Clean Energy Project Development in Current Economic Conditions

By Pat V. Sonti, Short Hills, New Jersey, USA

Introduction and critical phases which if altered leads to unsustainable

technologies and projects. Today, clean energy
Based on recent trends, there is much enthusiasm on technologies which are being promoted are, including but
promoting clean energy in the form of technologies and not limited to; solar, wind, biomass, biofuels, smart grid,
projects. Politicians, bureaucrats, legislators and regulators and green buildings.
as well as industry stakeholders have also embarked on
promoting clean energy against the backdrop of tackling
global climate change, reducing greenhouse gas (GHG)
emissions and creating jobs as part of a new clean energy
economy. Various international, regional and national level
climate change legislation is being proposed and in some
cases being seriously considered for enactment.

Source: World Energy Outlook, Intl. Energy Agency

There is no doubt in anyone’s mind that there is an

ongoing “global recession” and the path to recovery is Source: i2bf.com
quite uncertain considering the recent financial meltdown
which occurred is the worst in the post-World War II The above includes; combined heat & power (CHP),
period. Significant debt burden and ongoing weak balance natural gas, commercial nuclear as well as clean coal and
sheets across-the-board coupled with deleveraging enhanced hydrocarbon recovery through carbon capture
continue to plague businesses and individuals while conversion and sequestration (CCCS). Successful energy
substantial liquidity has already been injected into financial project asset development follows three (3) critical phases:
markets by central banks as part of quantitative easing
 Project Development (feasibility, permits &
efforts. Meanwhile, any foreseen recovery is subject to
clearances, contracts, and financing).
other important economic and financial factors, including
 Project Execution (engineering, procurement,
but not limited to, increasing federal / state budget deficits,
construction, startup and commissioning).
double-digit unemployment, reduced consumer demand,
 Project Operations (facility operations,
increasing rate of bankruptcies, continued mass financial
management, and operations).
destructive effects of over-the-counter derivatives,
collateralized debt obligations and credit default swaps.

Key Fundamentals of Energy Projects

The energy industry (conventional / alternate / renewable
sources) is extremely complex, sensitively balanced and a
highly integrated sector along its entire value chain and life
cycle from raw materials to exploration, production,
generation, transmission, and distribution to wholesale and
retail consumers of fuels, feedstock, and electricity. In this
Source: Pat V. Sonti, Advisor
context, the business and market fundamentals of energy
projects have always followed some very key fundamental
 Clean Energy Project Development in Current Economic Conditions
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Many well-minded enthusiasts such as project developers,
promoters and investors as well as up and coming “clean &
green” entrepreneurs are aiming to take advantage of the
potential opportunities from the clean energy sector. In
order to achieve true sustainability of projects, it is vital to
address the critical phases of clean energy projects in light
of the current economic conditions.
Source: www.matternetwork.com
Project Development
This is the most critical phase of a project wherein techno-
economic feasibility and viability must be clearly
demonstrated as well as obtaining the required federal /
state / local permits and clearances. In addition, mandatory
transactional agreements and contracts must be executed in
order to ensure syndicating and securing of debt for
achieving financial closure.
The cost of the project development phase depends on the
type of clean energy technology, its complexity as well as
its site location among the key factors. This major phase
typically can range from $1 million to $5 million
(estimated) from initial start to financial closure which
must be funded by project developers, promoters and
equity investors Very few projects can attract federal /state
grants at the initial phases of a project. There are four (4)
succinct sub-phases which make-up project development.
Sub-Phase 1; Feasibility
Covers; (i) conceptual, basic, preliminary and detailed
engineering; (ii) Project Feasibility Report (PFR); (iii)
Detailed Feasibility Report (DFR); (iv) Front-End-
Engineering-Design (FEED); (v) Environmental Impact
Studies (EIS) and; (vi) Commercial market studies, Risk
assessment and mitigation analysis. During this phase, it is
prudent for project developers, promoters and equity
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investors to engage highly qualified consultants and
advisors with proven track record in project development.
Sub-Phase 2; Permits & Clearances
Covers; (i) federal, state and local permits; (ii) green-tag
permits; and (iii) emissions and tax credits. During this
phase, regardless of the clean energy technology, some
projects may face substantial public opposition such as
“Not-In-My-Backyard-NIMBY” issues which must be
foreseen and factored by project developers, promoters and
equity investors.
Sub-Phase 3; Transactional Contracts
Covers; (i) Engineering-Procurement-Construction (EPC);
(ii) Operations & Maintenance (O&M); (iii) fuel /
feedstock supply agreements; (iv) product / commodity /
offtaker agreements; and (v) other applicable agreements
required for securing debt. The main focus and attention
must be on maintaining and achieving back-to-back
arrangements or “sacro-sanctity” between various project
agreements and contracts. It is vital to demonstrate
“bankability.” Contracts with creditworthy wholesale and
retail customers and long-term offtakers will enhance
chances of non-recourse debt financing from lenders. Such
contracts include Power Purchase Agreements (PPA’s) and
Energy Sales Agreements (ESA’s).
Source: www.ocrwm.doe.gov
Sub-Phase 4; Project Financing
Covers; (i) financial analysis and modeling; (ii) structuring
of equity, grants and debt; (iii) critical inputs regarding
equity and debt agreements through financial closing; (iv)
comprehensive risk assessment mitigation & management
report; (v) due diligence, syndicating and securing senior /
subordinated debt, working capital, and financial closing
costs. If non-recourse debt financing cannot be obtained,
lender’s may opt for limited recourse financing by way
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collateralization and securitization of project assets and / or
balance sheet(s) of project developers, promoters and
equity investors. It is important to understand and
appreciate the wise saying; “if you cannot finance it, forget
it.” This is especially true to clean energy projects.
Project Execution
Project execution is also known as the design & build
phase. During this critical phase, project promoters, equity
investors and lenders require supervision and management
of the EPC contractor throughout the entire process of
design-build-construction-startup-commercial operations
leading to plant commissioning. This is typically achieved
through engagement of an owner’s and / or lender’s
engineer.
As a note of caution, any clean energy technology which is
utilized in a project must be commercially proven and the
promoters, project developers, equity investors and lenders
must avoid becoming “guinea pigs” for early stage, pilot or
proof-of-concept technologies. Non-commercialized
technologies will add to project risk and may impact not
only financing but also sustainability of the project itself.
Project Operations
This phase covers facilities operation, management and
maintenance, renovation & modernization, re-vamps and
upgrades. Various owner’s and lender’s engineer reports
are required during the execution and operations phases. It
should be noted that the operations and maintenance costs
(OPEX) must be supported by a very detailed project
financial model in MS-Excel to be mutually developed and
agreed upon by the various equity and debt stakeholders.

