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The New Green Finance

The best way to tap into renewable project funding.

Fortnightly Magazine - October 2009

accept several liability without receiving security from the developer or its parent company. And persons with a tortious claim against the project might possess legal rights that override a limitation on liability to which the utility and developer contractually agree.

If a utility doesn’t need an ownership interest in project assets until preliminary development work is complete, it can delay its investment in the project, mitigating the risks associated with ownership. The parties would enter into a joint-development agreement that specifies their relative responsibilities and rights and the expected milestones at which the utility would invest in the project. Such an arrangement might save the developer from posting security to cover the utility’s risk of joint liability until later in the project’s development. In an RFP for joint-venture proposals, a utility can encourage proposals that don’t require the utility’s ownership participation in a project until after the project has achieved some preliminary milestones.

Financing Considerations

The recent financial crisis has tightened the terms on which developers can borrow to finance their projects. Although a utility does not normally seek project financing, and instead issues corporate debt to be repaid through rate recovery for its share of project costs, the project-financing market does affect the costs faced by independent developers and, in turn, the pricing such developers can offer utilities. If a utility partners with a developer through a joint venture, build-transfer or build-operate-transfer arrangement, it can benefit from understanding how trends in the project-finance market affect the cost of development and, in turn, the attractiveness of developers’ bids. A utility also can include terms in its RFP that will facilitate financing and thereby increase bidder participation and the number of strong proposals.

Today, project-finance lenders are limiting the size of their commitments, are agreeing to lend only for relatively short tenors, and are conditioning their loans on equity investors’ contribution of a higher percentage of project costs, all in addition to their more straightforward demand for higher upfront fees and interest-rate margins. Prior to the financial crisis, developers frequently could negotiate tenors on term loans that ranged from 15 to 20 years, and even longer tenors were possible in public capital markets or from infrastructure funds. In the current market, lenders often are limiting their exposure to much shorter periods, on the order of five to 10 years. As another sign of tightening, prior to the financial crisis equity investment frequently covered as little as 10 percent of the costs of a project, with the remainder financed by debt. Today, lenders often are requiring 20 percent to 30 percent of a project’s costs to be funded by equity. Finally, many lenders are limiting the size of their commitments, a development that may restrict more ambitious renewable projects but spare those developed on a smaller scale, or that might require developers to assemble a larger club of lenders.

In considering how a utility might structure an RFP to lower a developer’s capital costs, a joint venture might help the developer satisfy the lower debt-equity ratios lenders are requiring and operate within the lower