- DEFINITION OF BANKABILITY
Bankability or a bankable renewable energy project refers to the extent to which a project is considered financially viable and attractive to lenders and investors. Thus, a bankable project has manageable risks, predictable revenues, and a high likelihood of repaying debt.
B) BANKABILITY ISSUES IN ENERGY PROJECTS
Bankability issues refer to the factors that determine whether a project is likely to obtain financing from lenders and attract investors. Financial institutions assess these issues to determine whether the energy project can generate sufficient and reliable cash flow to repay debt while managing risks effectively.
Overall, lenders evaluate renewable energy projects based on the identification, allocation and mitigation of technical, commercial, legal, environmental, and financial risks to ensure stable long-term cash flows and reliable debt repayment. Thus, ensuring the project’s ability to:
– Generate stable cash flows;
– The likelihood of repaying loans on time;
– The overall risk profile of the investment;
– The cost and availability of financing;
– Proven technology and reliable resource data;
– Experienced developers, contractors, and operators;
– A strong legal and contractual framework;
– Stable regulatory support;
– Effective allocation and mitigation of technical, financial, environmental, and political risks.
C) KEY INDICATORS IN A BANKABLE ENERGY PROJECT
| Bankability Factors | Key Assessment Indicators |
| Revenue Certainty | – Long-term power purchase agreements (PPAs) with creditworthy off-takers; – Stable electricity pricing and tariff structures; – Predictable cash flows over the project life. |
| Technology Risk | – Proven and commercially established technology; – Reliable equipment from reputable manufacturers; -Performance guarantees and warranties; -Availability of maintenance and spare parts |
| Resource Risk | – Availability and reliability of the renewable resource (solar irradiation, wind speed, hydrology, biomass supply); -Accurate resource assessments based on long-term data; – Seasonal and climate variability. |
| Regulatory and Policy Risk | – Stable government policies supporting renewable energy; – Transparent procurement and tendering processes; – Consistent tax incentives, subsidies, or feed-in tariffs; -Risk of policy changes affecting project economics; – Stable, enforceable contracts and dispute resolution; -Clear repatriation rules and predictable tax treatment |
| Construction Risk | – Experience and financial capacity of the engineering, procurement, and construction (EPC) contractor; -Fixed-price, date-certain EPC contracts; -Risks of cost overruns and project delays. |
| Financial Structure | – Appropriate debt-to-equity ratio; – Competitive financing costs;Adequate debt service coverage ratio (DSCR); -Currency and interest rate risk management. |
| Grid Connection Risk | – Availability of transmission infrastructure; -Grid capacity to absorb renewable generation; -Timely completion of interconnection facilities; -Curtailment risk. |
| Environmental and Social Risks | – Compliance with environmental regulations; -Environmental and Social Impact Assessments (ESIAs); -Community acceptance and stakeholder engagement; -Resettlement and biodiversity considerations. |
| Land authorization and permits | – Secure land ownership or long-term leases; – Clear land titles and rights-of-way. |
| Political and Macroeconomic Risk | – Political stability; -Exchange rate volatility (especially where project revenues and debt are in different currencies); -Inflation and sovereign risk; – Risk of expropriation or contract renegotiation |
| Operational Risk | – Efficient operation and maintenance (O&M) arrangements; -Qualified operators and maintenance teams. – Expected equipment availability and performance |
D) THE INCLUSION OF BANKABLE CONTRACTS FOR AN ENERGY PROJECT
A bankable contract is a contract with a risk allocation between the Contractor and the Project Company that satisfies the Lenders.
Here,Lenders focus on the ability (or more particularly the lack thereof) of the Contractor to claim additional costs and/or extensions of time as well as the security provided by the Contractor for its performance.
Generally speaking the Lenders will require the following elements to be included for a contract to be considered to be ‘bankable’:
– A fixed completion date
– A fixed completion price
-No or limited technology risk
-Output guarantees;
-Liquidated damages for both delay and performance
– Security from the Contractor and/or its parent
-Large caps on liability (ideally, there would be no caps on liability, however, given the nature of EPC Contracting and the risks to the Contractors involved there are almost always caps on liability)
– Restrictions on the ability of the Contractor to claim extensions of time and additional costs.
E) THE ROLE OF OL & PARTNERS IN ENSURING A BANKABLE ENERGY PROJECT
Our Energy Regulation and Policy team understands that bankability in an energy project is very crucial thus, our involvement spans the entire project lifecycle, from project development and financing to construction, operation, and eventual decommissioning through the following:
- Conducting Legal Due Diligence
Verify that the project complies with all applicable laws and regulations by examining:
– Land ownership and lease rights;
-Corporate structure of the project company;
-Existing contracts and obligations;
-Regulatory compliance.
b) Drafting and Negotiating Project Contracts
Negotiating the key contracts that allocate risks among project participants because well-drafted contracts clearly define each party’s rights, responsibilities, and liabilities, reducing the likelihood of disputes.
– Purchase Agreements (PPAs);
-Engineering, Procurement and Construction (EPC) contracts;
-Operation and Maintenance (O&M) agreements;
-Equipment supply contracts;
-Transmission and grid connection agreements;
-Shareholder agreements
c) Supporting Project Finance
We create a financing structure that lenders consider secure and bankable by:
-Structuring financing transactions;
-Negotiating loan agreements;
-Preparing security documents;
-Advising on guarantees and collateral;
-Ensuring compliance with lender requirements.
d) Managing Regulatory and Policy Risks
Renewable energy projects are heavily influenced by government policies thus, we:
-Monitor changes in energy laws;
-Advise clients on regulatory compliance’
-Interpret tax incentives and renewable energy support schemes;
-Recommend strategies to minimize policy-related risks.
e) Ensuring Environmental and Social Compliance
Strong environmental and social compliance reduces legal, financial, and reputational risks. At OL & PARTNERS, we:
-Review Environmental and Social Impact Assessments (ESIAs);
-Advise on biodiversity protection and community engagement;
-Managing legal aspects of resettlement and compensation where necessary.