Ganhekou Wind Farm No.8 is one of the first projects to suc­cess­fully attract international lenders to China’s burgeoning wind market. The International Finance Corporation’s A/B loan structure was crucial in stimulating this interest. The strong international in­volve­ment on the lending side is more impressive in light of the fact that the project’s spon­sor is Chinese and it uses exclusively Chinese technology. While accustoming inter­nation­al lenders to the Chinese regu­latory environ­ment was chal­lenging, the deal closed less than a year after the IFC’s formal entry.

Although the Chinese government intro­duced its renewable energy law in 2006, it only made real progress in supporting wind power in 2009. In July 2009, the gov­ernment introduced an attractive feed-in-tariff and a 100% offtake guarantee from the Chinese transmission operator. Despite these guarantees and tariffs, China’s wind power boom has to date been almost ex­clusively funded through domestic banks.

The National Development and Re­form Commission, China’s economic planning agency, has been driving private sector in­vestment in wind and to this end awarded the 201MW wind farm to China Wind­Power under a 25-year concession agree­ment. The project is in the Jiuquan region, one of the five wind power bases high­light­ed by the NDRC in its 11th five-year plan.

The IFC entered the project in March 2010, began discussions with commercial banks in May and closed the project seven months later in December with Societe Generale, Rabobank and Intesa Sanpaolo as B loan participants.

The speed of the deal’s close can largely be attributed to inter­national lenders’ appetite for the Chinese wind market following the 2009 overhaul. China’s cheaper manu­facturing and labour costs also provide the opportunity for higher profit margins than on comparable projects in Europe or North America. In 2010 China became the largest wind energy generator worldwide, but opportunities for international investment in China have so far been slim. As such, international banks are keen to gain a foot­hold in a growing market.

At the time of financing there were no operational wind farms in the region, but several years of wind data pointed to the wind quality of the area. Instead, a larger challenge was the project’s use of exclusively Chinese equipment and technology. Although the banks were pleased with the cost savings entailed by this approach, it also necessitated in-depth due diligence. The Jiuquan region is noted for its harsh conditions, and high quality turbines were required to withstand both the region’s extremely low temperatures and possible interference from sand.

Lenders were given comfort by the decision to award the turbine contract to Sinovel, the largest turbine manufacturer in China and the second-largest in the world. Sinovel is supplying 134 of its SL1500/82 1.5MW wind turbine generators, a proven technology that has been used in several jurisdictions. The Chinese government financed and built the plant’s transmission line, which remains owned and operated by the state.

Lenders also wanted clarity on the terms of state support and the arrangements governing supply contracts. The lenders’ legal adviser, Allen & Overy, spent considerable time working through the Chinese regulatory framework for the project docu­menta­tion, as well as helping adjust the financial structure to conform with the Chinese foreign exchange framework. The project is notable in this regard for being the first foreign loan to be registered through the local State Administration of Foreign exchange.

The project has an expected annual output of 443,278 MWh and this electricity will be sold to the Gansu Provincial Grid Company on a take or pay basis under a 25-year power purchase agreement. The plant’s feed-in-tariff is set at RMB0.5206 per kWh for the first 30,000 hours of operation, before switch­ing to the average tariff of the local grid for the remainder of the plant’s life. This average tariff is expected to be much lower; for example it stood at RMB0.24901 per kWh in 2008. The plant is expected to operate 2,205 hours per year, so the initial tariff should run for just over 13 years. The rationale behind this is that the step-down in the feed-in-tariff will tally with the end of the China WindPower loan’s amortisation.

The debt consists of a $45 million 12-year IFC A loan, and a 10-year $95 mil­lion B loan syndicated to Societe Generale, Rabobank and Intesa Sanpaolo. SG and Intesa both took $35 million dollar tickets, whereas Rabobank took $25 million. The margin on the B loan was in excess of 300bp over Libor.

The debt has a 14-month grace period and has a cash sweep in place. Banks used P90 wind production as the base case, and the cash sweep kicks in if this is exceeded. The debt also includes a debt service reserve and a maintenance reserve, the latter of which is particularly impor­tant given the harsh conditions of the sur­rounding region.

Although the project is eligible for certi­fied emission reduction (CER) and clean development mecha­nism (CDM) credits, the banks did not factor these into their financial model. Sales agreements for both of these have since been signed, providing another source of upside for the lenders.

China WindPower invested $108.3 million in equity, putting the debt to equity ratio at a conservative 56:44. China Wind­Power’s arrangement with the IFC also included an equity sub­scription agreement, under which the IFC has invested $10 mil­lion of equity in China WindPower.

Foreign exchange hedging was required, as the feed-in-tariff is paid in renminbi whereas the debt is repaid in dollars, and Societe Generale and Rabobank provided this hedging. The com­mercial banks all believed that renminbi appreciation was much more likely than depreciation, but they still had to hedge against a drop. A series of one-way options, however, will pro­vide an upside to the banks if appreciation does occur.

Construction began in April 2010 and testing began in January 2011. The project is now complete and operational, as is the government-built construction line. 

Ganhekou Wind Farm No.8
Status: Closed 3 November 2010
Size: $248.3 million
Location: Guazhou, Gansu Province, China
Description: 201MW Greenfield wind farm, operated under a 25-year concession agreement
Sponsors: China WindPower Group
Lead arrangers: IFC, Societe Generale, Rabobank, Intesa Sanpaolo
Technical adviser: Sgurr Energy
Lenders’ legal adviser: Allen & Overy and JunHe
Lenders’ financial adviser: IFC