Financing biomethane plants: capital structure, DSCR, grants and bank requirements

A biomethane plant is usually financed from three sources: the investor's equity, a bank loan (most often in the project finance formula, in which repayment comes from the cash flows generated by the project) and a possible grant or preferential loan. The bank assesses above all the debt service coverage ratio (DSCR), that is, the ratio of operating cash flow available for repayment to the principal and interest instalment, and usually expects a value in the order of 1.2–1.4. It also requires secured revenues (a sales contract), stable costs (substrate contracts) and solid contractors.

Capital structure

The shares are indicative; the final structure is determined by risk analysis and the requirements of the financing institutions.

DSCR and how to calculate it

DSCR = CFADS / (principal instalment + interest), where CFADS is cash flow available for debt service (revenue minus operating costs, taxes and changes in working capital). Banks calculate the ratio for a base case and for stress scenarios (lower production, higher substrate costs, lower gas price).

Worked example (illustrative assumptions)

Data: CAPEX PLN 55 million, equity 30% (PLN 16.5 million), debt PLN 38.5 million, interest rate 7%, term 12 years, annuity. Annuity factor: 0.07/(1 − 1.07⁻¹²) ≈ 0.1259, so annual debt service ≈ 38.5 × 0.1259 ≈ PLN 4.85 million. With a required DSCR of 1.3, the CFADS needed is ≈ PLN 6.30 million. With OPEX of PLN 11.8 million, annual revenue must be about PLN 18.1 million; with production of 32 GWh this gives about PLN 566/MWh. A grant covering 20% of CAPEX (PLN 11 million) would reduce the debt to PLN 27.5 million (debt service PLN 3.46 million, CFADS PLN 4.5 million), and the required revenue would fall to about PLN 16.3 million, i.e. PLN 510/MWh. The example shows how a grant and DSCR affect the minimum price.

What the bank wants to see

1. A sales contract for biomethane (a PPA or an agreement with a seller), with price and volume.
2. Substrate contracts – multi-year, with prices or price formulas; the share of own feedstock.
3. An EPC contract (general contractor) with guarantees and penalties for delays and failure to meet parameters.
4. A service contract (O&M) with an availability guarantee.
5. Connection conditions and a connection agreement.
6. Permits (building, environmental) that are final and binding.
7. Sustainability certification and a plan for obtaining guarantees of origin.
8. Insurance (construction, loss of profit).
9. A feasibility study and a report by an independent technical adviser.

Sources of support

In Poland, investment support for biogas and biomethane has been offered by, among others, NFOŚiGW programmes (grants and loans), EU funds and instruments of international institutions (e.g. the EIB). The rules, budgets and dates of calls change, and some programmes are closed or replaced by new ones, so information must be verified in current announcements. Support usually requires meeting criteria on efficiency, environmental protection and state aid.

Risks that banks price

• Construction risk: delays, cost overruns.
• Technology risk: new technology without references.
• Feedstock risk: price fluctuations, availability, quality.
• Market risk: the gas price and premium.
• Regulatory risk: changes in regulations, certification.
• Grid risk: limits on injection.

Tips

1. Start discussions with the bank early, with a preliminary financial model.
2. Build the model with several scenarios and familiarise yourself with the covenants.
3. Make sure the contracts are consistent (e.g. the PPA term should not be shorter than the loan term).
4. Include a reserve for debt service and for replacing consumables.

The role of the technical adviser

The bank usually commissions an independent technical adviser to review the project: an assessment of the technology, schedule, costs, commissioning results and contractors' guarantees. It is worth preparing data so as to facilitate this assessment: design documentation, equipment certificates, supplier references, substrate test results and mass balances. A positive opinion from the adviser increases confidence in the project and can improve the financing terms, and comments in the report make it possible to reduce risk in advance.

Summary

Financing a biomethane plant rests on predictable cash flows and well-distributed risk. Grants lower the profitability threshold, but the contracts are decisive: sales, feedstock, construction and service.