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The need to consensus the vision of the future of market prices in the renewable energy projects financing

AleaSoft Energy Forecasting, October 13, 2021. In the renewable energy projects financing, the markets prices risk is the new protagonist. This is why it is essential to have a long‑term vision of electricity markets prices. Precisely one of the most complex parts in Project Finance is related to the different visions of the future that the actors have in the negotiation. PPA are an essential tool for reducing the market risk and achieving the projects bankability.

On October 7, the AleaSoft Energy Forecasting’s monthly webinars were resumed, in which a review of current issues of the energy sector is carried out by Oriol Saltó i Bauzà, Manager of Data Analysis and Modelling of the company. To start this new season, two speakers from Deloitte Spain participated, Carlos Milans del Bosch, Partner of Financial Advisory and Pablo Castillo Lekuona, Senior Manager of Global IFRS & Offerings Services. Antonio Delgado Rigal, CEO of AleaSoft Energy Forecasting, was also present at the subsequent analysis table. AleaSoft Energy Forecasting and Deloitte Spain customers can request the recording of the webinar here.

In the webinar an analysis of the current situation of energy crisis and of high fuels, CO2 emission rights and European electricity markets prices was carried out. The current state of renewable energy projects financing was also analysed and risks and difficulties in preparing the financial information were described, emphasising the importance of the markets prices forecasting with hourly detail as input in these processes.

Importance of having a vision of the future of market prices in Project Finance

In the webinar it was commented that, once the feed‑in tariff has practically disappeared and taking into account that the volume risk is accepted, the new protagonist of the renewable energy projects financing is the market risk. Hence the importance that all market players, shareholders, investors and credit institutions, have a vision of the future of prices when investing and lending money.

AleaSoft - Deloitte electricity market prices future visionSource: Deloitte Spain.

The “easy part” of the projects financing with market prices

In the renewable energy projects financing with market risk there is a part that can be called “easy” in which there is usually consensus among different actors, shareholders, investors and credit institutions. The Capex, Opex and Tax assumptions are commonly shared by these actors. In some cases they are subject to the assessment of independent third parties, but in any case they are common assumptions.

In general, there are also no major differences in terms and cost of financing among different credit institutions. Normally debt terms are usually between 16 and 18 years plus the construction time and the cost is usually an average of a Euribor plus 250 percentage points.

Production forecasts of the plant are quite accepted by all actors and they also improved a lot, especially those of wind energy, which are the most complex to carry out since this technology does not have a production profile as defined as that of solar photovoltaic energy. In this case, lenders are more conservative and use the P90 to calculate the size of the debt and investors use the P50 to calculate their yields.

The “not so easy” part of the projects financing with market prices

The most complicated part in renewable energy projects financing with market risk is related to electricity market prices in the future, because there are usually significant differences between long‑term price forecasts used by different parties. Sponsors have a more optimistic vision of the future, which is logical because their objective is to mobilise capital and convince their investors. However, banks tend to be more conservative because they need to ensure the return of all borrowed money.

This situation of different visions of futures on market prices makes contracting products that cover markets risk essential, especially in very large projects. This is the reason for the rise of PPA (Power Purchase Agreements), which, although they do not cover the prices risk during the entire life of the plant, can cover 10 to 15 years at the beginning of the project’s operation, facilitating the bankability of the project.

Next AleaSoft Energy Forecasting’s webinar

Given the importance and interest generated by the renewable energy projects financing, this will once again be one of the topics to be analysed in the next AleaSoft Energy Forecasting’s webinar, which this time will feature guest speakers from Engie Spain. This webinar will be held on November 11 and it will also analyse the evolution of European energy markets, which will most likely continue to be immersed in the current energy crisis.

Source: AleaSoft Energy Forecasting.
Long term forecasting

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