Bankability of a Renewable Energy Project

What is bankability?

Bankable, means that for a particular project: 

• The project risks are sufficiently eliminated, mitigated or otherwise controlled; and
• The project revenues, or at least a proportion of those revenues, are sufficiently sure and secure

Such that a lender is willing to accept the residual risk exposure and lend an amount reflective of the projected revenues, against payment of interest and other finance costs to remunerate lender risk exposure. Thus, bankability becomes a combination of controlling project risks, securing revenues and putting in place adequate lender protections to ensure that lenders can be comfortable providing debt finance on a non-recourse or limited recourse basis.

What are the categories of bankability?

• Intra-document bankability - Whether or not a particular document in itself presents an unacceptable risk sufficient to deter a lender from lending
• Inter-document bankability - Looks at interfaces across two or more documents, and whether or not they interact in a way that creates risk

What makes a renewables project bankable?

In the case of a power purchase agreement which gives a purchaser discretion as to the volume of electricity it buys, uncertainty is created as to revenues from electricity sales. Such a contract is unlikely to be bankable. A power purchase agreement which entitles the purchaser to renegotiate the price if the market moves, transfers market risk on to the seller. This is also unlikely to be bankable. 

The contracts and other documents that make up renewables projects are complex. Inter-document bankability issues arise where two or more documents are not properly aligned. Non-alignment can create significant risks for the project and for lenders. It is therefore vital that all of the documents are suitably aligned.