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Post by Deleted on Jan 18, 2015 12:37:47 GMT
Hi,
I understand that Wind Turbine projects are likely to have a fairly guaranteed income, inflation-linked, due to the government setting up the renewal electricity prices.
However, I am struggling to understand how some loans can offer an interest rate of 10%, when the project itself is expected a return of 10%. What's left for the developer then?
Found on the web:
"For projects in the up to 500 kW bracket a good deal would be between 8% and 12%. 12% is only offered to the most exceptional sites (i.e. high wind speed) with absolutely no development issues"
Thanks,
S
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jjc
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Post by jjc on Jan 18, 2015 13:26:53 GMT
"with absolutely no development issues" is the key phrase there.
AC wind loans (so far) have all been for sites still to be built so lenders are assuming development/construction risk.
The developers also stand to earn a (probably significant - if no site issues) profit from the increased value of the site on sale. Most are looking for financing from AC lenders in order to fund completion of the site & then build the 18 month+ operating track record needed to maximise its value for sale.
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mikes1531
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Post by mikes1531 on Jan 18, 2015 18:18:26 GMT
Most are looking for financing from AC lenders in order to fund completion of the site & then build the 18 month+ operating track record needed to maximise its value for sale. ... or refinance via a mainstream lender at a rate lower than the rate being paid to AC. And at that point -- to get back to the OP's question -- the return on the project exceeds the cost of the funding and the developer has a profitable project they can either hold or sell on to another investor.
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pikestaff
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Post by pikestaff on Jan 19, 2015 12:03:49 GMT
Hi, I understand that Wind Turbine projects are likely to have a fairly guaranteed income, inflation-linked, due to the government setting up the renewal electricity prices. However, I am struggling to understand how some loans can offer an interest rate of 10%, when the project itself is expected a return of 10%. What's left for the developer then? Found on the web: "For projects in the up to 500 kW bracket a good deal would be between 8% and 12%. 12% is only offered to the most exceptional sites (i.e. high wind speed) with absolutely no development issues"Thanks, S The bit I've emboldened sounds back to front. Good deals would attract lower interest rates. So I googled it and found the full text here: www.renewablesfirst.co.uk/financing-projects/. The sentences you've quoted have been taken out of context. The paragraph as a whole reads: "Most investors offer to pay a percentage of the gross income from the wind turbine to the site owner. The percentages offered generally range from 6% to 12%, with the range due to the wind speed at the site and the ‘ease’ of development. For projects in the up to 500 kW bracket a good deal would be between 8% and 12%. 12% is only offered to the most exceptional sites (i.e. high wind speed) with absolutely no development issues so that the likelihood of obtaining planning consent within a reasonable timeframe would be high. The majority of sites are offered 10%, and lower wind speed sites or sites with smaller turbines less." This has nothing to do with the interest rate on lending to a turbine project. It's the slice of the gross income offered to the landowner (their rent for the site). If the landowner gets 6-12%, the remaining 88-94% is available to service the loan and pay the developer their profit.
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Post by Ton ⓉⓞⓃ on Jan 19, 2015 16:32:27 GMT
The slice the Landlord gets is quite variable, in one case it's 20%. I'm thinking of the Northern Ireland one all being well. I don't remember checking but at the time I thought this was due to land values in N.I.
I think you (@sebtomato) mentioned about being "inflation linked..." The deals on AC so far are not inflation linked, but I think Abundant generation do, at least that's what I've heard.
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mikes1531
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Post by mikes1531 on Jan 19, 2015 16:53:15 GMT
I think you (@sebtomato) mentioned about being "inflation linked..." The deals on AC so far are not inflation linked, but I think Abundant generation do, at least that's what I've heard. What's index-linked is the FIT rate to be paid for each unit of power produced by the WT. That goes to the project's owner. Whether they pass along any of the increases they get to their investors/creditors/landlords will depend on the agreements they have with those people.
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shimself
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Post by shimself on Jan 19, 2015 17:03:04 GMT
The slice the Landlord gets is quite variable, in one case it's 20%. I'm thinking of the Northern Ireland one all being well. I don't remember checking but at the time I thought this was due to land values in N.I. I think you (@sebtomato) mentioned about being "inflation linked..." The deals on AC so far are not inflation linked, but I think Abundant generation do, at least that's what I've heard. Some of Abundance Generation AG loans (debentures) are index linked, not all. The key point is that the borrower can't repay the loan early (the term is normally 25 years), so there's a strong chance that the inflation proofing will be a big deal at some future time. The AC (& TC) loans usually have a 3 year term and can be paid off early. Not the same thing at all.
