Herbert Smith Freehills releases guide to assist green energy developers

12th May 2020 By: Donna Slater - Creamer Media Contributing Editor and Photographer

Professional services firm Herbert Smith Freehills says Africa-focussed developers and sponsors in the renewable energy market can fast-track project development and enhance bankability by using development funds (DFs).

The firm lays out the plans and their benefits in a newly launched renewable energy guide – 'Africa Renewable Energy Development Funds: A Guide for Market Entrants and Smaller Developers'.

It says a DF often blends public and private sector financing, noting that a DF is therefore willing to invest in projects with greater risk profiles, which may be in jurisdictions not usually favoured by commercial bank lenders or may involve newer untested technology, providing concessional financing or grants where required.

DF financing is used to supplement developer equity injections and commercial financing, providing the project with the resources it needs to reach financial close.

The guide explains that, generally, DFs fall into two categories: funds that focus on small- to medium-sized private sector developments, such as the Renewable Energy Performance Platform (REPP) and Climate Investor One (CIO); and large multidonor United Nations and / or World Bank-mandated funds, such as the Climate Investment Fund (CIF) and the Green Climate Fund (GCF).

DFs such as the REPP and CIO tend to have narrower eligibility requirements and greater rigidity in their financial offering. However, that also means the application process is likely to be faster, and private sector developers can apply to the DFs directly, without having to heavily rely on prior public sector engagement.

Alternatively, DFs such as the GCF and CIF offer greater flexibility in their finance offerings (including concessional financing and grants), enabling the parties to tailor financing to individual developer needs. The guide points out that these funds have the ability to deploy higher levels of financing, making them better suited to larger projects.

However, with funds such as the GCF and CIF, there is a greater focus on ensuring that the projects align with country-wide strategy. The guide notes that, therefore, developers will need to engage with public sector stakeholders, such as multilateral development banks and government institutions, from an early stage.

As a result, the application process (when going through funds such as the GCF and CIF) tends to be more lengthy and administratively burdensome, the guide states.

In return for its investment, a DF will require projects to meet certain criteria regarding the host country's economic development and demand ongoing compliance with detailed environmental and social standards in addition to the customary commercial covenants.

The guide highlights that these additional compliance requirements complicate the application process for many.

DFs commonly prescribe strict eligibility criteria relating to location, project size and investment value. DFs will test eligibility as a first step in the application process, and developers should review the criteria carefully to ensure project compliance, the guide notes.

In terms of key eligibility requirements, location, technology and project and investment size play a crucial role. For example, the REPP and CIF will limit funding to specific countries, while the CIF will only consider projects which are part of its pre-approved country-wide development programme.

In terms of technology, the guide points out that the CIO limits investments to solar, wind and run-of-river hydropower, while the REPP limits investments to grid-connected and off-grid solar photovoltaic, run-of-river hydropower, wind, geothermal, biomass, biogas and waste-to-energy projects.

As far as project and investment size go, the guide says REPP will consider small-scale projects that have a capacity of between 1 MW and 25 MW and up to 50 MW for wind.

For medium-scale projects, the CIO targets projects between 25 MW and 75 MW and has a minimum value size of $25-million.

Developers will need to make a detailed assessment of funding criteria before submitting an application.

In terms of proposals, the guide highlights that while DFs will assess proposals according to their own specific criteria, all will look to assess the project’s potential to impact climate change and in-country development.

These include impact on climate change, including emission-reduction potential and environmental impact, as well as impact potential (coherence to national climate policies) and scalability (replicability and up-scalability).

DFs will also look at the project's impact of financing (likelihood of reaching financial close), sustainable co-developments (for example electrification of rural areas, poverty alleviation and job creation) and economic soundness.