The need for money to fund energy solutions

 By Nicholas Newman

Trillions of dollars are being invested in energy projects around the world. Construction of new power stations, coal mines, pipelines, power plants and grids, as well as the exploration and development of new oil and gas fields, accounts for much of the investment. According to the International Energy Agency [IEA], $1.8 trillion was invested worldwide in the energy sector in 2015, a little down from the previous year’s figure of $2 trillion, owing to weak oil and gas prices and related industry cost-cutting and efficiency drives.

The upstream oil and gas sector attracted the largest investment at $583 billion, followed by electricity generation at $420 billion and electricity transmission at $262 billion, with a significant $313 billion invested in all renewable sources. China is currently the world’s leading energy investor at $315 billion, followed by the United States at $289 billion, while lagging well behind the U.S. with less than half the investment is the European Union at $140 billion. Individual energy projects can prove costly: It will cost $174 billion, over 20 years, to develop Libra, Brazil’s largest offshore oil field, while South Africa’s over-budget and over-schedule 4,764 MW-coal power station Medupi has an estimated final cost of $3.05 billion. IN addition, $3.76 billion was required for the development of the 870-MW London Array Offshore Wind Farm located near London.

Assembling the money

Funding of energy projects comes from a variety of sources. Those include companies and utilities themselves, loans and bond issues, as well as the state, in the case of national energy companies. In less developed and emerging countries, traditional sources of finance, such as the World Bank, IMF, OECD, governments and development and commercial banks have been joined by sovereign wealth funds, European utilities, private equity firms and hedge funds.

For example, the Green Investment Bank, European Bank for Reconstruction and Development (EBRD), Export-Import Bank of China, the Norwegian Sovereign wealth fund and private equity including the Blackstone Group are active financiers in energy projects. For instance, the $1.5 billion Carlyle Power Partners fund invests in power generation and related assets, and Blackstone Group has set up a $4.5 billion fund designed to invest in oil and gas projects. For Africa, new sources of finance for power generation include Power Africa, with its combination of government and private money dedicated to financing 30,000-MW of clean electricity and connecting 60 million people. Funding comes in a combination of loans, bonds and sovereign guarantees. With national government budgets constrained, there has been a rise in Independent Power Producer (IPP) projects financed by a mixture of loans and private investment, as well as private partnerships (PPP) in which governments, public utilities and the private sector establish new power and electricity projects. A good example of a PPP outside Africa is the new 3-MW $ 12.7 million combined heat and power plant and energy efficiency project in New Hampshire.

Given the size of capital requirements of power projects, many investors need to be assembled. Issuing debt and obtaining loans is a complicated and drawn-out business. Even in the United Kingdom, with its well-developed deep capital markets, multiple international banks and hedge funds took from 2001 until 2009 to finalize funding for the London Array Offshore Wind Farm.

Even in the United Kingdom multiple international banks and hedge funds took from 2001 until 2009 to finalize funding for the London Array Offshore Wind Farm

Making a bankable case

‘Private sector finance for any energy power project is available for “bankable” projects. These are projects that can show a viable business case that the money invested will be paid back. In the case of a power station, this usually means getting a ‘Power Purchase Agreement’ or contract from a creditworthy customer. Such a customer could be a national grid operator, factory or mine, who will guarantee an adequate and predictable revenue stream for repayment of the debt from the electricity its sells to its customers. In addition, project promoters must show that there is sufficient market demand for the power generated and a developer’s consortium partners has proven capability to complete the project on budget and within time. A case in point is the proposed $2 billion combined LNG import terminal and gas independent power plant, to be located at the port of Richard’s Bay in South Africa. Here, the state grid operator Eskom will need to agree to pay for the resultant electricity at a cost-reflective tariff, and the government will guarantee payment should Eskom fail to meet its obligations.

However, as Thomas Maier, European Bank for Reconstruction and Development [EBRD] Managing Director for Infrastructure has indicated, many project promoters fail to raise the capital they need from potential financial providers by failing to detail project preparations in their presentations. “Simply put,” says Maier, “the dearth of investment-ready projects has led to a widening gulf between what is required and what is delivered.” In order to improve the success rate of projects being considered by funders, banks like the EBRD and the African Development Bank have set up special offices to fund and streamline the expensive process of organizing a viable business case to be presented to potential funders and decision makers. For any energy project to be successfully realized, government support is essential. For example, Gazprom’s proposed Sudstream  pipeline to link Russia’s gas fields to southeastern European markets fell down through European political opposition. However, the construction of the Trans Adriatic Pipeline, which will transport natural gas from the Turkish gas grid to Italy via Greece and Albania has overwhelming E.U. political support. It is clear that, for commercially viable projects, funds will be forthcoming, but project developers must invest sufficient time and money into preparing their business case before presenting to potential funders and governments.

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about the author
Nicholas Newman
Freelance energy journalist and copywriter who regularly writes for AFRELEC, Economist, Energy World, EER, Petroleum Review, PGJ, E&P, Oil Review Africa, Oil Review Middle East. Shale Gas Guide.