We’ve had over 800 people download our commercial solar PV finance model. If you haven’t, you can download the Commercial Solar Model here. When our readers, students and alumni download it, we ask them what the is the #1 obstalce that is stopping them from financing commercial solar projects. Commercial meaning anything between 200kW and 5MW.
Here’s a few resources if you need to learn more about financing commercial solar projects
The model is part of the Solar MBA course, where Chris Lord will be providing all of the legal documents, robust financial models, executive summary outlines, investor pitch decks that he uses when advising clients that are financing commercial solar projects. After taking the Solar MBA, you’ll have all the knowledge, documents, models to finance commercial solar projects. If you need to learn how to finance projects between residential and 5MW, the Solar MBA course is for you.
Out of the 800 people who have download the model, these are the top 5 reasons that everyone cited is their hardest obstacles to financing commercial solar projects.
- Lack of access to investors, equity and banks.
- No Standard PPA Documentation
- Poor SREC Prices or Incentives
- Understanding, Communicating, Tools for Calculating Solar as a Financial Investment
- Good Sites/Good Customers
Here are Chris Lord’s answer to those questions, not in specific order to how I listed the questions above.
1. How do you account for SREC volitaltly in your finance model? A lot of companies think that volatility is stopping their ability to finance projects, when does this kill a project and how to you mitigate this risk so that it doesn’t kill the project?
There are different ways to account for volatility from the simple hand-plugging of numbers to sophisticated Monte Carlo analysis in a spreadsheet, but are you sure that modeling is the issue? Volatility is a scary word to investors, and as you know risk follows reward. In other words greater volatility must be accompanied by greater upside. Given the typical anemic returns for solar projects (let’s be generous and say low double digits), there is little room for volatiility. So, perhaps the question is less “how do you model an unknown” and more about whether you are marketing the SREC risk (SRisk) to the right party. You need a minimum price for that SRISK if you require it to meet your return, and you also need to structure it to avoid extended payments (if you can). One solution is to persuade the host customer in DG project to take SREC risk and return over time; alternatively you find a trader who seeks out merchant volatility and will buy the risk at a price – low enough to interest it, but high enough to meet you minimum return requirements. (Such buyers really do exist, but they typically move in and out of the market so timing is important.) The challenge in both scenario’s is how to minimize the effect of such a structure on the developer return.
2. A lot of companies feel that there are “no PPA” or lease partners available for projects between residential and 5MW. Why is this true? Why is there no standard PPA structure/documentation for middle market solar projects and how can companies overcome this?
Residential is a different type of project from commercial. You will need a enough volume, but there are “bundlers” out there that will take you on if you can meet their volume (and return requirements). We will talk about how to find them; once you do, they will provide you the “PPA” or lease package. The commercial systems under 5 MW truly are a challenge in this market. Here, packaging and marketing are absolutely essential. There are ways to get these projects done, but you don’t get a second chance if you present a project not yet ready. We will talk about how to do that effectively, and how to tap into sources that actually prefer the smaller, diverse package of projects.
Given that commercial projects are all custom with no standard documentation, what is your advice for a companies looking to fund projects between 100kw and 5MW? what is the process?
There have been efforts to standardize and bundle, but no one system has yet caught on yet. We will review some of these efforts, how to support them and how to use them to your advantage. For those eager to get started, check out Tioga’s effort – available online. We will spend some time understanding this PPA and where/how it can be changed to meet customer needs without undermining its “financeability”.
3. Tax Equity/Finding Investors. A lot of company feel that their only problem to growing their business is “getting tax equity” or “finding an investor”. What is your advice for these companies? What is the process for finding an investor? How does this overlap with the sales process? What do you need to do to get an investor interested and what will make them want to walk away?
Some of this is answered in #4 below, so I will focus on the sales process. When you are calling on a prospective solar customer, it makes sense to have the investor/lender in mind right at the outset. No point in calling on a customer that the market just will not finance. How do you distinguish? Pretend you have been asked to invest in the solar customer – what do you want to know? How long have they been in business? Are they profitable? For how long? Do they have a credit rating? (A “yes” to that question helps a ton!) Here is a question you should ask that isn’t quite as obvious: does the customer only want to save money or is “being green” as important? The reason this question is important is because it goes to what you can set the PPA price at and still catch their attention. Too often, developers just try to offer the same low PPA price to everyone, regardless of credit risk profile. Yet for a customer with a weaker credit risk profile, you will absolutely need to charge the highest possible PPA price because you will need extra yield to interest investors. (Of course, there is a point where a weaker credit profile is simply not financeable.)
The point is that even from the strongest credit-worthy solar customers, the higher your PPA price (say, equal to their current power charges), the stronger and more financeable your project.
4. Similarly, a lot of companies feel, “if only banks would lend to me”, that they could finance and many projects as possible. Is this true? What is your advice to them? Are banks lending, and what are the keys to get a bank on board?
In a situation like this, you have to pause and ask “why won’t banks lend to me”? We can blame some of the effect on the general state of the economy and the post-2008 attention now being paid to borrower/project strength but . . . there still are companies out there able to borrow. So how do you shift from one side of the ledger to the other? One place to start is to ask yourself whether you truly understand how lender/investors differentiate between projects they like and those they don’t like. To really answer this question you also have to understand how it is bankers/investors think about, and manage, risk. We will spend time understanding that view, but equally as important is the marketing your projects and your firm to prospective investors to take advantage of your new understanding. So we will address the multitude of ways to package your information in the easiest form possible for prospective lenders to digest and assess, but we will also cover ways to expand your network of prospective lenders. One of the most dangerous and difficult challenges for a developer/integrator is how to go from one investor/lender to many. When you are dependent on just one or a few investor/lenders relative to the size of funding you need from them, you may feel inches from success but you are also but a sneeze from disaster.
For those who want to get started before our session, take a banker to lunch and – not in the context of a specific deal (you don’t want to pressure him or her) – ask what are the critical parameters of risk they measure, how do they like the borrower/lender to present material, etc….