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Expert Blog – May 12, 2022

Investment Manager Jakoba van der Mei is an expert in project financing. In this blog she explains what is involved in project financing and what StartGreen can mean in this.

What is project financing?
'StartGreen can finance companies and projects in various ways. One of those ways is project financing. Cut cake for our investors, but I notice that people who are new to the financing market sometimes find this a difficult concept. I am writing this blog especially for them.

Project financing = start-up capital
To be able to start up a sustainable business – whether that is a wind or solar park or a company that develops an innovative product – you need start-up capital. You can use your own money, money from the bank and money from investors. As soon as you have enough money together and you have arranged all contracts for construction, purchase energy, maintenance, permits and subsidies, the project can start. We call that moment the financing moment (t = 0), or financial close in investment jargon.

Single injection
Only when the project actually starts running will investors be able to recoup their capital injection. The basic principle of project financing is that the project can 'hold up its own pants': in principle, in the event of a financial setback, you cannot fall back on a shareholder with deep pockets to make additional contributions. That is why you have to organize the project financing in such a way that no additional money is needed after the initial financing. This makes careful preparation essential, especially since the project often runs for years.

Types of capital
Projects are often financed with a combination of types of capital:

  • Own power, also venture capital referred to as the entrepreneur's own money. In the case of a cooperative, this is, for example, the contribution of its own members.
  • Foreign wealth: often has a distribution between junior and senior capital:
    • Junior capital: loans from citizens, funds or other financial parties. We also call this 'subordinated' capital, because the providers are the second to get their money back: so they sit behind the lender of the senior loan. A subordinated loan from citizens to an energy project (in a cooperative) is also referred to as a 'financial participation'.
    • Senior capital is the loan from the bank, fund or other financial party. This loan is called 'senior' because the provider has the first right to 'securities' (namely: the assets/value of the project). You can compare this with a mortgage: there the value of the home is the certainty that the bank will get its money back if the borrower is unable to repay the loan. The senior loan party often borrows a larger amount at a lower interest rate.

More information about types of financing can be found on the website of Invesdor (Oneplanetcrowd).

Higher risks, higher returns
The higher the risks of the project, the lower the value of the collateral, the less banks are willing to finance with senior capital. So you need less loan capital and therefore more equity capital to realize a project. From the initiators of the project, the following applies: the higher the risks, the higher the interest rate, but also a higher expected return. In addition, the more proven the technology is, the more debt you can attract and the less venture capital the initiator needs to bring along.

Senior capital is currently relatively cheap. A solar project (proven technology) currently often has a large share of (85-90%) senior debt. The remaining 10 to 15% is then filled in with subordinated and equity capital, together the so-called 'guaranteed capital'. You often need at least 50% own or guaranteed capital for an innovation.

Sufficient security
Financiers only want to put money into a project if they have sufficient certainty that they will earn back their investment. That is why the project builds in as much security as possible to guarantee this, such as long-term forecasts and long-term contracts. For example, for a wind project you need at least a year of wind measurements and an extensive study to estimate the potential energy generation and which wind turbines you need. The project calls in external expertise for such reports. In highly innovative projects you often also need (market) validation in the form of so-called due diligence-reports from external parties.

In addition, you must ensure that contracts are signed for the entire duration of the project. For example for the SDE subsidy from the government, required permits, the purchase of the generated energy (power purchase agreement), possible import of raw materials, and last but not least: for the construction and maintenance of the project itself (shown schematically below). When you have all these things in place, the project can start arranging the financing of the construction from financial close† For initiators, bringing all these things together is a challenging example of process management, which often requires a lot of patience.

spare jar
The moment the project can start financing: 'moment 0', you must have already agreed on all possible scenarios in contracts. And to make sure the project is completely self-contained (non-recourse), a pot for unforeseen setbacks is desirable, so that additional deposits are not necessary. This can be done, for example, by an MRA (maintenance reserve account) which you can call on during the term if, for example, parts break down. Every project has unforeseen issues: an inverter breaks down too early, for example. If there is more income in the next period, you must first top up the MRA before paying out a dividend.

From a to Z
StartGreen can provide the complete financing of a project, with the three types of capital mentioned. Projects often find it very pleasant if they can invest the financing with one party, especially if they also think along with you. In addition, we can help you choose the best financing and organizational structure so that the project becomes financeable. This is especially good for cooperatives that do not have this expertise in-house. We can often finance more flexibly than banks and we make time for customization. Our crowdfunding platform Oneplanetcrowd can help with (local) citizen participation. By involving citizens in energy projects, we help accelerate the energy transition.

Responsible business
I said it before: here at StartGreen, more is possible than at a bank. That does not mean that we take ill-considered decisions or take too great risks. We are an enterprising project financier. We investigate the possibilities in a responsible manner and we have the expertise in-house to understand the financial viability. We have realized a lot of project financing for solar, wind and bio-fermentation projects. But we are also working on more innovative projects and are looking at storage options for batteries, possibly in combination with energy generation projects. With that experience we can think along with projects and really help them further.

Project financing examples
For example, we recently can help make bio-fermentation project Sustenso possible† To this end, we have provided a subordinated (junior) loan from the North Holland Sustainable Economy Participation Fund (PDENH). Oneplanetcrowd brought in the guarantee capital for wind project For the Wind of energy cooperative Nieuwleusen Bringing synergy together through local citizen participation. En Energiefonds Overijssel provided equity capital (venture capital) to floating solar park Bomhofsplas† Through the Local Energy Initiatives (LEI-F) program, Energiefonds Overijssel provides development capital to start-up projects of energy cooperatives.

Make a difference
I came to StartGreen because I can come up with creative solutions here that really help the entrepreneur. My heart is in making things possible. Of course I prefer to make the greatest possible impact by investing in projects that accelerate the transition. I come from a family with a taxi company. We were already working on making the taxi fleet more sustainable at an early stage. We had a 'fries bus', which ran on pure vegetable oil and smelled like a moving chip shop. At StartGreen I can use my expertise in finance for a social purpose: to make the world a little more sustainable. That makes me very happy.'

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