Source: www.uvm.edu Source: www.tinycomb.com

Continual monitoring of project critical path and milestone Funding & Financing In Today’s Current Economic
schedules is required upto commercial operation of the Conditions via Private-Public-Partnerships
facility. In principle, any target total project cost structure
for a single project follows the below items of hard costs As indicated earlier, the project development phase must
and soft costs in addition to working capital and interest be funded by the promoters, project developers and equity
investors. In otherwords, balance sheet strength is essential
during construction. It should be noted that the total project
cost (CAPEX) must be supported by a very detailed project for undertaking any clean energy projects. In today’s
financial model in MS-Excel to be mutually developed and economic conditions, it is very difficult to fund the project
agreed upon by the various equity and debt stakeholders. development costs with debt in the form of either senior or
subordinated debt including working capital lines of credit.
Hard Costs In some cases, depending on the individual merits of the
(i) Civil and structural and related costs; (ii) mechanical clean energy project, some projects may attract either
equipment, process systems; (iii) electrical equipment and federal and / or state government matching grants.
systems; and (iv) auxiliaries and ancillary equipment and Private-Public-Partnerships (P-P-P)
process systems. Sources Funding & Financing
Equity Project developers, equity & tax
Soft Costs investors/funds, and promoters
(i) Pre-operative expenses (from initial project to Debt Commercial banks, financial
institutions, federal and state govt.
commercial operations); (ii) preliminary expenses (legal,
Working Capital agencies
accounting, statutory, corporate, insurance); (iii) turnkey Grants Federal and state govt. agencies,
project engineering and management services; and (iv) non-profits and foundations.
technology(s) license fee (as applicable). The project
developments costs incurred are included in this category. Source: Various government and industry sources

