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4 Players in Every Project
• Project Owner/Developer – sell electricity for profit
• Off-taker – purchase electricity cheaply
• Lender – repayment of credit with interest
• Contractor – build a facility for profit
• A successful project balances everyone’s interests
• Not unusual for parties (or subsidiaries) to take on multiple
roles – contractor as a lender; developer as a contractor;
off-taker as a developer
• Other parties – grid operator, government agencies
(incentives and regulations), consumers, environmental
concerns
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4 Steps in Every Project
• Planning
Where?
What?
• Financing
How do we pay for it?
• Construction
How do we build it?
• Operation
How do we ensure its success?
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Site Selection
• Site Selection
Good solar irradiation level
Adequate site size (purchase or lease)
Access to grid interconnection
Local incentives for solar development
No serious environmental issues
Limited potential local opposition
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Due Diligence
• Review of all aspects to determine if the project is
commercially viable
Technical feasibility – Is this the best technology for this location?
Financial feasibility – Can the project’s income service its debt?
Commercial feasibility – Is there a reliable purchaser of the
project’s output?
Regulatory/environmental/social feasibility – Are there significant
roadblocks to successful completion? Are there incentives for
project development?
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Financing Options
• Equity financing – one or more partners (investors)
provides capital/services to the project co. in exchange for
equity
• Non/limited recourse financing (project financing) – credit
is secured against assets of project co. only; project
income services debt
• Project is rarely financed exclusively through equity or
non-recourse loans, often a hybrid
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Key Financing and Project Documents
• Financing Documents
Credit/Loan Agreements
Shareholder Agreement
Security Agreements
Disbursement Agreement
• Project Documents
Power Purchase Agreement (PPA)
Engineering, Procurement, and Construction Agreement (EPC
Agreement)
Operation & Maintenance Agreement (O&M Agreement)
• One document you don’t need with solar – fuel supply
agreement!
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Financing Documents Key Provisions
• Senior Loan – often a short-term construction loan
converted to a longer term loan upon successful start-up
• Subordinated Loan – provided by investors/contractors;
should parallel senior loan
• Intercreditor Agreement – governs rights and
responsibilities among lenders
• Security Documents – assignment of all project assets and
revenue to lenders; typically a UCC filing or equivalent
• Disbursement Agreement – governs the “waterfall” of
project revenue; typically O&M expenses, debt service first
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Financing Documents Key Provisions (cont’d.)
• Financing documents should work together (and with
project documents) to ensure adequate liquidity to build
and operate the facility while protecting the lenders’
interests
• Risk Allocation
Debt structure/repayment
Interest rate risk
Change in laws/regulations
Technical risk
Operational risk
Off-taker/counterparty risk
Construction risk
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PPA Key Provisions
• Principal asset of the project is the revenue stream
provided by selling its electric output
• Price often divided between fixed “capacity” and variable
“energy”
Capacity charges – capital costs of the facility, fixed O&M
charges, developers’ ROE
Energy charges – solar significantly reduces variable costs to
variable O&M charges, taxes, insurance
• PPA is a long-term contract (15 – 30 years) – long enough
to repay debt
• PPA should limit project owner default and be oriented
towards “cureability”
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EPC Agreement Key Provisions
• Guaranteed completion date with “delay liquidated
damages” for each day project is not complete
• Guaranteed performance with “performance liquated
damages” tied to performance shortfall
• Warranties on design, materials, and workmanship
• Payment schedule may be tied to milestones
• Withholding/retainage for final completion of “punch list
items” or LDs
• Force majeure provision to excuse delay
• Termination in favor of developer
• Limitation of liability in favor of contractor
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Commissioning and Operation
• Requirements for commissioning and acceptance
Construction completed
Grid interconnection achieved
Performance test successfully completed
• O&M typically handled though O&M Agreement
O&M contractor assumes operational risk for facility
Duties include scheduled and unscheduled maintenance,
administration of relevant agreements, compliance with
laws/regulations
Payment can be fixed, cost-plus, or incentive-based
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International Issues
• Currency risks include non-convertability, transfer, and
devaluation
• Expropriation risk especially high when local government
is a partner
• Change in law/regulatory risk including import/export
restrictions, local workforce requirements, and price
controls
• Political violence/terrorism risk
• General issues related to corporate domicile, banking, and
labor laws
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Good 2015
• 7.3 GW of solar PV installed*
• Year-over-year growth of 17%
• Utility-scale solar growth 6%; more than half of all newly
installed solar PV
• Residential solar growth of 66% with over 2 GW of new
installed solar
• New solar capacity exceeded new natural gas capacity
and represented nearly 30% of all new generating
capacity
* Statistics courtesy of the Solar Energy Industries Association
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Better 2016
• 16 GW expected to be installed
• 119% growth
• 74% of new installation will be utility-scale
• Strong growth in residential and commercial markets too
• By 2021 U.S. solar capacity estimated to exceed 100
cumulative GW with an annual installation of 20 GW
• ITC extended to 2019 with step-down through 2022
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Continued Price Drops
• 17% drop in overall solar PV pricing in 2015
• Utility-scale projects enjoyed greatest decrease
• Average pricing for utility-scale was between $1.33 and
$1.54 per watt depending on technology
• Average pricing for residential was $3.50 per watt
• Increased efficiency/economies of scale from contractors
and developers will result in continued price drops,
especially in the utility-scale sector
• Lower prices per watt will make solar more competitive
with conventional power
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Solar is Getting Noticed
• Warren Buffet’s 2015 Letter to Shareholders noted the
effect renewables were having on the electric market
• Buffet: under the old natural monopoly regime “a ‘sloppy’
[utility] could do just fine financially”
• The efficiencies of renewables combined with tax benefits
will “erode the economics of the incumbent utility,
particularly if it is a high-cost operator”
• Buffet’s utility interest include a $16 billion investment in
renewables – 6% of U.S. solar generation and 7% of wind
generation
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Not All Sunny Skies
• Solar PV installation will likely decrease significantly in
2017 and not reach 2016 levels again until 2020
• Decrease due to pull-back in the utility-scale sector;
residential market likely to continue steady growth
• Why the decrease? Likely over-build in 2016 because of
concerns ITC would not be renewed
• Decreased electricity consumption – EIA estimates a 1.1%
decline in electricity sales in 2015; 5th decline in 8 years
• Reduction or removal of solar and renewable incentives,
especially at the state level
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Oil’s Slide Into Solar?
• Drop in oil prices presents a two-pronged challenge:
Dampening investor interest in the energy sector generally
More difficult for solar to compete on price
• Link between oil prices and solar development is limited
• Electricity generation is less oil and more solar
• Solar provides price stability among commodity price
fluctuations – known and controllable start-up costs and
only maintenance costs over the long term
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Questions?
Contact
Frederick (Erik) J. Heinle
Associate
Duane Morris
505 9th Street, N.W., Suite 1000
Washington, DC 20004-2166
P: +1 202 776 7874
F: +1 202 478 2270
C: +1 703 798 8150
fjheinle@duanemorris.com
www.duanemorris.com
