Investment Case Studies

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Investment Case Study: Thar Solar Project

Overview

KLP (Norwegian pension fund), together with the Norwegian Climate Investment Fund, managed by Norfund, entered into an agreement to take a 49% stake in a 420 MW solar power plant in India developed by Italian Enel. Norfund and KLP together take a 49% stake in the solar energy project Thar Surya 1 for approximately 2.8bn INR. The 420 MWp (300 MWAC) new solar power plant is being built in Rajasthan in India by Italian Enel Green Power. When the project is completed, it will deliver more than 750 GWh per year. Given India’s current energy sources, with a considerable proportion coming from coal, the project will avoid more than 615,000 tonnes of CO2 emissions per year – equivalent to the yearly emissions from 316,000 petrol cars in Norway.

Finance Mechanisms

The project was awarded to Enel through a reverse auction backed by the federal agency Solar Energy Corporation of India (SECI), who provided off-take certainty. The contract provides for firm off-take of all power produced at a fixed price, effectively eliminating volume and price risk for the project, and providing the credit risk of federal support. This contractual structure is key to attracting institutional capital to the project.

As a result, the project could be financed on commercial terms from both equity and lenders, with no need for special concessionary or blended finance instruments.

Project’s Key to Success

Federal backed off-take structure: The Government of India, in its commitments to renewables, has supported the provision of firm off-take arrangements through SECI. This structure brings the risk to a level that is acceptable to investors.
Role of the industrial partner: They are able to provide cost-effective solutions and manage the construction and operations of the project to high standards, whilst also being committed to the highest environmental and social standards.
Risk share between investors: Norfund and KLP act as financial investors in the project, effectively sharing the risk with Enel so that its risk exposure is at an acceptable level.

Remaining Challenges

The investment earns revenue in Indian Rupees and is also debt financed in Indian Rupees. The project is exposed to currency risk as all equity investors are foreign investors. In addition, it is difficult to fix interest rates on local currency loans for the full duration of the debt, so the project remains exposed to long-term interest rate risk. With power prices fixed in absolute terms, the inflationary effects on financing costs and operations represent a risk.

Investment Case Study: Lake Turkana Wind Power

Overview

Lake Turkana Wind Power (LTWP) was inaugurated in 2019, comprised of 365 wind turbines of 850KW each, and a high voltage substation. The project is, to date, the largest private equity transaction in Kenya and an example of innovative financing for energy projects, with an installed capacity of 310MW. The carbon credit potential of this project ranges between 565,920 and 1,264,320 CO2 tons equivalents (or carbon credits) per year. The project site has been selected due to its exceptionally favourable wind conditions: its expected capacity factor was at 55%; actual capacity factor has exceeded 60%. It provides approximately 17% of the country’s installed capacity, to be bought at a fixed price by The Kenya Power and Lighting Company PLC (Kenya Power) over a 20-year period in accordance with the Power Purchase Agreement (PPA).

Finance Mechanisms

The investor group included three Nordic DFIs (IFU, Norfund and Finnfund) and investors that were comfortable with project timelines (PensionDenmark, PKA, Pædagogernes Pensionskasse and Dansk Vækstkapital (the latter as a semi-public entity). The African Development Fund applied its first Partial Risk Guarantee to the associated 428 km transmission line to mitigate delay risk (otherwise covered by delay payment obligations of the Kenyan Government to the project company and its lenders). The project has been delivered under a multi-contract arrangement with 5 main suppliers of key project elements (wind turbines by Vestas Wind Systems, electrical balance of plant by Siemens, roads, and civil works by Civicon, grid stabilisation system by RXPC and compound/village by SECO).

Project’s Key to Success

Project preparation support from wind turbine manufacturer: This support led to better construction and operational success, especially with regards to logistics and transport planning and through providing a long-term O&M contract with guaranteed capacity utilisation.
Transaction structure deal: A unique public-private aspect in terms of generation by a privately owned independent power producer.
Close cooperation: All stakeholders worked closely together to minimise project-on-project risk. The project’s senior loan package was mobilised by a multiple lender group with Standard Bank of South Africa as facility agent and financing syndicated by African Development Bank and European Investment Bank, with guarantee structures from the Danish Export Credit Agency (political and commercial cover).

Remaining Challenges

LTWP is located in a remote area with lacking or underdeveloped infrastructure. Apart from the 428 km T-line, +200 km of offsite road upgrades will be commissioned, in addition to onsite road network and a compound village to house construction and operational staff. This presented an ambitious task in itself and seen in the perspective of 2000+ truck loads over a 500km distance from the nearest deep-sea harbour in Mombasa, made up an enormous logistic challenge. Yet, LTWP will mitigate greenhouse gas emissions equal to 740,000 metric tons of carbon dioxide equivalent (tCO2eq) annually, increase national electricity supply by 15–20% (relative to 2015 generating capacity), and create more than 2,000 local jobs including 150 permanent jobs.