The transaction of the year: the financing of the first and largest environmentally-friendly domestic solar power plant

“Lumen Park Szolnok, the country’s first and largest environmentally-friendly solar park, is not only outstanding in respect to its size and the development approach adopted but it is also worthy of special note regarding its financial background, which won the project the ‘Transaction of the Year’ award in 2022, granted by UniCredit Bank. SolServices Ltd, the developer of the project, has also applied an innovative solution in the financing of Lumen Park Szászberek, which will be opened this year. Moreover, it is already preparing for the challenges of the future, when new solutions will have to be found again,” said Kulcsárné Dr Krisztina Takács, the CEO and CFO of SolServices, which over the last five years has developed the largest 1 GW solar power plant portfolio in the region.

There has recently been a great deal of activity in the energy sector, and especially in the solar energy sector, which has expanded from zero to quite a significant size over just a few years. An outsider might assume almost every given factor would support the major expansion of solar energy in the future, so it follows that the financing of solar power plants would be a rewarding task. But what is really happening and how has the sector changed in the last five years, fraught with the challenges created by Covid, the energy crisis and other issues?

Dr Krisztina Kulcsárné Takács: The financing of solar parks over the last five years has been beset by all manner of extreme circumstances. When SolServices was launched in 2017-18, the macro environment was characterised by low inflation and low electricity prices, and climate change affected us directly albeit to a lesser extent. At that time, onshore wind power was practically the only affordable renewable technology, and although the domestic regulatory environment was not favourable, and Western Europe and the world were already way ahead of us, solar power plant construction was not yet considered a profitable investment given the prevailing conditions.

Photovoltaic (PV) technology became affordable after prices were reduced by the development driven mainly by demand in China, the United States and India. Western Europe also acted faster in this area too, abandoning support schemes such as feed-in tariffs, typical of early market development. This was also to be phased out in Hungary, but solar power plants with a capacity exceeding 0.5 MW had not really been built in the country at that time, so the installed capacity was relatively low. In 2018 we suddenly found ourselves in a financing environment where it was only possible to obtain energy financing in the mature markets of Western Europe through PPAs, i.e. long-term power purchase agreements.

Dr Krisztina Kulcsárné Takács

During this period, the greatest challenge we faced in the domestic environment was to convince our partners that it is possible and economically viable to install 1 GW of solar power plant capacity in Hungary, even given the mandatory feed-in system. One of the main concerns was related to financing: many people did not believe it would be possible to acquire 1 billion euro for renewable energy projects in Hungary, or if so only in the form of multilateral financing, however the potential stakeholders simply said they were sorry but it was already too late. So we had rather ambitious plans but the messages we were sent both from within and without suggested that they could not be implemented in the way we envisioned.

In contrast to this, we are now at a point where by the end of 2023 the 1 GW development planned by SolServices will be fully realised, all of the solar power plants will be built and become operational, in such a way that, in my estimate, all of the builders, financiers and sponsors involved will meet their targets.

All this happened despite the fact that initially it was a challenge to even convince anybody that the project would work at all given the risks associated with the regulatory changes.

At first we separated our portfolio into two, and in 2020-2021, when the market recovered, people began to realise that there could be something to it after all and opposition to solar power plants disappeared with several interested parties appearing on the financing and sponsorship side. This is when we decided to divide up the portfolio and then finance and build them on a project-by-project basis. Due to the completion deadline (by 2022), the project in Szolnok became one of the first in respect to financing.

Lumen Park Szolnok is not ‘only’ Hungary’s first and largest environmentally-friendly solar park but is also special thanks to the financing solution that was applied. What features make the undertaking stand out in comparison to other developments in its category?

The fact that an industrial-scale 40-50 MW solar power plant is operational in Hungary in 2023 can be attributed to SolServices being able to implement its 1 GW development plan. No one had thought in terms of this scale before; such magnitude had seemed inconceivable for many people. The project in Szolnok was also one of the largest in our portfolio, and with its 140 MWp, 180 hectares and cost requirements of approximately EUR 100 million – depending on the foreign exchange market situation – it constituted a gigantic project of the kind that had never before been implemented in Hungary. (The largest recently completed 250 MWp solar power plant in Mezőcsát is set on 400 hectares; and this was also one of SolServices’ projects by the way.)

Even though there was no precedent for this in Hungary, based on my experience abroad, I thought that it would be expedient to implement the development in bilateral financing, i.e. working with just one single bank, and that this project size would also work in Hungary.

The advantage of bilateral financing is that it makes the project easier by simplifying both the approval and funding processes.

Another reason is that this is an infrastructure project, long-term and a perfect example of project financing, so it could even be a ‘boxed product’, such as office building financing, for which, however, there is a standard, ready-made product pricing and term, and banks can easily sell it.

