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Unicase Law Firm
FINANCING
RENEWABLE ENERGY PROJECTS
Introduction
Authors: Ayana Unerbayeva, Symbat Akhatbek
Renewable energy project financing is the process of attracting investment to finance the development of renewable energy projects (hereinafter - “RE”), namely the development, construction and operation of power plants producing solar, wind and hydroelectric power.
In Kazakhstan, the Government actively supports the development of renewable energy projects by introducing mechanisms for the procurement of electricity from renewable sources, offering tax and customs preferences and providing state support in the form of grants.
Renewable energy project financing is the process of attracting investment to finance the development of renewable energy projects (hereinafter - “RE”), namely the development, construction and operation of power plants producing solar, wind and hydroelectric power.
In Kazakhstan, the Government actively supports the development of renewable energy projects by introducing mechanisms for the procurement of electricity from renewable sources, offering tax and customs preferences and providing state support in the form of grants.
What legislation governs the financing of renewable energy projects in Kazakhstan?
Financing of renewable energy projects in Kazakhstan is regulated by a number of legislative acts, including, but not limited to:
- Law of the Republic of Kazakhstan ‘On Electric Power Industry’ dated 9 July 2004;
- Law of the Republic of Kazakhstan ‘On Support for the Use of Renewable Energy Sources’ dated 4 July 2009;
- Order of the Minister of Energy of the Republic of Kazakhstan ‘On Approval of the Rules for Centralised Purchase and Sale by a Single Purchaser of Electric energy of Electricity Produced by Renewable Energy Facilities, Energy Waste Management Facilities’ dated 2 March 2015;
- Order of the Minister of Energy of the Republic of Kazakhstan ‘On Approval of the Rules for Determination of Tariff for Support of Renewable Energy Sources’ dated 20 February 2015;
- Order of the Minister of Energy of the Republic of Kazakhstan ‘On Approval of Standard Forms of Contracts of the Single Purchaser with Energy Producing Organisations Using Renewable Energy Sources, Energy Waste Management Facilities, Industrial Complexes, Direct Consumers, and Qualified Consumers’ dated 28 December 2017; etc.
What types of financing are accessible for renewable energy projects in Kazakhstan?
Potential investors for renewable energy projects in Kazakhstan include:
Kazakhstan is actively developing international co-operation and attracting investments in the RE sector, especially in solar and wind energy projects, which contributes to the successful implementation of large-scale RE projects in various regions of the country. Currently, the main investors in RE projects in Kazakhstan are development banks and foreign investors. Kazakhstan's high natural potential creates favourable conditions for the development of this sector.
- Project sponsors
- Institutional investors
- Government
- International organisations and development banks
- General contractor, operator
Kazakhstan is actively developing international co-operation and attracting investments in the RE sector, especially in solar and wind energy projects, which contributes to the successful implementation of large-scale RE projects in various regions of the country. Currently, the main investors in RE projects in Kazakhstan are development banks and foreign investors. Kazakhstan's high natural potential creates favourable conditions for the development of this sector.
What are the specifics of project financing in Kazakhstan?
There are several unique and interesting features of RE project financing in Kazakhstan: Government Support: Kazakhstan offers strong government support for renewable energy projects, including incentives such as auctions, tax benefits, customs preferences, and simplified licensing procedures. Depending on the type of investment, the Entrepreneurial Code[1] provides for, inter alia, the following investment preferences: 1) exemption from customs duties and value added tax on imports and 2) state in-kind grants.
According to the Concept of the investment policy[2] of the Republic of Kazakhstan until 2026 approved by the Government Decree of the Republic of Kazakhstan dated July 15, 2022 No. 482, despite the global crisis, Kazakhstan remains attractive for foreign direct investment and is the undisputed leader in the inflow of foreign investment in the Central Asian region. However, in order to maintain and strengthen this position in the current geo-economic and geopolitical conditions, Kazakhstan needs to be actively proactive in the struggle for foreign investment and create the most optimal conditions for investors.
Foreign investors generally aim to stabilise the legislative framework and contractual terms. This stability allows them to accurately gauge their future obligations, liabilities, and risks.
