The project's highest risk phase is during the construction period. During this time, there is the danger that the project spends more money than was originally planned, or more time is taken than was originally planned to complete the construction of the assets needed to generate revenue.

After that period has finished, and we are in the operations phase, once we have an established pattern of operations, the project effectively becomes a normal operating business with the same risks attached as any other sort of business, or maybe less because at least the revenue is guaranteed by the power purchase agreement, and the costs might be contractually agreed as well with say, a maintenance provider. So the risk to the lender decreases. At that point, the lower risk ought to be reflected in lower interest rates. It is very common for projects to refinance their debt once the project has been operating for a few years.

We call this process refinancing. We are effectively replacing the old debt that was taken out at the start of the project with some new debt at lower interest rates or other more favorable terms to the project company. That refinancing could be with the same lender, or it could be that the old lender gets paid out by a new lender and the debt was originally taken out, is replaced by a new debt. Under new terms and conditions. Usually there are penalties payable for early repayment of the old debt, and there are likely to be fees payable for the new debt. So both of those fees and penalties need to be modeled.

We set up the time of refinancing, or at least our estimate of when that might happen as just a normal flag. If the year equals the data which we think refinancing could occur, give me a one, otherwise give me a zero. The old debt repayment would be take that debt refinancing flag and multiply it by the remaining balance of the old debt. We treat that as if it is a repayment of the total debt. We then have some new debt, usually create a new corkscrew, a new base calculation for this new debt, and the amount that is drawn on the new debt is the amount that was repaid on the old debt. Multiply that amount by the flag and that will give us our new debt drawdown, and then we will build in the repayment terms, whatever they might be, a cash sweep, a PMT function, a bullet payment, whatever has been agreed It is very common to include refinancing in the project model. All of it, of course, is an estimate because we are modeling at a point in time before the project has actually commenced. We're then looking ahead beyond the construction period and a few years into the operating period and estimating when we could refinance and what terms and conditions might apply. Then if we look at the screenshot of the refinancing in the fourth year, the example on the slide is showing a senior debt, which is being repaid at 100 per year in the first, second, and third year. Then in the fourth year, we have some refinancing. The refinancing flag is shown on line two. It turns into a one in the fourth year. In that fourth year, the remaining 700 of senior debt is repaid. It's just the entire balance multiplied by the flag. We also have modeled an early repayment penalty of 1%, so on line 11, there's an extra fee of 7 being 1% of the 700 that has been paid early or prepaid. As the terminology used, we also see a new corkscrew underneath it, refinanced debt, and we show that as a drawdown of the 700 that was repaid of the old debt. Effectively, we are borrowing 700 from a new lender and using that 700 to repay the old senior debt. That 700 is a drawdown in the fourth year, and then we start repayments in whatever pattern is agreed with the new lender as part of their documentation and the loan agreement contract. We can also see in there that an upfront fee of 1% is payable, so in addition to paying the old lender an early repayment penalty of 1%, we would be paying our new lender a 1% upfront fee, and we've modeled that as 1% of the amount drawn down equals 7. So we have two different sets of fees. Given the cost of these fees, then the debt needs to be substantially cheaper or on much more favorable terms in order to offset the extra cost of paying these fees. In this case, we are modeling that the debt interest has dropped from 6% down to 5% per year.