However, initially I had to argue that what we want is essentially the same and even easier to build, takes less time and involves less risk, but actually that’s the product I would like to see. Banks had to understand this and accept that the risk premia must be priced taking this into account, because only then can it be competitive. In the end, there was a very positive response as numerous banks were interested in our plans. We sent the tender documentation to all of them and then received a series of offers, the best of which was sent by UniCredit.

What were the main challenges in setting up the financial background for the investment?

Hitches arose during the course of this such as the crediting for the power plant components – mostly imported from China – since, although the prime contractor is a solid international company, issuing a letter of credit would still have put a major strain on its liquidity. We therefore agreed that we would solve the problem. In the end, we managed to negotiate this with UniCredit, and in a way that essentially the entire letter of credit was packed into our loan agreement. The magnitude of this is demonstrated by the fact that solar panels alone account for about 60% of the total cost of the investment.

Bat House, Lumen Park Szolnok
Bat House, Lumen Park Szolnok

To comply with this challenge, we had to put together a very serious structure from both a legal and technical persepective, so that the bank would never be doubly exposed, and we would not have to deal with having to pay extra capital in order for everybody to not lose out and for everything to always come on time. This structure, as a package, became the business transaction of the year, since although project financing is significant in itself, the letter of credit and treasury structure had to be added to it. In the case of the latter, the differences in time and space between forint-based financing and euro-based general contractor payments also had to be addressed at a relatively early stage of the project. Some elements of the package already existed, but they had previously not been applied in such a configuration, nor specifically to energy projects.

Once the whole package had become highly significant, it had to be taken to every decision- making level of the bank. In the end it became so complicated that we had to hold separate training sessions on who would be responsible for doing what at the technical level, since if one detail had gone wrong, the whole thing could have been completely disrupted. This all constituted a great deal of work but we managed to acquire know-how that we were later able to utilise in the project in Szászberek.

The process was not a simple one since it included so many unconventional elements, and it took about nine months, which is a relatively long time.

How has the process been affected by the Russia-Ukraine war and its consequences?

At the end of February, amidst the war and crisis, we had already managed to have everything finalised; it could be seen in advance that there would be problems – although not of the scale that they ended up being – because energy and panel prices as well as interest rates increased internationally. In addition to rising interest rates, we were able to agree upon an interest rate swap that allows us to pay amazingly low interest rates compared to those of today. Our concluding this in time is now saving us and the bank billions, as even one percentage point means hundreds of millions or billions in a project of this huge scale. The construction was also very successful from this perspective. In any case, this was just about the last moment when financing could still be obtained in forints.

In equal measure to the resistance put up by the bank two or three years ago, there is now just as much satisfaction with this business and, as far as I know, it does not intend to sell this product on the secondary market.

Thanks to the project, a classic, long-term, market-based infrastructure development was finally implemented in Hungary with a market sponsor and market financing.

Various funds and financiers are eager for something like this abroad, i.e. money could have been raised from abroad if the income were not in forints. I think SolServices has trodden a new path, which is also demonstrated by the fact that the market is trying to copy our construction. Essentially the same model is used in the financing of similar domestic projects except that several banks participate, i.e. the financing is not bilateral in any of them.

Did you also apply unorthodox solutions to finance the Lumen Park Szászberek, to be opened this year, because of the challenging situation?

I thought that we could use the same tried and tested product for financing the Szászberek project, which is about half the size of the Szolnok one, but the conflict in Ukraine broke out in February 2022, and forint-based project financing came to a standstill not only in the case of solar power plants but collectively in Hungary, as no project could tolerate an increase in interest rates from 3% to 15%. Euro-based financing from abroad seemed problematic because, given that the revenue is in forints, there is basically no product on the market to cover long-term repayments, or even if there were for a term of a foreseeable maximum of 10 years, euro financing plus hedging would have been more expensive overall than forint-based financing; if the forint-based financing does not pan out, the latter will not either.

The only option left for the Szászberek project was to obtain euro financing from Hungary with the revenue being in forints. This had to be completed by December 2023 and banks had to be convinced of its viability. Actually, there is a natural hedge in the feed-in tariff-system itself, so while the expected time of return is obviously somewhat fluid, the project could not fail to such an extent that we would not be able to repay the loan.

In summary, at the end of another process lasting almost nine months, we finally managed to sign the agreement on euro financing again with UniCredit – among the banks who showed interest –, which also wished to continue our cooperation within the framework of portfolio financing.

The reason the project in Szászberek became unique is because while the rest of the mosaic is essentially the same as in the Szolnok project, we managed to obtain EUR financing with the revenue being in forints and create a guarantee structure that did not require the purchase of the ten-year hedge and paying its significant cost. The challenge of the future is what we will do with our forints in 15 years’ time, and since there is no long-term product, we had to work out how to hedge our exchange rate risks in an annually renewal cycle.

To what extent can this model be a trendsetter from this point on?

