Key Financing Methods for Power Projects

The main aspect of financial accounting of a power project is the power project financing. When it comes to determining the financial benefits and financial costs of a power project, a cost-benefit analysis is usually conducted. And for long-term projects, devising a strategy is a must. 

 

The first step of power projects financing is the identification of capital analysis - a debt equity mix which is used to finance projects. The main key to successful project financing is to identify, analyze, and assess the economic gains of the initiative and how those gains surpass the expenses. 

 

In this post, we will discuss the key methods of project financing that will apply to various projects.  

 

Capital Intensive Financing 

Project financing is required for undertakings that require large amounts of equity and debt. This scheme can be used with power projects that are usually associated with developing countries as they contribute to economic development. It is more expensive than corporate loans and therefore, it leads to higher costs and reduced liquidity.

 

Risk Allocation 

In this financing method, the risk costs are mostly allocated to the participants or investors whose risk tolerance is high. Stakeholders tend to use this system more because it helps them reduce the certain harm. 

 

Multiple Participants Applicable

When project financing is required for large-scale projects like power projects, multiple parties can participate to take care of the project funding. 

 

Asset Ownership

A Special Purpose Vehicle (SPV), which refers to a legal entity created in the context of raising capital, is assigned to have an overview of project proceedings and monitor assets associated with the project. Once the project is completed, the project ownership is assigned to the concerned entity as decided by the terms of loan. 

 

Limited Recourse Financing

Under this method, the borrower doesn’t have the ownership of the project until its completion, and therefore, lenders don’t have to invest time or resources in evaluating the assets and credibility of the borrower. Instead, lenders focus on the project’s feasibility. This method is often selected when it is deemed that the project might not be able to generate enough cash flow to repay the loan after completion. 

 

Loan Repayment with Project Cash Flow

According to this method, the excess cash flow received through the project is used to pay off the outstanding debt received by the borrower. Since the debt is paid off slowly, it reduces the risk exposure of the funding company or service provider. 

 

When looking for power projects financing, you can look for Chinese companies that work with investor groups who can facilitate the assets and resources to help with project financing. They can help you get the financial help in a short time period even if traditional banking and investment channels have not worked for you at all.