likely) possibility that demand should drop; and (b) that maintenance costs should far exceed forecasts. In both cases the net effect is a drop in projected revenues with the associated possibility of being unable to service the debt. The standard method of protecting the lenders against these risks is to establish a “take or pay” contract, with the loans being made on the condition of the contract’s existence and the assignment of its revenues to lenders in certain circumstances. Such a contract provides that the purchasers of the electricity agree to pay for the output of a predetermined amount (typically enough to cover debt service and other fixed costs), whether or not they take delivery of it. The contract could go further still and stipulate that the contract is binding whether or not the electricity is in fact available (“hell or high water” clause). Take or pay contracts of this type have, inter alia, been applied to hydroelectric projects and although the risk of lower electricity prices would not seem particularly high, if such contracts have been deemed necessary in the case of hydroelectric projects, they would probably be called for in the SPS project. Another method of transferring economic risk away from the lenders to the users is to include a “Cost of Service” contract which apportions the maintenance costs in proportion to the share of output contracted for by the users. This type of clause might be particularly appropriate in the SPS project where the forecast maintenance costs, though low in relation to the initial capital cost are nonetheless accepted as being difficult to predict and capable of considerable upward variation. Finally, one should mention the less sophisticated type of agreement, known as a “Deficiency Payment Agreement” or the similar “Working Capital Maintenance Agreement” whereby creditworthy participants quite simply agree to make up any deficiency between the revenues generated by the project and the debt service. Although this type of agreement gives wide cover to the lenders, it is not an ideal method of applying the general principle that risk should be apportioned in proportion to potential reward; however, it may be required where there is a low equity content. In addition to the completion and economic risks already mentioned above, lenders will be aware of the following: • Environmental risk, namely, the possibility that after the SPS project is well advanced, or actually producing, environmental problems be discovered which were not foreseen at an earlier stage. However, existing information indicates that the SPS scheme has a distinct advantage over nuclear power stations in this area. • Force majeur, which is the most frequent way of describing inescapable events of nature or of mankind (e.g., wars) beyond the control of the participants which interrupt or destroy the project. It is possible that the lenders will feel that these two unlikely but serious risks, together with the overall nature of the project, mean that they require a direct guarantee in spite of the agreements already mentioned. Such a guarantee would have to be given by a clearly creditworthy entity who may not be a direct participant in the project, for instance a government. Having briefly described the framework of project financing, I now propose to suggest sources of funds which might possibly be considered for the SPS installations. The funding needs of the project are characterised by very high initial capital costs, relatively low maintenance costs and minimal operating costs. To that extent the project’s cash flow profile somewhat resembles that of a hydroelectric project. One must therefore seek to raise very substantial funds for immediate use on the basis that once production starts the low level of operating costs will assure ample
RkJQdWJsaXNoZXIy MTU5NjU0Mg==