Developer Advanced Power is in the pro­cess of selecting counterparties for the EPC, feedstock and offtake contracts for its 1.2GW Eemsmond combined-cycle gas turbine project in the Netherlands. The Eemsmond project company is a 50:50 joint venture between Advanced Power Holdings, Advanced Power’s Dutch subsidiary, and Siemens Project Ventures.

Its progress to date says more about the state of the Dutch transmission market and permitting process than the state of debt markets. But as Advanced looks to line up construction, offtake, and supply contracts, and if it hopes to stay in the project as a long-term operator, the state of debt markets will become much more relevant.

The latest round of commercial discussions have begun after a two-year process of obtaining the main environmental permits and a favourable grid connection agreement with TenneT, the grid administrator of the Dutch electricity network. 

Development on Eemsmond started in 2008, and one of the first priorities was obtaining the necessary environmental per­mits. Advanced Power eschewed the usual process of drafting proposals, submitting them, and then modifying them in re­sponse to complaints and appeals. Instead, they approached the relevant NGOs and stakeholders from the very beginning to discover their concerns, and then took account of this in its planning.

A key point arising from these consultations was the site’s proximity to the Wadden Sea, which falls under the Natura 2000 guidelines. In response to this and other issues, Advanced Power incorporated hy­brid cooling systems and other equipment that would reduce emissions into its plans. Advanced Power also signed an agreement with Natuur en Milieufederatie Groningen (NMFG), an umbrella group of 50 environmental organisations, to provide funding for environmental initiatives in the region. This approach to environmental per­mitting paid off, with the main environmental permits granted in November with no appeals or objections.

Obtaining a grid connection agreement with TenneT, however, went less smooth­ly. Although there is existing electrical infrastructure in the region, TenneT argued that it is unable to cope with the surfeit of planned power projects in the region. TenneT originally argued that project connection would have to wait until the end of 2016, to coincide with the completion of a 220km 380KW overhead lineupgrade. TenneT eventually conceded, how­ever, that connection in mid-2015, the scheduled start of plant operations, may be possible. In response, Advanced Power argued that it would need connection far in advance of this date for commissioning and testing. The Dutch competition auth­ority stepped in to mediate the process and came down in favour of the project sponsor, stating in April 2010 that TenneT should make capacity available in 2013.

Although the sponsors have yet to ob­tain building permits, this process should not be contentious. Advanced Power in­tends to submit applications in the second half of 2011 and then receive approval in the first quarter of 2012.

The next milestones will be the selection of an engineering, procurement and construction (EPC) contractor and ob­tain­ing gas supply and offtake agreements. Given Siemens Project Ventures’ participation in the development stage equity, Siemens will almost certainly be selected as EPC contractor. It should be stressed, however, that under the EU procurement process Siemens was the only firm to submit a compliant bid. The main bidding pre-condition was that an EPC contractor must also be the manufacturer of the relevant turbines, which narrowed the potential field considerably and no other eligible companies expressed interest. As a result, Siemens is currently negotiating the terms of the EPC contract with the project company.

Negotiations for gas supply and offtake agreements are far less advanced. An initial market investigation by Advanced Power has suggested that the large Dutch utilities have a suppressed appetite for long-term contracts. Reasons for this include un­attractive spark spreads (margins between power prices and gas prices) and the drop in electricity demand following the credit crunch. Eemsmond CCGT will not be­come operational until 2015, however, and Advanced Power is hoping that potential buyers will be anticipating more favour­able conditions after four years.

Advanced Power also hopes that the use of H-class turbines will make its long-term contracts more appealing, because regional power prices are set according to the marginal costs of less efficient gas-fired units. The H-class turbines are the most efficient of their kind and, this should help Eemsmond and any putative offtaker stand out from the crowd. The turbines are also highly flexible (in terms of start up, shut down and running at different loads) which will allow the plant to adapt to being a back-up source of power for intermittent renewable sources such as wind.

Advanced Power aims to complete this commercial structuring by the end of 2011, at which point it will start negotiating financial documentation. Advanced Power has not appointed an overall project financial or legal adviser, but has already held brief informal discussions with major commercial banks. The institutions, however, felt it was difficult to predict the levels of funding that will be available to the project in a year’s time.

As such, Advanced Power has not de­cided how much of the Eu1.2 billion ($1.6 billion) project costs will be covered by sponsor equity. In previous projects, such as the T-Power CCGT plant, Advanced Power sold off its equity stake in parallel with closing the deal. International Power paid Eu23 million for Advance’s stake in the 420MW plant at financial close in December 2008. That Eu440 million financing closed in the teeth of the credit crunch with a ten-strong club assembled by Fortis.

In this instance, Advanced Power wants to retain a stake beyond financial close. The developer will resort to the previous practice, however, if it is unsuccessful in finding additional capital.