Overcoming the Crucial Early Financing StepsWed, 02/19/2014 - 12:39
Some may ask why companies with talented engineering firms do not embark on renewable energy projects for self- supply. The answer could be that long and painful administrative procedures are involved that can delay projects, costing time and money. These may be seen as a necessary evil, but for Ernesto Hanhausen, Managing Director of Emerging Energy and Environment (EEE), the main element deterring companies from self- supply projects is financing. The EEE team is comprised of specialists in the creation of investment funds. The team’s goal is to create funds to invest in the development of renewable energy projects and promote sustainability, renewable energy use, and energy efficiency in Latin America. Hanhausen sees Latin America as having unique economic, market, and regulatory conditions suitable for the development of the aforementioned activities. Said conditions have been recently implemented on different levels across the continent. Brazil stands out as a country that began funding such projects earlier, especially through its development bank, BNDES. Mexico, however, has made several recent changes to its regulatory framework, culminating with the Energy Reform, that will facilitate the development of sustainability projects.
The Mexican renewable energy market is relatively new, making it attractive for foreign companies. However, Hanhausen cautions that success is not guaranteed since foreign firms are unfamiliar with the country’s particular conditions. For example, in terms of risk analysis, land related issues are one of Mexico’s most delicate and complicated subjects. Foreign companies might hit brick walls when it comes to land ownership, ensuring client orders, and contracts with suppliers as navigating these obstacles requires significant Mexican experience. “All these steps must be properly assessed and complied with in order to make a proper project proposal package that a bank will accept,” warns Hanhausen. “We, as a specialized investment platform, collaborate with developers in making these packages because the requirements for us to participate as investors are very strict.”
EEE participates in projects by injecting capital and taking on the financial risks. The investment capital follows an internal interest rate while the funds are on a fixed interest rate. “We support a project with capital to facilitate our clients’ requests for loans at banks,” explains Hanhausen. The more favorable the financing terms are, the higher the internal return rate will be for the investors. This leads to direct negotiations with banks, which are carried out by clients but with EEE’s support.
A common obstacle in the renewable energy market, according to Hanhausen, is that not many developers know how to properly plan and structure a well-balanced project. Since renewable energy is an innovative idea, it tends to attract people who think outside the box,” says Hanhausen. “These creative minds have great ideas but may not have enough experience when it comes to preparing business plans. Thus, they are often rejected by financing institutions.” What EEE representatives are seeing in the market is a thorough crop of projects from the more experienced developers, followed by other players. Generally, parties approach EEE directly, attracted by the firm’s potential to act as a venture capitalist, to take on the investment risk side of their endeavors. Since this trait also brings in less experienced developers, EEE does not only contribute with robust capital. It also provides the necessary technical and technological aspects that unexperienced promoters need.
When his firm first approached banks, especially smaller ones, explaining the projects took too long and the meetings never materialized into an actual development. This meant that EEE initially chose projects financed with existing capital from associates and international financial institutions at very high interest rates. The first Mexican financial institutions to show a willingness to back this sector were development banks, particularly Banobras. Among the private banks, larger ones such as Banamex and Bancomer were the first to break rank and show interest. The market has evolved and almost every bank now has some kind of scheme to finance renewable energy projects, says Hanhausen. Furthermore, the government is heavily focused on these matters, providing guarantee schemes through development banks.
Currently, the firm is working through its Emerging Energy Latin America Fund II, which focuses on renewable infrastructure investments in Latin America’s high growth economies: Brazil, Mexico, Peru, Chile, and Colombia. The fund is mainly intended for companies that want to invest in hydropower, wind power, and solar energy. “EEE takes care of the initial financial risks. After that, developers only have to deal with social, political, and currency exchange risks, which can all be easily mitigated.” He adds that if the initial steps are properly taken care of, projects rarely encounter any financial difficulties.