Page 14 - North American Clean Energy July August 2015

solar energy

Four Financial Risks For Solar Developers

To Consider In Today’s Market
By Sripradha “Shrips” Ilango

TODAY’S SOLAR MARKET IS BOOMING, and developers are at the center of an incredible op- mandated caps in several utility territories, now’s the time to get inancing done to prevent
portunity to bring projects to market. But, developers looking to cash in on the solar rush running short on construction timelines and losing project value.
should beware several inancial risks – ones often avoided by securing investors early in the
process.
Be a little leery of LOIs

Countless deals have fallen apart at the last minute in the past 20 years in the energy Beware of putting too much faith in a letter of intent. Recent analysis contained in a New
industry, but some developers have gained competitive advantages in evaluating assets and York Public Service Commission order estimated 80% - 90% of LOIs don’t mature into
bidding on development opportunities through these four lessons learned:
binding agreements. his is seen particularly across the Northeast U.S. where entities are
eager to get assets out of the market. An LOI certainly gives inancing parties exclusivity

Start from the start: What makes a project inanceable?
and can add to a pipeline, which makes sense for larger entities concerned about pipeline
Ask what makes a solar project inanceable: How should contracts be structured? What valuation, but smaller developers should carefully consider LOIs. It’s a free option in many
kind of returns does the market demand? What contractual provisions will bring an asset cases, and one party can take months on due diligence while a developer is losing precious
through construction to operation?
days on other deadlines.

Solar projects are often considered analogous to real estate investments – install panels, Most responsible inanciers will do their diligence before putting out an LOI. hey will
wire them together, then sit back and collect returns. his is true to a degree, but these are strive toward inanceable and executable LOIs while deferring to a developer’s needs and
energy investments with operational risks such as performance of equipment, repairs, and the capital they’ve risked, but some parties may issue LOIs to get a project of market be-
maintenance, etc. As assets age and markets change, operational risks should also be priced fore deciding to pass toward the end or requiring much lower pricing.

in.
Another area of importance is revenue assumptions. For instance, for a project with
What’s a solar developer to do?
a 10- to 15-year power purchase agreement (PPA) and an asset life of 35-40 years, what If these risks mean developers should lock in inancial partners early on, what constitutes
pricing can be assumed for the second half of a project’s lifespan? Many developers aggres- the right investment opportunity? Ironically, it often depends on the inancing party’s risk

sively price projects on the back-end to look good from an internal rate of return, but to a tolerance. Early-stage projects may have a site option with completed interconnection ap-
inancing party, this seems risky and raises red lags.
plications, ongoing environmental studies, and visibility into an of taker, but inanciers
may still back away from development-stage risk.
Developers can also get creative to increase returns, for instance negotiating fees for
Avoid assumptions on inancial requirements
Developers without take-out inancing should avoid assuming return requirements on time spent getting a notice to proceed, asking for project equity, or tying compensation to
long-term equity or debt, because this could limit inancing. For instance, a yieldco’s 3% delivering on development milestones.
yield could be translated into an equity retirement of 3% to 4% internal rate of return, but Project returns also increase through long-term inancing relationships – building a
these are two very diferent things.
bridge, not a pier. Developers may face a learning curve on their irst or second transaction

Long-term equity does not come at these low rates, meaning poor guidance on inance- with a particular investor, but by the third or fourth deal it’s a seamless process where eve-
able market pricing can strand a project, costing developers all the capital they’ve risked.
ryone speaks the same language under the same set of expectations. With time, developers
Considering pricing requirements in the asset inance process also enables smarter learn what a successful inancing package looks like, while investors, in turn, learn about

inancial decisions. For instance, when bidding PPA pricing to an RFP, developers with i- development cycles and can optimize the risk/reward perception of development.
nancing in place know their take-out commitment instead of just expecting project inance Above all else, play the long game. Many deals fall apart at the last minute, and in some
at an assumed rate of return.
instances they’re worth putting back together, but always question if a faltering deal is
worth saving. Maybe they’re falling apart for a reason, and stretching to get one deal done

Keep regulatory changes in mind
may look good now, but might be the wrong long-term decision.
Consider how regulatory impacts may afect projects, especially with an eye toward sealing Solar is considered an upstart stealing from the incumbent energy space, which creates
a deal under known circumstances, instead of holding out for a potentially bigger payout long-term paradigm perceptions of low single-digit returns, but solar is already becoming
down the road. Fast-evolving market dynamics mean a project ready for inancing today accepted among the traditional energy industry. As the waters become less frothy, devel-

could be stranded in a few months.
opers with long-term relationships to inancing parties will be better
Federal Investment Tax Credit uncertainty is a well-known example – today’s 30% tax positioned to keep building pipeline investment – even in times of re-
incentive could fall to 10% in 2017, completely changing project economics. here is also duced funding sources.
an inlux of capital entering the market to take advantage of today’s ITC rates, meaning de-

velopers who wait too long to lock in a inancial partner may miss the rush.
Sripradha “Shrips” Ilango is the executive vice president of inance for
State policies also mean developers shouldn’t wait too long on project inancing. Consid- Soltage LLC.
er Massachusetts – installation targets have fostered a solar boom, but projects must reach
completion by a certain date to monetize their full beneits. With net metering at or near
Soltage, LLC. | www.soltage.com

14 JULY/AUGUST 2015 nacleanenergy.com