However, if the potential developer enters into an investment agreement (as detailed in Section 1.5 below), only the terms within that specific agreement will be stabilised. It's crucial to understand that this stabilisation applies solely to the conditions of the investment agreement and not to other regulations affecting the potential developer's activities. Furthermore, this stability guarantee does not extend to amendments in laws related to national and environmental security, public health, or the regulation, production, and sale of excise-taxed goods.
Long-Term Power Purchase Agreements (PPAs): Renewable energy projects in Kazakhstan often benefit from long-term PPAs with the government or utility companies, offering a stable revenue stream for project developers and making the projects more attractive to investors. A significant issue affecting the bankability of PPAs in Kazakhstan is that the tariff is fixed in Kazakh Tenge (the local currency) for the entire duration of the PPA. To address this, an indexation mechanism has been introduced to make these PPAs more attractive to investors.
It is worth mentioning that, the FSC concludes PPAs based on the results of the auctions held after January 1, 2021 with electricity producing organisations using RE and included by the authorised body in the list of electricity producing organisations using RE, and purchases electricity for twenty years from the date of commencement of comprehensive tests, during which the electricity is supplied to the unified power system of the Republic of Kazakhstan, or from the date of expiration of the deadline to submit the operational acceptance certificate of the RE facility as per the PPA, whichever comes first.
International Cooperation: Kazakhstan has actively pursued international cooperation and investment in its renewable energy sector, resulting in the successful implementation of large-scale renewable energy projects of 1 GW in capacity, across various regions of the country.
Project Finance Structures: Renewable energy projects in Kazakhstan typically employ project finance structures that combine debt and equity financing. This approach allows investors to diversify their risk while also giving them a vested interest in the project's success.
Green Bonds: Kazakhstan has shown interest in issuing green bonds to finance renewable energy projects. Green bonds are a form of debt financing where the proceeds are used exclusively for environmentally friendly projects, such as renewable energy.
[1] Article 283, paragraph 2, of the Entrepreneurial Code of the Republic of Kazakhstan dated 29 October 2015
[2] ‘On Approval of the Concept of Investment Policy of the Republic of Kazakhstan until 2026’ Resolution of the Government of the Republic of Kazakhstan dated 15 July 2022
According to the Concept of the investment policy[2] of the Republic of Kazakhstan until 2026 approved by the Government Decree of the Republic of Kazakhstan dated July 15, 2022 No. 482, despite the global crisis, Kazakhstan remains attractive for foreign direct investment and is the undisputed leader in the inflow of foreign investment in the Central Asian region. However, in order to maintain and strengthen this position in the current geo-economic and geopolitical conditions, Kazakhstan needs to be actively proactive in the struggle for foreign investment and create the most optimal conditions for investors.
Foreign investors generally aim to stabilise the legislative framework and contractual terms. This stability allows them to accurately gauge their future obligations, liabilities, and risks.
However, if the potential developer enters into an investment agreement (as detailed in Section 1.5 below), only the terms within that specific agreement will be stabilised. It's crucial to understand that this stabilisation applies solely to the conditions of the investment agreement and not to other regulations affecting the potential developer's activities. Furthermore, this stability guarantee does not extend to amendments in laws related to national and environmental security, public health, or the regulation, production, and sale of excise-taxed goods.
Long-Term Power Purchase Agreements (PPAs): Renewable energy projects in Kazakhstan often benefit from long-term PPAs with the government or utility companies, offering a stable revenue stream for project developers and making the projects more attractive to investors. A significant issue affecting the bankability of PPAs in Kazakhstan is that the tariff is fixed in Kazakh Tenge (the local currency) for the entire duration of the PPA. To address this, an indexation mechanism has been introduced to make these PPAs more attractive to investors.
It is worth mentioning that, the FSC concludes PPAs based on the results of the auctions held after January 1, 2021 with electricity producing organisations using RE and included by the authorised body in the list of electricity producing organisations using RE, and purchases electricity for twenty years from the date of commencement of comprehensive tests, during which the electricity is supplied to the unified power system of the Republic of Kazakhstan, or from the date of expiration of the deadline to submit the operational acceptance certificate of the RE facility as per the PPA, whichever comes first.
