Zorlu Enerji has received commitments on a $103 million debt package to support its Jhimpir wind project in Pakistan’s Southern Sindh province. Financial close is expected by the third quarter of 2011. Jhimpir Wind is the first privately owned and financed wind farm in Pakistan. It sells power to Pakistan’s National Transmission and Dispatch Company (NTDC) through its Central Power Purchasing Authority under a 20-year power purchase agreement that benefits from a full sovereign counter-guarantee.

Pakistan wind projects are frontier emerging market projects and to stimulate demand Pakistan has adapted the cost-plus model from its thermal independent power projects (IPPs) to the renewable sec­tor, but with the government also as­suming wind risk. The National Electric Power Regulatory Authority (NEPRA) looks closely at the project costs of a spon­sor and the tariff is approved with a pre-defined internal rate of return (IRR) for the sponsor. This cost-plus template is well established for thermal and hydro plants and now has a foothold with wind projects.

On thermal projects the IRR is 15%, while for wind projects it is nearer 17%. The sponsor may squeeze slightly higher returns than 17% with cost savings on the O&M contract but there is likely to be only one or two percentage points’ difference.

The project company, Zorlu Enerji Pakistan Limited, is a subsidiary of Zorlu Enerji Electrik Uretim, the Istanbul-listed energy producer and distributor. Proceeds of the loan will be used to increase capacity at the existing wind farm, located 100km northeast of Pakistan’s commercial hub of Karachi, from 6MW to a total of 56.4MW. Zorlu installed the 6MW first phase in 2009.  Zorlu Industrial is the EPC contractor and Zorlu O&M will be responsible for operation and maintenance. On successful completion of Phase II, Zorlu will then look to expand the plant’s capacity to 300MW with a phase III.

The total cost of the phase II project is $147 million: 30% financed through equity provided by Zorlu Enerji and the rest through US dollar-denominated loans from the Asian Development Bank ($36.8 million), the International Finance Corporation ($36.8 million), the ECO Trade and Development Bank ($15 million) and a Pakistan rupee loan (Rp1.3 billion, or $15 million) from Habib Bank. The facilities will carry a tenor of 12 years with a two-year grace period. The margins are 450bp over Libor. The Asian Development Bank is coordinating lender and worked for two years to put the financing together.

Given the government guarantees on the offtake contract and its assumption of wind risk, debt service coverage ratios are not a principal concern for lenders. The deal is levered 70:30, but more important to the lenders was the sponsor’s track record as a developer and the turbine supply agreement and availability warranties offered by the experienced Danish manufacturer Vestas.

Lenders were convinced of Zorlu’s pedi­gree as a wind developer by its track record in its native Turkey more than the 6MW pilot of phase I. Zorlu operates the 135MW Osmaniye Rotor, Turkey’s lar­gest, and closed a $130 million financing for that plant with the IFC, European Bank for Reconstruction and Development and European Investment Bank.

The existing 6MW wind farm project is currently dispatching power to the Hy­der­abad Electric Supply Company. Once the second construction phase is complete – expected in 2012 – the 56.4MW wind farm will supply power to the national grid through the 20-year take-or-pay power purchase agreement with the NTDC. The tariff drops by around two-thirds once the project debt is paid down 10 years after completion.

Pakistan relies heavily on imported fossil fuels for the bulk of its energy needs. Power demand has surged by over 40% over the past five years, resulting in regular brownouts in all major urban centres and the introduction of power rationing. There is a 22% shortfall in supply at peak electricity demand. Hydroelectric plants dominate Pakistan’s power mix, though private sector operators are generally running gas-fired plants.

But domestic gas supply is fast running out, with the depletion of the country’s main Sui gas reservoir. Plans for either an Iran-Pakistan or India-Pakistan gas pipe­line have been mothballed and there has been little progress on a mooted LNG terminal. When Sui runs out, roughly half of thermal capacity may have to switch to using imported oil. Even now, shortages have led to Pakistan resorting to rental generating units that run on diesel fuel. The cost of running these plants is higher than the current cost of wind projects.

The government is therefore engaged in a major drive to expand its energy options, including tapping renewable ener­gy re­sources such as wind, given around 50GW of capacity is available in the south of the country alone. The government has an in­ternal policy to have 6% of its total power generation provided by renewable energy by 2030, a target that excludes large hydro projects.

The government is taking full wind risk on these projects and effectively providing a minimum revenue guarantee that covers both debt service and a 17% rate of re­turn. If the wind is less than forecast the government will make up the shortfall to the spon­sors. The sponsors only bear the risk for non-performance when the wind blows. In future the government is hoping to wean itself away from these levels of support when, and if, developer appetite improves.

In the short term, another three to five projects are close to financing. There is al­most no appetite for Pakistani projects at international commercial banks so in­vari­ably the project financings will be led by a combination of the ADB of IFC with around one-third of the debt sourced from local banks. Given persistent international lender anxieties about political risk in Pakistan, local banks’ increasing familiarity with wind offers the best chance of an alternative debt source to the multilaterals.

Jhimpir Wind phase II
Status: Lender commitments received, financial close expected by Q3 2011
Description: $103 million debt package to expand wind farm from 6MW to 56.4MW
Sponsor: Zorlu Enerji
Lead arrangers: ADB, IFC, ECO Trade and Development Bank, Habib Bank
Sponsor legal counsel: Clifford Chance
Lenders’ legal counsel: Shearman & Sterling (international), Haidermota (local)
EPC contractor: Zorlu Industrial
Turbine supplier: Vestas