Following the money: financing your solar farm
April 18, 2017
The potential for successful large-scale solar in Australia is enormous, but problems with financing can spell death for your project.
In this final part of our series of articles on overcoming potential roadblocks to solar developments, we take a closer look at some key risks often scrutinised by lenders and investors for utility-scale solar PV projects.
It is important to engage a third-party consultant to carry out a bankable energy yield assessment for your solar PV project. This is required by project lenders, but is also useful for internal purposes, and for any future discussions with all the project stakeholders.
To begin with, it is critical that the solar resource data appropriately represents the project site. An on-site measurement campaign using high-quality instruments for at least 12 months is recommended to capture the complete seasonal pattern, which can then be correlated with a long-term data set. If such on-site measurement is not available, using and cross-checking several high-quality satellite data sets from reputable data suppliers can be acceptable, though will increase risk and uncertainty.
Energy modelling needs to be in line with the actual design of the project. Make sure that the equipment input files for the modelling software are properly checked and supported by actual data. Transparency in these inputs means increased certainty in the energy yield results.
Degradation of PV modules is a contentious subject, and of concern to lenders and investors. For solar PV projects financed in Australia, the degradation assumptions (in the system level) are in the range of 0.5% to 1%, which is supported by a body of recognised studies. Lenders may request supporting information to justify lower-end degradation numbers.
In addition to total energy yield, the generation profile over the year is increasingly important in estimating revenue and securing power purchase agreements, and thus needs to be estimated accurately. Combining your solar PV plant with battery storage can offer further unique advantages to optimise revenue and minimise connection costs. However, battery storage adds another layer of analysis to estimate the final generation profile and the additional energy losses based on the specific battery technology and control strategy.
Uncertainty analysis is a crucial element of any bankable energy yield assessment as lenders and investors need to look at the project’s downside energy production scenarios at different time scales. It is not uncommon for banks to finance a renewable project using a conservative scenario.
The uncertainty of the energy yield assessment may dictate the debt sizing, or influence credit ratings for the project, so it is critical to fully understand the project’s resource uncertainties.
The main uncertainty that opens up downside energy production scenarios is the solar resource. A rigorous resource assessment is likely to considerably improve the financing conditions for your project. Other inputs and parameters used in the analysis can also introduce uncertainty and must be well supported and justifiable, rather than pragmatically assumed.
Offtake risk is another key element considered by financiers. Projects without power purchase agreements (PPAs) may struggle to obtain project finance or receive unfavourable financing terms. Only enter into PPAs with creditworthy counterparties with investment grade ratings.
Lenders ideally want PPAs with at least the same duration as the loan tenor, e.g. 15 years.
Entering into long-term PPAs directly with corporate offtakers is increasingly popular globally as large companies convert to 100% renewables. Although not common in the Australian market, corporate PPAs do offer an attractive solution for future renewable projects in effectively mitigating offtake risk.
To date, few large-scale solar PV plants are operating in Australia. It is possible that your project will be proposed with PV module products yet to achieve a track record for utility-scale solar farms, so how can you offer project lenders confidence in the capability and reliability of the proposed technology?
Engage in conversations with module suppliers early and ask for relevant documentation, such as third-party bankability assessments and accelerated test results with recognised solar PV testing institutes. Absence of information must result in conservative assumptions for financing purposes, so efforts to extract and justify all parameters is typically well worthwhile.
It is also important to know, and to contractually specify, the specific bill of materials intended to be used by the module manufacturer, as different materials can vary performance.
A good construction and maintenance contract can help you obtain favourable financing terms. For example, it is important to ensure that your EPC contract has well-defined principal’s requirements and technical specifications, with no exclusions in the scope of works or technical specifications that could result in significant cost variations incurred by the owner. Also, be sure that the operations and maintenance (O&M) scope is sufficiently thorough and aligned with the energy yield estimate, and be sure to budget for any out-of-scope O&M task particularly in regards to inverter maintenance.
Set out a rigorous yet reasonable testing scheme for final completion to ensure the quality and capability of the PV plant to deliver the estimated energy output. It is also advised that the guaranteed plant performance is in line with the energy yield assessment. A good contract also properly addresses the multi-year energy guarantee regime and associated liquidated damages scheme to good industry practice.
From a lender’s perspective, ideally you would want an O&M agreement with a contract duration to at least match the loan tenor, and with an all-inclusive thoroughly specified scope of services covering both preventative and corrective maintenance. This should ensure minimal out-of-scope O&M costs for the owner. A maintenance reserve account is typically required by the lender to manage any cost items not covered by the existing O&M agreement during the loan tenor (e.g. inverter refurbishment/repair/replacement).
Alternative Financing Solutions
The investment landscape is changing, and traditional project finance may not always be your best option. For example, for relatively small solar PV projects, project finance is often not cost-effective and transaction costs can be significant.
Green Bonds offer another solution for financing or refinancing of renewable energy projects. Green Bonds are any type of bond instrument used to finance or refinance eligible ‘Green Projects’. As the size of the global bond market is US$ 100 trillion, tapping into such a pool of funds will undoubtedly help to drive the renewable finance landscape in Australia. However, the Green Bond market is not accessible to all developers – and will typically require a significant transaction size (typically US$100 million or more), and specialised expertise.
For smaller developers and projects, depending on the size, solar PV projects may be aggregated and funded on balance sheet, for example via a corporate facility, or with pure equity. Technical due diligence for projects financed in this way would still be required (particularly if planning to sell the projects once operational), and the overall key risk elements would be the same as for traditional project finance, although the scope of works required for due diligence may be reduced. Standardisation across smaller projects – for example, in configuration, energy yield analysis, equipment and contractor selection, and key contracts – is crucial for keeping transaction costs down in smaller projects.
When you can offer an investor confidence that your project has adequately considered and planned for all potential risks, achieving favourable and secure finance doesn’t have to be a roadblock to solar success.