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The construction of wind farms is gaining momentum, requiring multi-billion dollar investments.
China, India and the United States continue to lead the wind power sector.
More than 60 GW of installed capacity was added during 2019 alone.
This is motivated by the need to reduce dependence on fossil fuels and minimize the carbon dioxide emissions associated with energy production.
WindEurope reports that European wind energy investments totaled € 52 billion in 2019, with the UK, Spain, Germany and France remaining the industry leaders.
Despite impressive reserves of oil and natural gas, current hydrocarbon exporting countries such as Russia and the UAE also need to develop renewable energy sources to ensure a sustainable future.
Investments in the construction of wind farms by country:
| Country | 2018 (USD billion) | 2019 (USD billion) |
| China | 51,6 | 56,4 |
| USA | 22,1 | 32 |
| India | 4,2 | 2,5 |
| Great Britain | 5,9 | 4,3 |
| Spain | 3,1 | 2,5 |
| Germany | 3,6 | 1,2 |
| Netherlands | 2,1 | 2,2 |
| Brazil | 1,4 | 3,5 |
Against this background, wind farm project financing is becoming a serious issue, requiring the use of combined financial models and the search for new sources of funds.
Given the high initial investment, ranging from 1 million to over 3 million euros per megawatt of installed capacity, attracting low-cost financing is becoming critical to the viability of wind energy.
LBFL is an international company that promotes the development of energy projects around the world. Together with our partners, we are always ready to offer financing for the construction of your facility. We not only invest, but also develop individual financial solutions for each client.
We also provide comprehensive engineering services, including engineering design, procurement and delivery of wind turbines and electrical equipment, construction and installation, operation and maintenance, repair and modernization of wind power plants.
Please contact our official representatives to find out more.
The main ways to finance the construction of wind farms
Where to get money for the construction of a wind farm?This is one of the first questions that any person or company asks when considering starting renewable energy production.
Renewable energy projects offer many benefits, including reduced carbon dioxide emissions, environmental protection, energy independence, and the ability to create sustainable businesses. But the significant investment required could hinder the project.
The search for sources of funding for the construction of wind farms begins with a detailed economic study of the project. After conducting a comprehensive study, we can determine the best ways to implement a specific project. This stage includes an analysis of the technical, economic and legal part of the project.
At the next stage of the project implementation, a specific action plan is developed.
It should contain detailed technical data (location of wind turbines, installed capacity, selection of the best technologies, expected energy production) and financial research (amount of investment, interest rates, payback period).
Sources of financing for a wind power project can be as follows:
• Internal financing. The project is fully financed from the initiator's own funds, without attracting additional borrowings.
• External financing. The project requires attracting investments and bank lending. In this case, it is necessary to decide on the types of financing available in particular market.
• Combined financing. This option assumes a combination of own and borrowed funds in the form of various financial models.
The main external financing options that can be used for wind energy projects will be listed below.
Choosing a way to finance the project
When choosing the optimal financing model, project sponsors are recommended to adhere to a certain algorithm.It takes into account a number of key parameters, including liquidity, the scale of investments in absolute and balance terms, the possibility of obtaining bank loans by partners, as well as the potential for expanding the wind energy project in the future, etc.
One of the most well-known models for financing wind energy projects is credit lines or loans.
Usually financial institutions require a company to have a certain credit history in order to obtain a large loan on favorable terms.
The credit line is provided for a specific period, but it can be renewable and expandable.
The bank provides the client with an account from which he can receive funds within the established limit.
The client pays a percentage calculated based on the funds actually used.
This method of financing a business is used to cover the gap between profits and payments or for a temporary lack of liquidity. This type of financing is not well suited for the construction of wind farms, when significant funds need to be raised before the cash flow from the project is received.
Some banks offer loans for the construction of wind farms or modernization projects, but the high interest rates and strict customer requirements make them unsuitable for most companies.
Participation loans can be provided by several lenders to the same borrower. For example, three banks may participate in the financing of one large project, with one of the banks acting as the lead bank. This financial institution then engages other banks to share risks and rewards.
Also, financing of wind farm construction can be carried out through leasing instruments.
