development financing institutions may provide lower-income countries with financing at lower costs and long tenors. This option is viable when the host-country has adequate funds on hand or can attract funds from lenders at nominal rates with fewer pressing needs.
2. Developer Finance Model
Large multinational corporations, such as international oil and mining companies have powerful balance sheets and therefore, can fund a project by contributing in the form of equity. These funds often derive from retained earnings or may be borrowed by developers from banks, or raised through the issuance of corporate bonds. Developer financing can be a component of the Public-Private Partnership (PPP) based on the project structure.
Since this model limits the number of funding parties for coordination, it avoids the complexity that is common in the case of multi-party financings. However, in most cases, the developer doesn’t have the financial capacity to fund a Power Plant Project alone. Thus, it is the least popular model.
3. Resource-Based Infrastructure Finance Model
This model requires the host country to retain a third-party contractor or developer to design, develop, and implement a project in exchange for rights to natural resources granted by the host country to the foreign sovereign counterpart. In this case, the third party contractor is typically a foreign state-owned enterprise who is responsible to fund the project, and apparently, the ultimate reimbursement they get comes from its sale or use of the natural resources it is able to extract.
Like developer financing, this model also limits the number of funding parties with which the host country has to deal and avoid the complexity. Besides, it offers the added benefit of not tapping into a sovereign’s available cash reserves or its access to third-party lending.
However, the main challenge that comes with this model is how to accurately evaluate the rights to natural resources that are exchanged for the infrastructure. The volatility of commodity prices, timing of planned extraction, and financial capacity of sovereigns to benefit from the agreement make it almost impractical to properly assess the accurate value.
4. Project Finance Model
In the project finance model, the sovereign or a government offtaker grants certain concession rights related to the building, ownership, and operation of a power plant project to a special-purpose company whose main business is the building, ownership, and operation of the project. The project company usually contracts third-parties for construction and operation parts of the project.
The project company can finance the project by using:
• Funds provided by its owners as equity investments or shareholder loans
• Loans provided by lenders, such as commercial banks, export credit agencies, development finance institutions, export-import banks, multilateral development banks, etc.
• (in some cases) funds made available by the sovereign or by donor parties either as concessionary loans or grants
Lenders usually lend most of the funding on a limited-recourse basis, which means the loans are secured by all of the assets of the project company and by a pledge over the shares in the project company. In case the project company is unable to repay the loans, the lenders have no recourse against investors.
This model avoids capacity constraints, opportunity costs, and balance sheet financing by a sovereign. The project finance model can be more affordable or expensive than financing a project on the host country’s balance sheet. Project risks are efficiently and equitably allocated to parties willing and able to bear risks.
Companies planning to build a power plant should perform due diligence before getting financing from a funding corporation that provides assets as equity to ensure secure funding. To complete a power plant project successfully, find a funding corporation that can offer a reliable Power Plant Project Finance Model with solid asset backing and guarantees using proven strategies and programs.