International Cooperation: Kazakhstan has actively pursued international cooperation and investment in its renewable energy sector, resulting in the successful implementation of large-scale renewable energy projects of 1 GW in capacity, across various regions of the country.
Project Finance Structures: Renewable energy projects in Kazakhstan typically employ project finance structures that combine debt and equity financing. This approach allows investors to diversify their risk while also giving them a vested interest in the project's success.
Green Bonds: Kazakhstan has shown interest in issuing green bonds to finance renewable energy projects. Green bonds are a form of debt financing where the proceeds are used exclusively for environmentally friendly projects, such as renewable energy.
[1] Article 283, paragraph 2, of the Entrepreneurial Code of the Republic of Kazakhstan dated 29 October 2015
[2] ‘On Approval of the Concept of Investment Policy of the Republic of Kazakhstan until 2026’ Resolution of the Government of the Republic of Kazakhstan dated 15 July 2022
What is involved in the basic documentation for financing renewable energy projects?
- Power Purchase Agreement (PPA): A long-term agreement between the project company and the FSC for the purchase of electricity. The FSC undertakes to purchase electric energy produced and supplied to Kazakhstan’s unified power system by the RE facilities at auction prices based on the auction results, taking into account indexation. The PPA is crucial for securing revenue streams for the project.
- Investments Agreements: A contract between the project company and the government that sets out the government's obligations to support the project, including providing necessary permits, approvals, and infrastructure support.
- Finance Documents: These include the loan agreement, security documents (such as mortgages, pledges, and guarantees), and any ancillary agreements related to the financing of the project.
- Engineering, Procurement, and Construction (EPC) Contract: A contract between the project company and the EPC contractor, which outlines the terms and conditions for the construction of the renewable energy project.
- Operation and Maintenance (O&M) Agreement: An agreement between the project company and an O&M provider for the ongoing operation and maintenance of the renewable energy project.
- Grid Connection Agreement: An agreement with the grid operator for the connection of the renewable energy project to the grid, including technical requirements and grid access.
- Land Lease Agreement: A lease agreement for the use of the land where the renewable energy project will be located.
- Insurance Policies: Various insurance policies, including construction insurance, operational insurance, and political risk insurance, to protect the project against unforeseen events.
- Direct Agreement: This agreement is designed to protect the interests of the lender by ensuring that certain key project agreements, such as the power purchase agreement and construction contracts, remain in effect and are not terminated or modified without the lender's consent. The Direct Agreement establishes a direct contractual relationship between the lender and these key parties, allowing the lender to step into the shoes of the project company in the event of a default, and to ensure that the project can continue operating and generating revenue to repay the loan.
What risks are involved in financing RE projects?
Like any infrastructure projects, RE projects demand substantial initial investments. Typically, these projects are funded by loans from international organisations in foreign currency, which poses a currency risk and can substantially inflate the project's costs when converted into the national currency, tenge. To mitigate this risk, an indexation mechanism has been introduced to enhance the attractiveness of PPAs for investors. However, there remains a risk of delays in tariff indexation, potentially resulting in losses for investors, particularly if the costs of power generation increase while the tariff remains unchanged post-project launch.
Additionally, RE projects often entail long payback periods, amplifying risks for investors, particularly in unstable economic conditions. Political interference poses another risk in project finance, as changes in legislation can significantly impact a project's financial outlook. Therefore, it's crucial for investors to carefully evaluate political risks before committing to any projects.
These factors present significant challenges for investors, particularly during the planning and execution stages of RE projects.
At the same time, Kazakhstan's renewable energy sector offers a range of unique features and opportunities for investors, making it an attractive destination for renewable project financings.
Additionally, RE projects often entail long payback periods, amplifying risks for investors, particularly in unstable economic conditions. Political interference poses another risk in project finance, as changes in legislation can significantly impact a project's financial outlook. Therefore, it's crucial for investors to carefully evaluate political risks before committing to any projects.
These factors present significant challenges for investors, particularly during the planning and execution stages of RE projects.
At the same time, Kazakhstan's renewable energy sector offers a range of unique features and opportunities for investors, making it an attractive destination for renewable project financings.
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