In the coming period, new solutions will have to be found again, as there are not many feed-in tariff project developments – based on forint revenues – but instead the time may come for PPAs send market-based projects with euro revenues. The world has once again passed us by: in Western Europe, the financing of PPA projects is already an established ‘boxed’, i.e. standard product, yet they are already providing funding for market-based projects, and from this point on, domestic financiers are at a disadvantage.

Based on market forecasts, the model works even with stock exchange electricity prices of 40-50 euros/MWh, however, market-based financing still seems too risky a venture for many people in Hungary.

People would instead prefer the PPA scheme, for which they are welcoming projects but the problem with this is that PPA is still in its infancy in Hungary, and, in addition to this, the price of the PPA is currently quite volatile, so from the developer’s point of view it may not be worth accepting an offer received today for a project to be launched a year later.

In any case, there is a new stage ahead of us and we are returning to the international market. Although the power plant is physically located in Hungary, energy can be sold anywhere, and financing the project is a good business opportunity for everyone, from venture capitalists to
pension funds. The market has also opened up much wider in financing, and I expect much fiercer competition in this area than in the past. But once again, we, the actors on the demand side of financing, have to properly define exactly what we want, involving ever increasing financing opportunities. In these circumstances, one of the main challenges for Hungarian-based banks is to understand that it heralds the wind of change, and if they want a project, they must also appear in the market segment.

The results of developments in 2022 have been an impressive, unprecedented increase in demand for renewable energy in the market.

Economic necessity converged with green principles and this also gave a boost to funding.

The green factor has also increased in importance in the financing sector, which means that nowadays a project simply cannot be financed without including some green energy source. Nevertheless, this alone may not be sufficient as proven by the fact that ESG reporting obligations will now be extended to large companies and in the years to come to smaller ones too. At SolServices we take changing expectations very seriously and we have developed our concept for next-generation environmentally-friendly solar parks and our white paper partly bearing this in mind, while focussing on sustainability along the entire supply chain.

Over the last five years, Solservices has developed the largest solar portfolio in the region under your financial leadership. How do you see and judge the situation of women in the renewable energy sector?

This is a young branch of industry and this segment is extremely attractive to young people. The average age of employees at SolServices is also relatively low, because when we started in 2017, we were looking for people with fresh, specific professional knowledge acquired in a new field of science, which is rare in Hungary, and as a result younger people joined us. For them it is completely natural that men and women work in every area.

There is a far more mixed picture for this generation than in the past, and, recruiting purely based on professional knowledge, we found that currently about 60% of our employees are women. This is simply the reality today: for example, seven out of ten applicants for environmental engineering jobs in the renewable industry are women. Roles are connected to positions and tasks, regardless of whether they are filled by men or women. Although we could assume that some professions require stronger, more assertive approaches and others a more empathetic approach, and that this would predetermine the ratio between male and female employees, reality does not confirm this stereotype.

At the end of the day, a team is formed, which requires both women and men in every area, and the chief reason for this is the same as what drives the major changes taking place in the energy industry today: the desire for diversification and the comparative advantage that this brings. Of course we are not all the same but what lends a team efficiency is its diversity. Diversity must, therefore, not be limited to gender as various age groups and even nationalities should be included. Everyone contributes with their own unique approach, way of thinking and ideas, and if the team is diverse, everyone is in their best-suited place and performs their role well, in which case we will be efficient and can make progress. It is through diversity that steady, long-term and essential growth can be facilitated, not only in size, technology and geography, but also in regard to the workforce.

Details of the financial background of Lumen Park Szolnok and Szászberek

Lumen Park Szolnok

  • The largest bilateral PV financing to date in the CEE region;
  • The largest green financing to date in Hungary;
  • The project won the “Transaction of the Year” award in 2022 from UniCredit Bank for its complex business transaction;
  • In the past this amount of financing only came in the form of club loans, but now we have managed to get a bank behind the project;
  • 80% credit intensity, which is also unique;
  • 100% forint based financing at 2021 prices; the long-term interest rate swap transaction was concluded at the right time with proper long-term advanced planning;
  • The bank not only provided financial cover for the investment but also covered the panel purchase through a letter of credit transaction to the general contractor, i.e. in parallel with the loan, it also provided a separate continent-wide guarantee for the purchase of assets representing nearly 60% of the investment;
  • FX hedging transactions were also concluded in advance for purchases in various currencies, so losses resulting from the weakening of the forint in 2022 could be prevented.

Lumen Park Szászberek

  • The current interest rate environment no longer makes forint-based financing profitable and although initially all financiers rejected euro-based financing, we managed to achieve a 70% intensity, 100% euro loan;
  • This is advantageous for procurement, so the company does not run an FX risk during implementation, while covering its operations with other instruments for the repayment period;
  • The interest rate swap transaction has also been concluded, but in a modified construction adapted to the current environment.

Photos: SolServices Ltd , Source: