2 Derisking mechanisms Stapled financing principal interest maturity prearranged Guarantees and insurance to cover situations that affect project revenue Standardized documentation PPA gives certainty about the amount and price of generation ID: 1029395
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1. July 17, 2019Bringing it all together: designing a bankable auction package
2. 2De-risking mechanismsStapled financing: principal, interest, maturity pre-arrangedGuarantees and insurance to cover situations that affect project revenueStandardized documentationPPA gives certainty about the amount and price of generationRfP incorporates design elements, makes the rules of game known to biddersAuction designTechnical criteria help banks assess good quality projectsContracting structures (e.g. ESIA, land lease) can make cash flow more stableCash flow of the project is the main source of collateral and loan repayment (value of the operating project is higher than value of asset).Willingness to extend financing to bidders depends on stable, forecastable project cash flows (i.e. price and generation amount)What: A bankable auction package determines the willingness of lenders to extend financing
3. 3Buyer (Government)Lower cost of finance (potentially) lower bids lower cost of electricityProducerStability and magnitude of cash-flow determines leverage (how much debt can the project viable absorb?)Bankable auction package helps secure project finance at more favorable conditions (e.g. principal, interest rate, maturity)Better financing conditions lower cost of financeWhy: a bankable auction package can lower cost of finance and price paid for electricity
4. 4Draft participation documents should be published yearly and include:draft Request for Qualification (RfQ)draft Request for Proposal (RfP)Power Purchase Agreement (PPA) Implementation Agreement (IA) A final non-negotiable contract should be published to Construct a bankable PPA, and Reassure bidders that all auction winners sign the same terms with off-taker (except for offered price)Draft and final versions of the PPA should be publishedTo help ensure transparencyConsulting the private sector, banks, and investors for feedback on a draft PPA before publication is advisableConsiderationsMultiple rounds of procurement give more certainty to markets, allow for learning effectsHow: Standardized PPA
5. 5Source: IRENA 2018Tranche 1: debt on commercial termsTranche 2: debt on concessional terms based on available grant funding. Tranche 3: needs to be sourced by bidders from other financiers, whether commercial banks, export credit agencies or other sources. Example: IFC stapled financingAdvantages: reduce due diligence for bidders and banksBidder: speeds financial closure, especially for new market entrantsBuyer: strengthen the non-negotiable, bankable nature of the contracts offeredStapled financing is offered to all pre-qualified bidders but is not mandatory.How: De-risking mechanism – Stapled financing
6. 6Source: IRENA 2018InstrumentDescriptionExampleSovereign guarantee/Implementation AgreementMinistry of Finance offers to pay off-taker´s payment to projects.South Africa, Uganda Government Support Letter/AgreementGovernment supports the company's performance of its obligations and the off-taker performs its obligations under the PPA (lighter than a guarantee)KenyaIDA Partial Risk Guarantee(Payment)Payment guarantee of letter of credit signed by utility and project company.The letter of credit states utility need to provide payment security equivalent to 6 months of IPP revenuesScaling SolarHow: Guarantees and insurance