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plants. This lack of financial resources and the insufficient credit rating of such countries could be rectified by private investment — provided that the legal situation of the specific countries allows private investors to enter the power market. The worldwide deregulation of the power market is changing the way new power investments are made and has significant implications for the future development of solar power technologies. SOURCES OF CAPITAL There are three general sources of capital available for a renewable power project: equity, debt, and grant financing. An equity investment is to purchase ownership in the project. A debt investment is a loan to the project. For example, in the purchase of a house, the person buying the house is the equity investor, and the mortgage is the debt. In addition, since most solar power projects cannot compete with conventional fossil power technologies today, a number of organizations have offered grant financing to help buy-down the non-economic portion of the project. These grants typically are made available to help account for environmental, developmental, and economic externalities that would not otherwise be accounted for during a normal competitive project selection. FINANCING AND OWNERSHIP STRUCTURES There are two types of financing and ownership structures used for financing power facilities: • “Corporate finance” with investor-owned utility ownership. • “Project Finance” with private ownership. Corporate financing, also known as internal or equity financing, is characterized by the use of corporate credit and general assets of a corporation, typically a utility, as the basis for credit and collateral. Utility ownership is potentially attractive for solar power projects because it has a potential for cost saving due to: • A partial offset of the specific project risk to the utility/corporate portfolio, ignoring the variance in risks associated with different projects. Here the overall credit rating of the company is used to estimate debt and equity costs rather than project specific capital costs in a standalone project finance model. • A better credit standing, and hence lower interest rates, increased debt amortization periods, and less restrictive loan covenants, called debt service coverage ratios (DSCR). However, due to high investment costs, most of the utilities — especially those in developing countries — are not in a position to generate sufficient corporate finance resources regardless of the advantages of corporate financing. As a result the concept of project financing was developed. Project financing can be defined as the arrangement of debt, equity, credit enhancement for the construction of a particular facility in a capital-intensive industry where lenders base credit appraisals on the estimated cash flows from the SERVICES 8% SITE WORKS & LAND 13% SOLAR FIELD 49% POWER BLOCK 14% BOP 8% HTF SYSTEM 8% Figure 1: Typical Cost Distribution of Parabolic Trough Power Plant facility rather than on the assets or credit of the promoter of the facility (Short, 1995). The impetus behind the move toward project finance is to change the focus of financing power plants based on the credit rating of the host country to the merit of the project itself. According to Nevitt (1995), the term “project financing” is defined as the financing of a project in which a lender is satisfied to look initially to the cash flows and the earning of that project as the source of funds from which a loan will be repaid and to the assets of the project as collateral for the loan. Project finance is the primary financing structure used by all independent power producers (IPPs). Unfortunately there exists a widespread confusion between the terms “independent power producer” and “project finance”: IPP represents the entire project environment, which includes project financing, planing, construction, and operation of the facility. However, since an IPP project is making use of the method of Project Finance it is sometimes a difficult task to separate them. For a better overview, the concept of independent power producers will be discussed in a separate chapter later. CHARACTERISTICS OF PROJECT FINANCING Cash Flow–Related Lending The crucial criterion by which lenders assess the financial feasibility and credit rating of a project is the ability of the project to cover the annual operation and maintenance (O&M) costs and debt service with sufficient cash flow. Therefore, a lender with a long-term credit exposure is mainly interested in the ability of the project cash flow to service debt over the entire loan life cycle. The lender evaluates this ability by analyzing the capital structure of the project, the major sources and uses of funds, its profitability over the loan period, and its projections of future profitability. Copyright © 1999 by ASMEPDF Image | Financing Solar Thermal Power Plants
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