{"id":14957,"date":"2022-05-27T01:23:31","date_gmt":"2022-05-27T01:23:31","guid":{"rendered":"https:\/\/startgreen.nl\/project-finance-an-essential-instrument-for-the-energy-transition\/"},"modified":"2022-05-27T01:23:31","modified_gmt":"2022-05-27T01:23:31","slug":"project-finance-an-essential-instrument-for-the-energy-transition","status":"publish","type":"post","link":"https:\/\/startgreen.nl\/en\/project-finance-an-essential-instrument-for-the-energy-transition\/","title":{"rendered":"Project finance, an essential instrument for the energy transition"},"content":{"rendered":"<p><span style=\"color: #2acc9d;\">Expert blog &#8211; May 12, 2022<\/span><\/p>\n<p>Investment Manager Jakoba van der Mei is an expert in the field of project finance. In this blog, she explains what project finance involves and how StartGreen can provide support. <\/p>\n<p><!--more--><\/p>\n<p><strong><span style=\"color: #2acc9d;\">What is project finance?<br \/>\n<\/span><\/strong>&#8216;StartGreen can finance companies and projects in various ways. One of those ways is project finance. For our investors, it is second nature, but I notice that people who are new to the financing market sometimes find this a difficult concept. I am writing this blog specifically for them.   <\/p>\n<p><strong><span style=\"color: #2acc9d;\">Project finance = start-up capital<\/span><\/strong><br \/>\nTo start a sustainable enterprise\u2014whether it is a wind or solar farm or a company developing an innovative product\u2014you need start-up capital. You can use your own money, bank loans, and investor funds for this. Once you have raised enough money and arranged all contracts for construction, energy off-take, maintenance, permits, and subsidies, the project can commence. We call that moment the financing moment (t = 0), or <em>financial close<\/em> in investment jargon.   <\/p>\n<p><a href=\"\/#_ftnref1\" name=\"_ftn1\"><\/a><strong><span style=\"color: #2acc9d;\">One-off injection<br \/>\n<\/span><\/strong>Only when the project actually starts running can investors begin to earn back their capital injection. The starting point of project finance is that the project must be &#8216;self-sufficient&#8217;: in principle, you cannot fall back on a shareholder with deep pockets to provide additional funds in the event of a financial setback. Therefore, you must structure the project finance in such a way that no more money is required after the initial financing. This makes careful preparation essential, especially since projects often run for many years.   <\/p>\n<p><strong><span style=\"color: #2acc9d;\">Types of capital<\/span><br \/>\n<\/strong>Projects are often financed with a combination of different types of capital:<\/p>\n<ul>\n<li><em>Equity<\/em>, also known as <em>venture capital<\/em>: the entrepreneur&#8217;s own money. In the case of a cooperative, this is, for example, the contribution from its own members. <\/li>\n<li><em>Debt<\/em> capital: often divided between <em>junior<\/em> and <em>senior<\/em> capital:\n<ul>\n<li><em>Junior<\/em> capital: loans from citizens, funds, or other financial parties. We also call this &#8216;subordinated&#8217; capital because the providers are second in line to get their money back: they stand <em>behind<\/em> the provider of the senior loan. A subordinated loan from citizens to an energy project (in a cooperative) is also called &#8216;financial participation&#8217;.  <\/li>\n<li><em>Senior<\/em> capital is the loan from the bank, fund, or other financial party. This loan is called &#8216;senior&#8217; because the provider has the first right to &#8216;collateral&#8217; (namely: the assets\/value of the project). You can compare this to a mortgage: there, the value of the house is the security that the bank will get its money back if the borrower cannot repay the loan. The senior debt party often lends a larger amount at a lower interest rate.   <\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p>More information about types of financing can be found on the <a href=\"https:\/\/www.oneplanetcrowd.com\/nl\/s\/informatie-investeerders\">Invesdor (Oneplanetcrowd) website<\/a>.<\/p>\n<p><strong><span style=\"color: #2acc9d;\">Higher risks, higher returns<br \/>\n<\/span><\/strong>The higher the risks of the project, the lower the value of the collateral, and the less banks are willing to finance with senior capital. You then have less debt capital and therefore need more equity to realize a project. From the perspective of the project initiators: the higher the risks, the higher the interest rate, but also the higher the expected return. Additionally: the better proven the technology is, the more debt capital you can attract and the less venture capital the initiator needs to provide.   <\/p>\n<p>Senior capital is currently relatively inexpensive. A solar project (<em>proven technology<\/em>) currently often has a large share (85-90%) of senior debt. The remaining 10 to 15% is then filled with subordinated and equity capital, together known as &#8216;guarantee capital&#8217;. For an innovation, you often need at least 50% equity or guarantee capital.   <\/p>\n<p><strong><span style=\"color: #2acc9d;\">Sufficient security<br \/>\n<\/span><\/strong>Financiers only want to put money into a project if they have sufficient certainty that they will earn back their investment. Therefore, the project incorporates as many safeguards as possible to guarantee this, such as long-term forecasts and multi-year contracts. For a wind project, for example, you need at least a year of wind measurements and an extensive study to estimate the potential energy generation and which wind turbines are required. The project engages external expertise for these types of reports. Highly innovative projects also often require (market) validation in the form of so-called <em>due diligence<\/em> reports from external parties.    <\/p>\n<p>In addition, you must ensure that contracts are in place for the entire duration of the project. For example, for the government&#8217;s <a href=\"https:\/\/www.rvo.nl\/subsidie-en-financieringswijzer\/sde?msclkid=fd1305ddaf6511ec96566da90ce35bb6\">SDE subsidy<\/a>, necessary permits, the off-take of the generated energy (<em>power purchase agreement<\/em>), any import of raw materials and, not to be forgotten: for the construction and maintenance of the project itself (shown schematically below). Once all these matters are finalized, the project can arrange the financing for construction from <em>financial close<\/em>. For initiators, bringing all these elements together is a challenging feat of process management, for which they often need a great deal of perseverance.   <\/p>\n<p><strong><span style=\"color: #2acc9d;\">Reserve fund<br \/>\n<\/span><\/strong>At the moment the project can be financed: &#8216;moment 0&#8217;, you must have already agreed on all possible scenarios in contracts. And to ensure that the project is completely standalone (<em>non-recourse<\/em>), a fund for unforeseen setbacks is desirable, so that additional capital injections are not necessary. This can be done, for example, by co-financing an MRA (<em>maintenance reserve account<\/em>), which you can draw upon during the term if, for example, parts break down. Every project faces unforeseen issues: an inverter might fail too early, for instance. If there is more income in the following period, you first replenish the MRA before paying out dividends.    <\/p>\n<p><strong><span style=\"color: #2acc9d;\">From A to Z<br \/>\n<\/span><\/strong>StartGreen can provide the full financing of a project, using the three types of capital mentioned. Projects often find it very pleasant if they can place the financing with a single party, especially if that party also thinks along with them. Additionally, we can help choose the best financing and organizational structure so that the project becomes bankable. This is particularly beneficial for cooperatives that do not have this expertise in-house. Furthermore, we can often provide more flexible financing than banks and take the time for customization. Our crowdfunding platform Oneplanetcrowd can assist with (local) citizen participation. By involving citizens in energy projects, we help accelerate the energy transition.      <\/p>\n<p><strong><span style=\"color: #2acc9d;\">Responsible entrepreneurship<br \/>\n<\/span><\/strong>As I mentioned before: more is possible here at StartGreen than at a bank. That does not mean we make ill-considered decisions or take excessive risks. We are an entrepreneurial project financier. We investigate the possibilities in a responsible manner and have the expertise in-house to understand the bankability. We have realized many project financings for solar, wind, and bio-digestion projects. But we are also working on more innovative projects and looking at storage options for batteries, possibly in combination with energy generation projects. With that experience, we can think along with projects and truly help them move forward.      <\/p>\n<p><strong><span style=\"color: #2acc9d;\">Examples of project finance<br \/>\n<\/span><\/strong>For example, we recently <a href=\"mailto:https:\/\/www.startgreen.nl\/nieuws\/biovergister-sustenso-in-boekelermeer-gaat-nederland-duurzaam-gas-leveren\/\">helped make the Sustenso bio-digestion project possible<\/a>. For this, we provided a subordinated (&#8216;junior&#8217;) loan from the Sustainable Economy North Holland Participation Fund (PDENH). Oneplanetcrowd raised the guarantee capital for the <a href=\"https:\/\/www.oneplanetcrowd.com\/nl\/project\/200395\/description\" target=\"_blank\" rel=\"noopener\">Veur de Wind<\/a> wind project of the Nieuwleusen Synergie energy cooperative through local citizen participation. And Energiefonds Overijssel provided equity (venture capital) to the <a href=\"https:\/\/www.energiefondsoverijssel.nl\/nieuws\/zonnepark-bomhofsplas-het-grootste-drijvende-zonnepark-in-europa\/\" target=\"_blank\" rel=\"noopener\">Bomhofsplas floating solar park<\/a>. Through the Local Energy Initiatives program (LEI-F), Energiefonds Overijssel provides development capital to start-up projects of energy cooperatives.    <\/p>\n<p><strong><span style=\"color: #2acc9d;\">Making a difference<\/span><br \/>\n<\/strong>I joined StartGreen because I can offer creative solutions here that truly help the entrepreneur. My heart lies in making things possible. Naturally, I prefer to make as large an impact as possible by investing in projects that accelerate the transition. I come from a family with a taxi company. We were early adopters of making the taxi fleet more sustainable. We had a &#8216;chip van&#8217; that ran on pure vegetable oil and smelled like a mobile deep fryer. At StartGreen, I can use my expertise in finance for a social purpose: to make the world a bit more sustainable. That makes me very happy.&#8217;       <\/p>\n","protected":false},"excerpt":{"rendered":"<p>Expert blog &#8211; May 12, 2022 Investment Manager Jakoba van der Mei is an expert in the field of project finance. In this blog, she explains what project finance involves and how StartGreen can provide support.<\/p>\n","protected":false},"author":11,"featured_media":14960,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[135,123,136,121,153,129],"tags":[174,127,175,130,183],"class_list":["post-14957","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-blog","category-energiefonds-overijssel","category-impact-financing","category-news","category-pdenh","category-startgreen-capital","tag-blog","tag-energy-transition","tag-entrepreneurship","tag-financing","tag-innovations"],"acf":[],"_links":{"self":[{"href":"https:\/\/startgreen.nl\/en\/wp-json\/wp\/v2\/posts\/14957","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/startgreen.nl\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/startgreen.nl\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/startgreen.nl\/en\/wp-json\/wp\/v2\/users\/11"}],"replies":[{"embeddable":true,"href":"https:\/\/startgreen.nl\/en\/wp-json\/wp\/v2\/comments?post=14957"}],"version-history":[{"count":0,"href":"https:\/\/startgreen.nl\/en\/wp-json\/wp\/v2\/posts\/14957\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/startgreen.nl\/en\/wp-json\/wp\/v2\/media\/14960"}],"wp:attachment":[{"href":"https:\/\/startgreen.nl\/en\/wp-json\/wp\/v2\/media?parent=14957"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/startgreen.nl\/en\/wp-json\/wp\/v2\/categories?post=14957"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/startgreen.nl\/en\/wp-json\/wp\/v2\/tags?post=14957"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}