Leasing is a long-term lease of an energy facility with the right to subsequently renew the contract or buy out the asset after a certain period.
Forfaiting refers to the sale of bills of exchange or other payment obligations to a financial institution. The initiator of the project pays off the debt to the creditor, obtains liquidity, and the risks are transferred to the said financial institution. The latter is the main difference between forfeiting and factoring, a very similar financing alternative.
Factoring and forfeiting are alternatives that support the development of energy projects by freeing their initiators from debt.
A sponsor of a wind power project can obtain long-term financing from investors by issuing new shares or increasing the par value of existing ones. In this case, the so-called business angels, venture funds and investment funds can act as investors.
Business angels are private investors who, in addition to capital, can share their experience in the wind energy sector and specialized technical knowledge.
They can also provide access to a network of business contacts and other tools.
Usually this type of person invests in the early stages of a project.
There are business angel networks that are responsible for collecting information on the promising projects for potential investors. Some of these investors specialize in the development of the wind energy sector.
There are also venture capital funds specializing in the wind energy sector. Unlike private investors, venture capital funds invest all resources in financing other companies. To invest in a wind farm, venture capital funds need to have confidence in the business plan and the people who are executing it.
They also require clarity about their own exit strategy.
It is important for them to choose the moment when they will sell their share with the maximum profit.
In general, venture capital funds contribute a lot to innovative energy projects. These funds prefer to enter the advanced phases of a project when the project has demonstrated its viability in the market.
Specialized investment funds have developed due to the peculiarities of the implementation of projects in the field of renewable energy sources. Today specialized private, public and public-private foundations appear, which offer numerous solutions adapted for this type of project.
Crowdfunding is a financing model that is based on collecting money from a large number of private investors without resorting to the services of a bank or other financial institution. Typically, crowdfunding is done through online platforms that offer this type of service. Collective financing of projects can be carried out by purchasing shares of a future energy facility.
There are also cooperatives that commercialize clean energy and invest in renewable energy projects. Some of these cooperatives offer their members opportunities to invest in wind power projects at a fixed or variable interest rate, or obtain cheap electricity.
Despite the variety of financing options for wind energy projects, the implementation of large multi-million dollar projects requires individual solutions that combine different sources and conditions.
Financial instruments for the construction of wind farms
A set of financial instruments usually includes several financial mechanisms used to attract and effectively use funds within a project.The most important instrument in wind farm project finance is the project company, also known as SPV (Special Purpose Vehicle). The need to create a dedicated structure has arisen as a result of the growing demands on energy projects.
When financing the construction of a wind farm, there may come a time when a company's financial health could be jeopardized by the implementation of several expensive projects. In these cases, the solution may be to fund each project through a separate legal entity, SPV.
A project company is created specifically for the implementation of a specific project.
The chosen financial institution, such as an investment fund, finances the SPV.
It provides the start-up capital for the construction.
Thus, the initiators of the project should not be faced with financing from their own funds. The generated profit is then divided between the initiators and the fund.
The key difference from the traditional financing model is that the balance sheet of the project sponsor and its partners does not reflect the debt incurred on the initial investment in the project. In fact, the SPV is fully liable for the debt.
In some countries there are government funds specializing in energy efficiency and renewable energy sources. Such funds offer loans for the implementation of energy projects and are usually controlled by state administrations to promote renewable energy on their territory.
The international company LBFL offers personalized financial solutions for the construction of power plants, substations and power lines.
Wind farm project finance: basic principles
Project finance is a financing mechanism for large-scale projects based on the ability of the future enterprise to generate cash flows that allow it to pay off debts and provide profit for all participants.These are predominantly reliable and highly efficient projects using mature and well-established technologies.
Project finance is widely used in the telecommunications sector, but it is now gaining momentum in sectors such as power and infrastructure, allowing large investments, historically associated with public finance, to be transferred to the private sector.
In particular, large photovoltaic and wind farms in Europe are often funded using this method. The nature of this type of project is fully adapted to the philosophy of project finance, and European legislation allows for predictable and sufficient generation of cash flows to ensure payments on obligations.
The increase in wind power project finance is associated with a significant increase in investment in renewable energy and the tendency of governments to reduce budget deficits despite the development of new large projects. This model allows both government agencies and private companies to successfully implement projects with high capital investment.
