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Scrutiny in Project Finance due to the Pandemic is Bound to Make Impact in the Energy Sector

image credit: How COVID-19 impacted bankability?

Project delays and the inability to secure financing has become a real threat in large scale energy infrastructure projects due to the outbreak of COVID-19. It is too early to get conclusive data. But you can already imagine the degree of calamity after hearing that the UN expects global FDI flows to shrink 30% to 40% during 2020/21.

The mood amid the storm

According to the industry poll conducted in April 2020, 47% of respondents think that the pandemic impacts energy projects heavily due to import dependency. 27% optimists thought COVID-19 won't have any impact. As a project financier do you think COVID-19 has only short-term implications for energy sector projects? 

Differing impacts on stakeholders

Surrounding Special Purpose Vehicles (SPV) various stakeholders have different motivations to get into the game. They seek different benefits both financial and non-financial nature. For some SPV is simply a part of the value chain so they don't push hard on returns. This is a complex mechanism, so everyone is thinking about the way ahead amidst the new normality.

Risking with oversimplification, I assume that in the context of COVID-19 the key stakeholders scratching their heads initially due to the new circumstances are sponsors and lenders. In the relationship of these key stakeholders, there is a balancing act between the sponsor's willingness of being flexible and the lender's desire to put controls to manage cashflow.  

Sponsors can walk away if the project faces existential threats without any moral obligation. While lenders can’t simply walk away if things go south.

The project should drive the financing – not the reverse. Meanwhile, project finance is a cashflow business.

The project should drive the financing – not the reverse. Meanwhile, project finance is a cashflow business. Considering COVID-19 increased commercial and macroeconomic risks lenders are most concerned about the consequences of the pandemic. Because lenders accept the term risks and principal risks amid disruptions.

On the other hand, sponsors are cautious of completion risk factored by travel restrictions (including to and from a site), personnel, and other project hurdles. So, in this situation delayed deliveries are becoming the new normal. The combination of the fact that China holds 50% of the global renewable energy components market and the disease broke out there puts supply chain risks to the top of the list everywhere.

Tougher scrutiny to sustain bankability  

The willingness of financial institutions to finance energy projects is shaken due to recent uncertainties. Lenders seek security and certainty and put greater scrutiny upon the reliability of partners and the trustworthiness of developers. Lenders will push forward special risk-mitigating terms due to COVID-19 disturbances. As a result, securing financing will get tougher because lenders are re-making their risk assessments today. It’s not so simple to close a deal anymore!

Giants affected

To understand the extent of problems it is enough to have a look at recent events. In the 1st half of 2020, Vattenfall had pulled out of participating in the auction for 700 MW of power at the Hollandse Kust Noord wind farm off the Dutch coast. Due to the pandemic uncertainties, one of the major energy players had to abandon an opportunity to assure the delivery of current projects. 

P.S.

Yes, at least the EU is signalling a commitment to the energy transition amid the crisis. And there is real EU government financial backing coming in long-term because Europeans want to turn a disaster into an opportunity. If Joe Biden takes over the White House, we will see similar clean energy sentiment across the Atlantic too. You know that's an if. But also, don't forget the role of the private sector in financing technology across the value chain. Time will show if those in the private sector will keep the appetite for the clean energy projects mid/post COVID-19 era. What you are going to do if they will sit on their hands due to economic crisis and credit crunch?

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Rauf Fattakh's picture

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