Project Financing and Long-term Investment for Hydroelectric Power Plant (HPP)

Project Financing and Long-term Investment for Hydroelectric Power Plant (HPP)

Project Financing and Long-term Investment for Hydroelectric Power Plant (HPP)

Published May 5, 2022 


67 Articles

Project Financing and long-term investment for hydropower plant projects is becoming increasingly important for the development of the global energy sector in the context of growing competition for financial resources.

Project finance (PF) was developed as a form of financing investment projects, the cost of which exceeds the capabilities of the organizers and requires external resources. Since the 1970s, there has been an increase in the number of projects implemented worldwide using this financial instrument, especially in the infrastructure and energy sector.

Although PF is not a fundamentally new form of financing, its importance for the world economy is steadily increasing. Optimal risk allocation and off-balance sheet investments are very important for investors. Traditional secured long-term bank loans do not provide these benefits.

Havelet Finance Limited offers private and public customers professional assistance in financing energy projects around the globe, including long-term bank loans and project finance schemes.

We also develop tailor-made financial solutions for energy sector and other capital intensive areas.

Long-term Hydropower Plant Financial Model: Theoretical Basis.

In corporate finance practice, the term “financial model” refers to a comprehensive analytical tool that is used to evaluate and compare projects. This tool is based on initial project data with a set of assumptions that are processed using standard mathematical and statistical methods to obtain the most accurate predictions of future results. Financial modeling principles include the following:

The stages of forecasting the financial results of the HPP project include:

  • Making a set of assumptions for financial analysis.
    • Development of a detailed program to maximize profit (electricity sales).
    • Forecasting revenues from electricity sales taking into account internal and external factors.
    • Forecasting the costs of production and supply / sale of electricity.
    • Drawing up a project budget with a plan of expenditures and sources of funds.
    • Planning financial costs, taking into account the schedules of loan repayment.
    • Drawing up a detailed report on the profit and loss of the project.
    • Planning for working capital requirements.
    • Drawing up detailed reports on cash flows.
    • Determination of the cost of capital.
    • Assessment of the effectiveness of the project.

In practice, compiling a financial model for a hydroelectric power plant will require the collection and processing of a large amount of information that is relevant to the future and therefore subject to uncertainty. This activity requires complex calculations, taking into account changes caused by objective reasons or a change in the position of the project participants on specific issues. Thus, the level of qualifications, practical experience and technical equipment of the financial team, along with access to project information, determine the result of financial modeling of each project.

Analysis of the financial needs of the hydropower project

To assess the financial viability of a hydroelectric project, a holistic model can be proposed that reflects the structure of revenues and costs for a given type of project in the light of current regulations and market conditions (any significant aspects related to the commercialization of generated energy are important). Assessment of HPP assets is the foundation for subsequent analyzes, because initially it is very important for companies to clearly establish the value that certain investments will add to achieve strategic goals. For this purpose, financial experts use different methods, depending on the specific type of asset and the use of unreliable data that can distort the results and create unnecessary risks.

Comparative Analysis of the Financial needs of the Project

This is a comparative assessment of the asset value of a hydropower project based on the value of similar assets in the local market. Subsequently, a multiplier system (the ratio between the value of a similar asset and a specific characteristic such as income, profit or production) is used to compare the reference asset with the asset under analysis. This analysis can be done in two ways. The first method is related to comparing the HPP project with another asset with similar characteristics. The second is to compare the performance of mature assets based on past data on the same asset. The mentioned method is simple and easy to use, but it presents certain uncertainties and assumptions, and therefore requires a professional approach.

Capital structure in a financial model of a hydroelectric power plant

One of the most important tasks at the planning stage of an investment project for a hydroelectric power plant is to determine the capital structure.

In this context, experts identify the following criteria:

  • Types of capital: a set of sources of financial resources and instruments available to the company that will be used for the construction and launch of the facility.
  • Time frame: comparison of specific sources of capital and financial instruments involved in the implementation of the project at different stages. This kind of structure is built on a clear time frame for the start and end of financing / refinancing of the HPP project.
  • The complexity of the financial decisions taken during the construction and launch of large capital-intensive facilities is due to a number of factors.

In the literature on financial management of the energy sector, the goal of financial forecasting is reduced only to determining the financial needs of the enterprise. In practice, this goal is much broader and covers not only the financing of the hydropower project, but also other needs. Among them are the development of the enterprise, the management of working capital, the formation of the value of the project for investors, as well as the management of project risks of various nature, and much more.

If you are looking for professional financial modeling services for hydropower projects, contact the Havelet Finance Limited. Our company provides long-term financing for large projects, offering clients comprehensive support at all stages.

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