Interest Rate Ratchets
- 02:11
Interest Rate Ratchets in renewable energy project finance.
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Glossary
Project finance Renewable EnergyTranscript
Sometimes the project's lenders will agree to lowering the interest rates as the project earns more revenue. So, for example, stepping outside of renewable energy for a moment. If you have a project that's a building that's going to be tenanted, and that tenant area will then earn the project company rent. As more and more tenants sign up to leases, the interest rate drops, and the lender might feel comfortable with that because they're getting more and more secure about how much the future cash flows are likely to be. Because more and more of the building is occupied in a renewable energy project, this doesn't often occur, and that's because before we reach financial close, we have a power purchase agreement or PPA, which contractually secures the revenue for the project. We have a large scale customer who's prepared to buy all, or the vast majority of the output of the project before it is even constructed. So we don't often see situations where the interest rate would change as the cashflow gets more and more secure. It's relatively unusual. It could occur if the equipment is activated gradually. For example, let's say you have a wind farm with a hundred turbines. Then as the turbines get switched on and reach full power, then we could have a situation where the interest rate drops because more and more of the power equipment has been activated successfully. Often this doesn't happen in a renewable energy project because the gap between activations is relatively quick. However, it can occur in some projects.