Profitable v. Fundable

It’s not enough for a renewable energy project to be profitable; proponents must prove that their project is fundable. A profitable project shows a viable business, but a fundable project protects the lenders incase it becomes unviable.

Renewable projects are generally structured to require project financing. This results in the formation of a new legal entity. The new company has no track record or financial history and that of its founders, while valuable, is not often provided as a covenant to lenders.

The value of the project is in the Power Purchase Agreement. This agreement establishes the appetite, rate and term for the power. This is the covenant to which the lender is most sensitive. If it’s a government-related entity, the project stands a chance.

The assets have no value in these types of deals. They can’t be repossessed and have no resale value of note. Their value lies in the ability to operate under an existing contract, so it’s important that they operate. Warranties and performance guarantees are critical to moving a project from profitable to fundable.

The debt service level is critical—cash flow should show the ability to service at least the required debt load, so that if the system performs below expectations there’s still enough revenue to support the debt payments. One way to help make a project fundable is to give the lender access to the revenue before it’s realized by the operating company. This is referred to as a “lockbox” or “sweep account.”

To move a project from profitable to fundable, the debt lenders must have the following:

• Enough security to cover them in a worst case scenario;
• Third party step-in operators that can run out the contract on their behalf if necessary;
• Equipment suppliers with the ability to fulfill their warranties;
• Sufficient cash flow to cover their payments; and,
• Take-or-pay contracts with government-grade customers.

In many cases, it becomes more cost-effective for equity to build and operate the generating asset for a few years until it has an operating history. As many of the unknowns become known, it’s more likely that the project can be eligible for refinancing.

Fidel Reijerse is the president of RESCo Energy Inc.