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Post by Ton ⓉⓞⓃ on Jan 19, 2015 17:10:40 GMT
I think you (@sebtomato) mentioned about being "inflation linked..." The deals on AC so far are not inflation linked, but I think Abundant generation do, at least that's what I've heard. What's index-linked is the FIT rate to be paid for each unit of power produced by the WT. That goes to the project's owner. Whether they pass along any of the increases they get to their investors/creditors/landlords will depend on the agreements they have with those people. I see what you're saying you're right, and they can decrease with deflation.
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Post by Deleted on Jan 19, 2015 20:13:02 GMT
This has nothing to do with the interest rate on lending to a turbine project. It's the slice of the gross income offered to the landowner (their rent for the site). If the landowner gets 6-12%, the remaining 88-94% is available to service the loan and pay the developer their profit. Hi, I didn't mean it was an interest rate, but the expected return for the project itself. If a wind turbine project is returning 12% (i.e. income generated based on initial investment), then I was wondering how they could pay an interest rate of 10% to borrow to fund the initial investment. I guess I am confused on whether the loans on AC are just for the land, for the turbine itself, or for the whole project (land + turbine installation). Basically, if the total investment cost is 100, and they expect to make a return of 12 per year, and they have to pay 10 to pay the interest on the 100 borrowed, it does not leave much for the AC fee and the developer margin, at least for the duration of the initial loan. When I mentioned "indexed on inflation", I understand the electricity rate guaranteed to be paid is indexed on inflation (so inflation is not eroding the returns). S.
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mikes1531
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Post by mikes1531 on Jan 19, 2015 22:09:11 GMT
This has nothing to do with the interest rate on lending to a turbine project. It's the slice of the gross income offered to the landowner (their rent for the site). If the landowner gets 6-12%, the remaining 88-94% is available to service the loan and pay the developer their profit. I didn't mean it was an interest rate, but the expected return for the project itself. If a wind turbine project is returning 12% (i.e. income generated based on initial investment), then I was wondering how they could pay an interest rate of 10% to borrow to fund the initial investment. I guess I am confused on whether the loans on AC are just for the land, for the turbine itself, or for the whole project (land + turbine installation). Basically, if the total investment cost is 100, and they expect to make a return of 12 per year, and they have to pay 10 to pay the interest on the 100 borrowed, it does not leave much for the AC fee and the developer margin, at least for the duration of the initial loan. But if pikestaff is correct, and the 6-12% simply refers to the proportion of revenue that's paid to the landowner, then we really know nothing about the return that could be generated by the remaining 88-94% of the revenue. It could be 5%. Or it could be 20%. In any case, the AC loans are short-term compared to the lives of the projects, so the developer might not care how much they earn during that period. If the AC finance means they can build the project, and once the project is up and running it could be refinanced at a low interest rate, or sold to an investor at a price greater than what it cost the developer to create it -- including the financing costs -- then the developer has a profit opportunity that's probably worth pursuing. Think of it this way... If you could arrange a loan that allowed you to purchase a piece of land and build a house on it that you could sell a couple years later for twice what it cost you to build, would you really care whether you had to pay 20% interest?
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pikestaff
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Post by pikestaff on Jan 19, 2015 22:58:15 GMT
This has nothing to do with the interest rate on lending to a turbine project. It's the slice of the gross income offered to the landowner (their rent for the site). If the landowner gets 6-12%, the remaining 88-94% is available to service the loan and pay the developer their profit. Hi, I didn't mean it was an interest rate, but the expected return for the project itself. If a wind turbine project is returning 12% (i.e. income generated based on initial investment), then I was wondering how they could pay an interest rate of 10% to borrow to fund the initial investment. I guess I am confused on whether the loans on AC are just for the land, for the turbine itself, or for the whole project (land + turbine installation). Basically, if the total investment cost is 100, and they expect to make a return of 12 per year, and they have to pay 10 to pay the interest on the 100 borrowed, it does not leave much for the AC fee and the developer margin, at least for the duration of the initial loan. When I mentioned "indexed on inflation", I understand the electricity rate guaranteed to be paid is indexed on inflation (so inflation is not eroding the returns). S. The rent paid to the landowner is not the expected return on the project. They are related, but only in the sense that the rent is limited by what the project co can afford to pay the landowner as rent, after paying finance costs and the developer's return. A wind turbine project is structured as a project co which builds the turbine on land rented from the landowner. The project co funds the construction of the turbine with some equity from the developer and a pile of debt. The gross return is the income from the feed in tariff (FIT) and from the sale of electricity under a power purchase agreement (PPA). Based on the figures in your source, between 6 and 12% of the gross income is paid in rent to the landowner. The remainder is applied to service the debt and to pay the developer's return on their equity. (This is a slight oversimplification on the short term AC deals where the developer intends to sell or refinance, but it's the whole story on many long-term deals.) You are correct that the FIT is index-linked. The PPA may also be index-linked depending on the deal. There is a floor PPA rate which is index-linked but it's common for a higher rate to be negotiated (not necessarily for the full term) and this may not be index-linked.
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