Question one
Elcogas is an entire financing project that is expected to become limited after the construction stage. In this project, the lenders such as banks needed a guarantee from the guarantors because the gasification of coal technology was being applied for the first time in a power plant. Additionally, the lenders also wanted a change of law to protect them against the variations in the way the state determines the tariffs of electricity. Regarding the financial arrangements, the project had 35 lenders that include large and small banks in Spain, France, Germany, and the United Kingdom (Elcogas Case Study, 2016). However, the first underwriting banks are the Banco Bilbao de Vizcaya, Chase Investment Bank, and Deutsch Bank. The main underwriters played different roles concerning the financial modeling, insurance, and engineering during the period of the project and this led to the financial closing. In this case, the Deutsche Bank acted as the engineering bank until the financial closure because there was no other bank to perform such tasks due to corporate guarantees.
Question two
The risks that are associated with this project are the technological risk, lack of power purchase agreements, complex government formula that determines the price of electricity, and sponsor guarantee during the construction period. Due to the emergence of new technology in this project, the cost for every megawatt hour of the Elcogas plant was relatively high. For instance, the cost of the plant was more than some plants twice its size in the United Kingdom. However, the increased cost of the plant was partially compensated by lower feedstock cost. Moreover, coal was found to be near the surface and easy to extract.
The lenders were familiar with the gasification of coal process in the chemical industry and since this was the first application of the technology in the power segment, the financial lenders (banks) were not willing to assume the technical risks that are related to the project completion. Therefore, to mitigate this risk, the power plant should be accepted by the Ministry of Industry as part of the Stable Legal Framework (SLF) to secure revenues hence; leading to repayment of the bank debts. Consequently, Elcogas will be a more traditional limited recourse project financing, and the guarantees will fall away after the completion of the project as per the defined technical standards.
Question three
One of the major project trouble is the electricity risk. This is because no power purchase agreement is equivalent to the United States, United Kingdom, and other markets. However, the closest equivalence is the SLF, the long-term arrangement that is enacted by the Industrial Ministry. Therefore, the produced electricity is purchased by the state as per the complex indexation formula that covers all phases of electricity production.
Success factors
The site of the project is about two hundred kilometers from Madrid (Elcogas Case Study, 2016). This place was selected because it had several industrial factors such as the availability of coal, water, petroleum coke, and transportation. Similarly, it is a rural region with fairly large coal mining towns. There is also a profuse supply of readily accessible low quality of coal. Just around it, there is a coal mining with a large petroleum plant owned by Repsol, the largest petroleum company in Spain. Technology; the part of this project is simple, standardized with a turbine technology that is similar to other plants around the globe. Similarly, the gasification process provides a readily available coal and petroleum coke chemicals that produce a mixture of gas that drives the turbines to generate electricity that is sold in Spain.
References
ELCOGAS CASE STUDY. (2016). Integrated Gasification Combined Cycle Power Plant.
