solar project finance

solar project finance

Exploring Solar Project Finance: Strategies and Best Practices

1. Introduction to Solar Energy and Project Finance

Developing and implementing larger scale solar energy systems, however, can be a complex process. Although solar energy is free, capturing it requires an upfront investment in power installation that in most cases is larger than the cost of electricity that will be produced over the life of the equipment. Conventional power plants are typically developed by utility companies with access to inexpensive capital and the large scale required to source and install equipment for a project at an economic cost. These companies have also benefited from regulatory and cost-of-service structures that allowed them to pass the costs of their plants through to ratepayers. As renewable energy became increasingly attractive, public policy in many states started to support it. To overcome the high capital costs for renewable energy installations in the short term, states utilized a type of enhanced market mechanism called an incentive or subsidy program. By offering support payments, investment tax credits, production tax credits, tax rebates, or other financial incentives, states were able to reduce the net costs of installing renewable energy sources such as solar power.

There are two types of solar power. Solar thermal energy uses the sun’s warmth to heat hot water or other substances like oil that are used to generate electricity or be utilized for other purposes. Solar photovoltaic (PV) energy captures the photons from sunlight and transfers them to electrons. The electricity generated by these reactions can be used directly in homes, businesses, and power plants or be stored in the electric grid. Solar energy is a hugely attractive source of energy for several reasons. Solar power is dependable, has an almost inexhaustible supply, releases few pollutants to the environment, provides a solution to the problem of urban air pollution, and also contributes to the reduction of greenhouse gases that lead to climate change. Additionally, solar energy is very modular. A solar energy system can consist of just one solar cell or a few panels bolted together. Furthermore, the technology is easily embraced.

1. Introduction to Solar Energy

2. Key Players and Stakeholders in Solar Project Finance

Key stakeholders in solar projects include end-user customers (asset owners), solar PV project developers, project management, engineering, procurement, and construction (EPC) firms, equipment manufacturers, suppliers, installers, and operation and maintenance (O&M) companies. Consulting engineers, accounting and legal professionals, government researchers, and third-party groups and associations also play important roles. The financial community – including lenders and investors of projects – is also likely to play a critical role in negotiations and project development to be more favorable to lenders and equity players. Their practices, needs, and preferences frequently shape the nature, character, and operation of this segment of the energy marketplace. Businesses and industry groups active within solar customers and the customer market should also be included, especially in local units or under-regulated segments of this market. Only a few stakeholders have the same design and construction resources as global companies, and the sizing of the production and distribution network and the reliance on other companies for project-related services is intended to estimate midrange to help financial experts understand the key players in the industry.

As a subset of the project finance industry, solar project finance has its own unique set of key project stakeholders. These are the parties largely responsible for taking the project from concept to construction and operation. Additionally, both active and prospective stakeholders increasingly rely on outside contractors, suppliers, consultants, engineers, lawyers, accountants, financial institutions, insurance brokers, and government agencies to help them design, fund, and execute solar projects. It is important to understand the roles the various stakeholders play in shaping and financing these projects and the relative influence and interplay of their participation and interests in developing a successful PV project.

3. Financing Options for Solar Projects

Depending on project characteristics, different forms of financing—such as equity, debt, and insurance—suit varying financial goals. Skillfully obtaining and blending finance sources can improve financial performance and reduce the overall project risk, which will bring additional project revenue and make a contribution on market expansion and knowledge accumulation. How to obtain access to project finance and effectively evaluate different investment options, therefore, is one of the ongoing issues faced by solar developers. This chapter elaborates some of the key commercial financing sources, sharing relevant practices from industry finance perspective and trying to answer these questions. Furthermore, related financial issues that would support the next steps to build financial capabilities are also discussed.

Financing is a key issue for solar development. It not only drives project development, it is also a significant portion of overall system costs. Several financial factors should be considered and carefully planned out in order to manage project risks, including start-up and operational risks, and effectively allocate resources. The lack of access to finance is one of the key growth barriers for the solar PV industry. Therefore, to identify financial sources, and to understand and evaluate which financial sources are appropriate or available, is extremely important when preparing to make solar investments.

4. Risk Management and Mitigation Strategies in Solar Project Finance

At this time, solutions at issue in paragraph 1 always work only with a small number of investors. For properly designed identify and evaluate steps 2 and 3, if exposure liability to merchant plant risk is not investor deterred or impaired, or against the project’s overall long-term exposure, requestOptions can potentially mirror merchant plant risk takers merchant PPA-corporate of solid or municipal, auction-based feed-in-tariffs that portfolio projects for project offers risk diversion when most of their debt service liabilities are inadequate.

Although the resource risk of a solar project is relatively low, given the simplicity of photovoltaic and concentrated solar electricity generation technologies and the reliance on the solar resource, other risk types have become more important. One trend in project cash flow risk is that merchant plant risk predominated for the first 20 years of an asset’s life. PV and CSP plant developers’ credit standing, off-take credit, and long-term project completion and operations risk backup support became important. The availability of such credit or guarantees, however, was limited to those developers that can achieve an investment-grade credit rating. Another important risk is that political risk in developing markets explains the global shift from high feed-in tariff rates to the risk capital necessary to develop and secure projects. Low-interest and high construction cost rates are reflected in actual feed-in tariff or feed-in premium rates. There are only three strategies to mitigate the above project cash flow risks: diversification of off-take risk, or modeling and assessment of the risks at issue, or some position-takes to address the unique risks of the major projects and tariff or project structure design adjustments according to project cash flow risk market conditions at the onset of a project. Many market participants fail in proper analysis and assessment techniques to evaluate both the exposure of the project cash flow to merchant plant risk and the project’s overall credit risk and alternatively increase the exposure of the project business plan to nature’s solar resource risk exist.

5. Case Studies and Success Stories in Solar Project Finance

Second, policy and regulatory certainty are critical to achieving investment returns in a timely and predictable manner. Third, understanding local investment conditions and establishing strong local relationships are essential for project success. Only when the interests of all investors are protected can a project progress with the speed that will attract top-tier lenders and at a cost that allows economic and financial viability. Finally, many of the roadblocks encountered when financing U.S. solar projects are self-inflicted. Since these are self-inflicted, they are not experienced in other offshore markets. Only after the United States broadens and extends the solar incentives already provided, and introduces a date-certainty framework, can we truly assess the broader risks and opportunities associated with the technology itself.

This chapter includes case studies of innovative financing alternatives, solar financing best practices by a number of seasoned solar financiers, a review of the strategies required to achieve solar energy sediment, and rebuttals to common arguments against government support for solar finance. Numerous case studies of solar projects in the United States provide several valuable lessons that can guide solar project financing efforts in developing countries and help to stimulate the flow of commercial investment to the solar sector in these countries. The common themes that emerge from these case studies and success stories are, first, the importance of foundations, the grander the project, and quality preparation to exploit all available financing opportunities and attract top-tier financing partners.