Understanding Solar Project Finance Risks

In an ideal world, solar developers would find an appropriate site for solar, the local utility would offer low interconnection costs, the investor would receive a reasonable financial return and the surrounding community would welcome the project.

This would make developing a solar project easier than most because the risks would be relatively low, says Keith Cronin, co-instructor of HeatSpring’s Solar Executive MBA Training and other courses.

While such a scenario is possible, solar projects don’t generally come together that easily, he says. 

Many Risks to Getting a Solar Project Going

“Financing can be difficult to do because there are so many solar finance risks and there may not be very many rewards,” says Cronin, who works with hedge funds, venture groups, high net worth individuals and landowners to bring together parties and structure financial instruments for their projects.

Developers are investing money; they need to understand what they’ll get out of their investment, he says.  They need to begin with a detailed development plan, a topic that the solar MBA course covers. The plan is important because these are long-term assets with 20 plus years of operating expectations for all of the parties in a transaction.

To assess risks, developers should look into the financial health and integrity of potential clients.

For example, if developers are working with a large publicly traded company interested in installing solar, it’s important to ask the company for financials or to find ratings from services like Moody’s and Fitch. 

The Benefits of Working with Larger Organizations

“Larger organizations can provide things like letters of credit, or can borrow more easily at desirable interest rates. You can gauge their credit risk based on their financials,” Cronin says.

It’s more difficult to gauge the risks of working with smaller companies, he adds. For this reason, it’s a good idea to include in PPAs mechanisms that protect the developer and the land or building owner. They include investment grade offtakers, bonds and specific covenants in the PPAs, he says.

As developers tick off the items in their development plan, they must juggle a number of tasks to get a project off the ground. They include finding suitable property and interconnecting with the utility.

The Tricky Task of Utility Interconnection

Interconnecting with the utility can be one of the tricky tasks in a development plan. As early as possible in the process, developers should find out if there’s a point of utility interconnection close to the property. They need to identify the cost of interconnecting and find out when interconnection is possible. This cost should be plugged into the financial model to evaluate a project’s financial strength. Without a relatively speedy and low-cost interconnection, a project can’t move forward.

It’s also important to understand which solar incentives are available from utilities or government agencies. They might include net metering or tax credits.  It’s critical to know that incentives can change and so can interconnection rules. One change in the state legislature can alter the economics of a project overnight.

Developers should try to forge relationships with those offering incentives.

Partnering with Utilities

“Utilities are always looking for partnerships to assist in development of multiple projects,” Cronin says.  Municipal utilities or cooperatives may not have in-house expertise in solar development and may want to partner on projects. “They may not have access to the capital markets to finance these projects and will look to you to assist in their development,” he adds.

Signing option agreements with landowners is another important task. These outline the right to install solar on someone’s land. This generally involves a lease for a given period of time, 15 to 30 plus years. The landowner receives monthly rent payments as compensation for the term of the project.

“This is negotiated usually with attorneys on the specifics of the deal and making sure things like the title is clean and there are no issues or encumbrances with the land,” says Cronin. “The developer would usually enter into a letter of intent and have a period of time to perform due diligence on the property.” That could include preliminary engineering studies for utilities or environmental studies required by local or state agencies.

Should You Sell the Project After Initial Development?

What’s more, solar developers need to decide whether they want to sell the project after they’ve done some initial planning and development. This is comparable to real estate investors beginning a project by installing electrical utilities and other infrastructure elements, and then selling the project.

“You might get to a certain point and decide to sell it to larger investors who can carry the costs and see the project through,” says Cronin.

Juggling all the tasks involved in a development plan can be challenging. And while solar developers are checking off all the tasks in their plans, they should keep in mind that solar projects can be risky.

“You need to know your marketplace, what landowners want, what investors want, permitting requirements, what incentives are available and the risks and rewards for you,” Cronin says.