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The project execution phase, via CAPEX, must be funded
via a debt-equity ratio of minimum 50:50 to 80:20
maximum depending on the risk profile assessment and
debt service coverage ratio (DSCR) as determined by the
lenders. Syndication of the debt usually comprises of both
commercial banks and financial institutions; both public
sector and private sector. Depending on the balance sheet
strength and commercial market fundamentals,
collateralization and securitization of the debt is done
either via balance sheet strength, limited recourse (project
assets hypothecated to lenders), or non-recourse (strength
of revenue / offtaker agreements). In today’s economic
conditions, federal / state loans and loan guarantees may be
available on a project-by-project basis. The loan guarantees
are critical to securing any debt from commercial banks
and financial institutions.
Source: www.vnf.com
As a part of the detailed project financial model, it is
important to incorporate both fiscal and financial
incentives in the form of production tax credits, income tax
credits, tax holidays and accelerated depreciation. Also,
carbon credits, renewable energy credits, and any other
such incentives must be modeled accordingly. These will
help the overall project profitability indicators such as
Internal Rate of Return (IRR), payback period, DSCR etc.
In some cases, project developers, promoters and equity
investors with very strong balance sheets opt to fund the
entire project development, CAPEX and OPEX well into
project commercial operations. Such project developers,
promoters and equity investors may seek to re-finance the
project based on viable revenue / offtaker agreements
which generate high current income, high net profits and
positive cashflow.
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Project Structure
Design and implementation of a viable project structure is
vital to the success of any clean energy project. Below is a
proven business model and structure for effective project
development along with funding and financing sources.
Source: K&L Gates, Pat V. Sonti
In all cases, it is very important to be weary of speculators
who may be keen to have various early stage exits in the
project development and execution phases by “flipping”
the assets which may have a major impact of the clean
energy project’s sustainability. It would be very prudent to
ensure that majority, if not all, of the various stakeholders
continue in the clean energy project until such time full
commercial operations and positive waterfall cashflows are
achieved. This approach may be required at least to the
extent that a major portion of the debt is serviced, normally
occurring during the first 1-5 years of commercial
operations.
Forward Steps
The energy industry has undergone major ups and downs
since the first crude oil embargo of 1973. Many across the
policy and public spectrum have attempted to define an
optimal energy mix coupled with comprehensive energy
policy. In the last two-to-three decades, there has been a
major thrust of deregulation of the entire energy value
chain of production / generation-transmission-distribution.
The main emphasis has been; customer choice; open
access; independent regulatory authority; and market
indexed energy prices for wholesale and retail consumers.
Meanwhile, many project developers, promoters, equity
investors and lenders have been undertaking energy project
development based on non-recourse or limited-recourse
financing with very few balance sheet based projects. As a
result, with the onset of risks associated with business and
market fundamentals coupled with policy uncertainty,
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energy projects today must adhere to conservative balance These factors include:
sheet basics and focus on proven business models. 1. Comprehensive and sustainable energy policy with
Looking ahead, under the current economic scenario, one an optimal energy mix covering conventional /
of the most important factors is the restoration of equity alternate / renewable energy or “all of the above
investor’s confidence which will allow them to emerge solutions” must be enacted at the federal / state
back from the sidelines and participate with project levels.
developers and promoters in order to undertake 2. All encompassing legislative and regulatory
development of clean energy projects. framework for the energy sector must be enacted at
the federal / state levels.
Risks & Mitigation 3. All regulators must be free of political and
An effective comprehensive risk analysis must be bureaucratic interference and must encourage open
undertaken by stakeholders to assess, quantify, allocate and access, market competition, sustainable energy
distribute associated risks thereby resulting in a proper pricing and customer choice.
mitigation plan. A viable methodology and approach can 4. Sound, predictable, sustainable and effective tax
include; policy at the federal / state levels in order to allow
tax investors to participate in the “jump-starting” of
 Identify the risk, understand its origin, nature, and clean energy project development, especially with
categorize / classify the risk. funding the pre-operative and preliminary expenses
 Determine the effective course of corrective associated with the sub-phases; feasibility, permits
action(s), commercial / financial / schedule & clearances and transactional contracts.
impact(s) for each corrective action, and establish a 5. Entire project development phase must be funded by
tabulated categorized risk / reward ratio. equity sources and matched, when proven viable, by
 Assess the execution plans for each corrective grants. This will allow “bankable” projects to attract
action, roles & responsibilities, transactional debt financing via loan guarantees and loans.
contracts and agreements, and applicable insurance. 6. All project stakeholders must ensure that critical
 Implement the corrective action based on a critical path milestones are met, namely; financial closure
path milestones schedule and monitor and manage and commercial operations date.
the performance of all responsible parties. Summary
The potential risks can include, but not limited to, the There are great business opportunities available in the
following: clean energy sector worldwide. In order to achieve true
 Technical; proven technology, design, engineering, sustainability and “bankability”, beyond hype, hysteria and
procurement, construction, commissioning, start-up speculation, it is essential that project developers,
operations, maintenance, retrofits, revamps and promoters, equity investors or lenders adhere to both
spare parts. business and market fundamentals. In today’s uncertain
 Commercial; supply-demand, price, competition, economic conditions, it is also critical to understand and
transactional contracts and agreements, escalation, appreciate that balance sheet strength is vital for
indexation, foreign exchange variation, force undertaking successful project development, achieving
majeure, and default provisions. financial closure and commercial operations.
 Financial; debt-equity ratio, subscribing equity, References
syndicating debt, working capital, grants, balance 1. Five Emerging U.S. Public Finance Models:
sheet exposure, interest during construction, Powering Clean-Tech Economic Growth and Jobs
collateral / security, and hypothecation of assets, Creation, October 2009, Clean Edge Inc., San
liquidation and default. Francisco, CA, USA.
 Policy; federal / state energy policy, regulatory 2. Financing Incentives in the Stimulus Package
framework, permits & clearances, taxes / duties / Project Finance Basics Power Purchase Agreements,
levies, tax credits, accelerated depreciation, and Presented to the Florida Renewable Energy
carbon credits. Producers Association, September 2009, K&L
Essential Next Steps Gates, Palo Alto, CA, USA.
3. World Energy Outlook, 2009, International Energy
There are essential next steps which must be undertaken by Agency, Paris, France.
various stakeholders in order for any clean energy project 4. Annual Energy Outlook, 2009, U.S. Energy
to be implemented successfully and achieve sustainability. Information Agency, Washington D.C., USA.

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