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The development of hydropower, which began in the second half of the 19th century, ensured stable economic growth for years to come.
The statistics of commercial and industrial loans show that hydropower funding continues in a green transition era, with many nations moving away from fossil fuels and wary of unpredictable nuclear power.
Each HPP is a masterpiece of engineering, embodied in concrete and steel by dozens and even hundreds of large and small contractors, equipment manufacturers, suppliers, developers, engineering firms. These are colossal hydrotechnical structures with many miles of adjacent artificial seas that require many billions of investment and many years of planning and construction.
The construction of modern hydroelectric power plants involves large commercial loans, often issued by syndicates of the largest banks and international financial institutions.
Today, hydropower plants account for about 1200 gigawatts of installed capacity.
According to forecasts by the International Energy Agency, this figure will reach 2000 GW by 2050, which will require huge investments, including long-term bank financing and government support.
GCAM Investment Group offers financing for hydropower projects in different countries. Our specialists develop optimal financial models and customized solutions for each project.
We are engaged in long-term loans, project finance, financial engineering, modeling and consulting, satisfying the full range of financial needs of our clients.
Contact us to find out more.
Bank financing of hydroelectric power plants
To better understand the importance of long-term bank loans in the construction of hydroelectric power plants, one must first assess the scale of costs and the capital needs of companies initiating large hydropower projects.Today, hydropower are considered among the most expensive generation technologies, with cost ranging from 2 to 5 million euros per 1 MW of installed capacity.
These numbers are on the rise as technology and materials become more expensive and suitable sites for new hydropower plants become scarce. This means more earthworks, more resettled areas, more environmental protection measures and more additional costs. Of course, large HPPs look more attractive in terms of cost per megawatt of installed capacity, but everything rests on the lack of suitable places on rivers with adequate elevation changes and wilderness areas along the banks.
Moreover, hydroelectric power plants are becoming more technologically advanced, which entails rising costs for new turbines, wireless sensor networks, digital control and monitoring systems, cloud computing and advanced security solutions.
Measures to protect biodiversity, as well as costly policies aimed at social and environmental sustainability, also require significant investments at various stages of planning, construction and operation of HPPs. Long-term bank financing, especially with the support of local governments and international financial institutions, helps companies to meet these ambitious goals in the best possible way.
A separate area of development is the so-called small hydropower, which refers to the construction of small hydropower plants with a capacity of up to 20-30 MW.
Unfortunately, small HPPs are not able to have a significant impact on macroeconomic development, being limited to local effects on the community and business.
However, €50-100 million bank loans can solve numerous problems of small companies developing such projects.
The main instrument of bank financing of hydroelectric power plants is the so-called investment loan.
Investment lending is aimed at the end result of investment activity in the form of cash flows (the sale of electricity to consumers), which at the macroeconomic level is expressed in the growth of national wealth. This is a type of long-term loan that has a number of organizational, informational, resource and regulatory features listed below.
Typical features of investment lending include:
• Borrowed funds are issued by the bank for a specific investment project, as a result of which the bank requires detailed reporting and strictly controls the spending of the loan.
• The interest rate on an investment loan for a hydropower plant should not exceed the level of profitability of a particular project, and the loan term usually exceeds 10 years, which is consistent with the long construction period of large-scale hydrotechnical structures.
• The investment loan and interest are usually repaid using the cash flows generated from the implementation of a specific hydropower project. This once again highlights the importance of control by capital providers.
The construction of hydroelectric power plants is different in that such projects require huge funds at the earliest stages of development.
When it comes to earthworks and the construction of millions of cubic meters of reservoirs, uninterrupted financing is critical. In addition, large hydropower facilities require very complex and costly engineering services.
The construction of a hydropower plant is a complex and multifaceted project with many risks that capital providers try to take into account. For this reason, careful preparation of the loan application is essential for a positive outcome. Detailed business plan, engineering documentation, financial documentation, reporting and forecasts, environmental permits, licenses and other project-related documents form the basis of future financial relationships at a very early stage.
Given the high cost of planning and construction, the syndicated loan has a special place in the realities of bank financing of hydropower projects.
This is a form of loan in which two or more lenders provide a loan to one or more borrowers and sign the same loan agreement.
Typically, one of the largest banks is appointed as an agent bank to manage the loan issuance process on behalf of other participants in the syndication process. Under syndicated lending, participants raise investment funds for the borrower due to the need for capital. The fee for organizing syndicated lending is the greater, the more complex the procedure for granting a loan and the higher the project risk.
At this stage, the role of state bodies is important, which often provide loan guarantees and other support for large hydropower projects.
Commercial and industrial (C&I) loans for hydropower projects
Commercial and industrial loans in the hydropower sector are widely used both to finance large investment projects and to replenish the working capital of companies.By definition, C&I loans include any loans made to companies not to individuals (also known as business loans). In most cases, we are talking about short-term financing, which is almost always provided with collateral.
Typical commercial & industrial (C&I) loan products are listed below:
• Working capital line of credit.
• Asset based business line of credit.
• Long-term equipment financing.
• Letters of credit.
• Bridge loans.
• Factoring etc.
Asset-based lending is used by energy companies that already have certain assets but require additional working capital to develop and grow their business.
This could be a flexible credit line that is used to purchase materials, and other purposes. Such loans are secured by some form of collateral, which may be hydropower assets, expensive equipment or infrastructure.
A bridge loan, which is considered an auxiliary or intermediate financial instrument, is included in the group of short-term loans. The interest rate on a bridge loan is high, but there is a high demand for it in all industries.
Some reasons for applying for a bridge loan:
• Purchase of assets, equipment or land at a bargain price.
• Covering the current liabilities of the hydropower project.
• Business development, increasing the installed capacity, etc.
It is suitable for companies that have a difficult situation requiring external borrowing, but for some reason cannot get a traditional loan.
At the same time, the borrower must be sure of receiving funds in the short term to repay the debt. It is extremely undesirable to take such a loan if there is nothing to close it in the near future. Often, hydropower borrowers will take out such a loan against a quick sale of assets or before obtaining a larger loan at a low rate. As a rule, a bridge loan is issued for a period of no more than 12 months.
As for the letter of credit, it is a more specific tool in the context of commercial and industrial loans.
LoC refers to a letter from a bank that guarantees timely payment from the buyer to the seller for goods shipped or services rendered.
In the event that the buyer is unable to pay for the purchase, the bank will be required to cover the full or remaining amount.
Letters of credit are widely used in international transactions, including in the energy sector, construction and maintenance of hydroelectric power plants and their infrastructure.
An important role in bank lending to hydroelectric power plants is played by the state, which acts as a regulator and closely monitors the financing of this strategic industry.
The interest of governments is natural, because hydropower remains one of the most stable and predictable sources of electricity generation in industrialized countries. Moreover, 90% of the balancing capacity in the world is in pumped storage electricity and 10% in other technologies such as thermal power plants or batteries.
It is a critical tool for balancing unpredictable green energy capacities in the grid, and the world will not introduce another model on an industrial scale in the near future.
Each of the listed instruments of bank financing is designed to solve certain problems in the process of developing the energy business. The right choice of funding method is one of the most important conditions for the prosperity of hydropower sector.
GCAM Investment Group is ready to offer long-term bank financing for hydroelectric power plants and related infrastructure.
We provide a full range of financial and consulting services in Europe, the USA, Latin America, Africa, the Middle East, as well as in South and East Asia.
Contact us for a consultation and to learn more about financing options.