The main characteristics of wind power project finance are listed below:
• A project company called SPV is created for the implementation of a specific project.
• The sponsor of the project can contribute a significant part of the capital of the enterprise, thus linking the financing of the project with its management.
• The project company enters into complex contracts with various participants (for example, a developer, supplier, client and financial institution).
• The project company operates with a high debt-to-equity ratio, so lenders have limited ability to claim SPVs in the event of project failure.
• The terms of guarantee agreements ensure that the interests of all participants are satisfied. These requirements are higher at the initial stage of wind farm construction (engineering design). The costs at this stage are very high with no income generated.
• Creation of a reserve fund from a surplus of cash flow, which allows companies to protect themselves from unforeseen circumstances throughout the life of the project.
Thus, funds within the framework of wind farm project finance are attracted not in the traditional form based on the creditworthiness of the participants, but depending on the expected profitability of the project.
Distinctive features of project finance include cash-flow related lending, clear risk sharing between project participants, and off-balance sheet financing.
Cash flow related lending
The specificity of wind power projects is the extremely low potential for revenues in cases of project liquidation compared to the total cost of project development.For example, in the event of the early termination of a nearly completed wind farm, the sale value of the remaining assets would be low.
In project finance, wind farm assets and potential sale value are not a primary consideration, but lenders look to potential cash flows after the project is launched.
Unlike traditional lending or asset-based finance, assets play only a secondary role for SPVs.
The main risk for lenders in wind farm project finance is the halt of the wind farm construction. The wind farm will only be able to generate cash flow if it is built, certified and commissioned.
Clear distribution of risks between partners
Risk sharing means a clear distribution of project risks between project participants based on their competencies and resources to effectively manage certain situations during project implementation.Depending on the situation with a specific project, a financial institution may offer lending based on the project's cash flows, with additional recourse rights. Financiers usually distinguish three levels of financing including non-recourse, limited recourse and full recourse.
Non-recourse financing, which is rarely used in practice, limits the lender's right to use borrowers' capital. The opposite form of financing, with full recourse to the borrower, violates the principle of project finance and therefore refers to traditional corporate finance based on the customer's creditworthiness.
The main objective of risk sharing between the individual parties is to create a reliable funding structure that allows participants to continue the project in the event of complications.
Off-balance sheet financing
Off-balance sheet finance is a common accounting practice in which companies register a certain portion of assets and liabilities in a way that does not appear on the balance sheet.On the one hand, using SPVs to finance the construction of wind farms offers great opportunities for project sponsors, allowing the company to maintain a low debt-to-equity ratio.
On the other hand, this model creates risks for investors. Typically, companies must disclose off-balance sheet financing in their financial statements so that any investor can study the data and assess the company's true position.
The creation of a project company with appropriate quotas may result in sponsors only having to account for the appropriate share in the company in accordance with applicable accounting rules.
Financing wind power projects around the world: our services
The demand for project financing for the construction of wind farms around the world is growing.Only professional adaptation of a financial product to the needs of each company can ensure the successful implementation of a project. The variety of financing models, complex bureaucratic procedures, risks and hidden costs associated with choosing the optimal source of financing encourage businesses to seek professional advice.
The international company LBFL is ready to act as your financial advisor and reliable partner in the field of investment lending.
We help find sources of funding for wind energy projects in Russia and the CIS, the EU, the USA, Latin America, Africa, the Middle East and East Asia.
Do you need a bank loan, factoring, leasing or raising capital by issuing new shares?
LBFL together with international partners will find the best solution.
We offer assistance in obtaining financing for the construction of wind farms in the amount of up to 90% of the project cost.
Our company has experience in implementing dozens of successful investment projects and relies on a team of highly qualified specialists in the fields of finance, banking, project management and law.
We guarantee our clients professional advice and reliable financing models for each project.
We develop business plans and carry out financial research that is necessary to attract business financing. When working on business plans, we take into account the resources of your enterprise and the goals of all project participants.
This allows us creating to develop a model that will help to obtain a bank loan or financing from alternative sources on favorable terms.
Contact our representatives to learn more about wind farm project finance services.
