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Third Party Solar Financing


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Third Party Solar Financing- Establishing a Bankable Process

Published in: Engineering
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Third Party Solar Financing

  1. 1. DNV GL © 2018 SAFER, SMARTER, GREENERDNV GL © 2018 Third Party Solar Financing Establishing a bankable process 1 Jackson Moore Head of Section – Solar Technology, North America DNV GL – Energy Public
  2. 2. DNV GL © 2018 Agenda 2 ▪ 3rd party financing considerations ▪ Process-based due diligence ▪ Portfolio effect ▪ Conclusions and recommendations Public
  3. 3. DNV GL © 2018 3rd party financing considerations 3 Public
  4. 4. DNV GL © 2018 Traditional project finance vs. 3rd party finance ▪ Traditional non-recourse project finance is common for utility-scale solar projects – Legal and technical processes are rigorous, but well defined – Reliance on a single asset to cover DSCR and generate expected equity return ▪ 3rd party finance and securitization presents due diligence challenges 4 How does the risk profile change considering that we may not be able to review every project in detail but there are a portfolio of assets to support the financing? How can we due diligence hundreds or thousands of projects in a time- and cost- effective manner? Public
  5. 5. DNV GL © 2018 The situation ▪ Sponsor’s target market is residential or commercial/industrial (C&I) roof-top ▪ Sponsor originates leads and desires to offer financed solar on either a lease or PPA basis ▪ Sponsor may have internal construction capabilities or may work through installer partners ▪ Sponsors may desire to raise capital for: – Construction bridge financing through COD, or – To securitize constructed assets to return capital to the Sponsor for additional projects (e.g. via bond offering or sold to a YieldCo) ▪ Financiers require adequate due diligence of the Sponsor’s portfolio ▪ Cash-sale installers looking to expand their market by adding a finance option ▪ Installer partners also need to understand the credit requirements to position themselves to be “bankable” partners – While this is routine for utility-scale contractors, smaller installers typically do not have experience with finance 5 Public
  6. 6. DNV GL © 2018 The approach ▪ May still result in financing terms (e.g. DSCR vs PXX) more conservative than traditional project finance in today’s market ▪ Expected to improve over time as risks are compared with real performance 6 How does the risk profile change considering that we may not be able to review every project in detail but there are a portfolio of assets to support the financing? How can we due diligence hundreds or thousands of projects in a time- and cost-effective manner? Performance analysis + Portfolio effect Process-based review + Statistical auditing Public
  7. 7. DNV GL © 2018 Process-based due diligence 7 Public
  8. 8. DNV GL © 2018 Bankable processes ▪ Well-documented, rigorous internal processes are critical ▪ Recommendations are based on several due diligence engagements in the United States and Australia that can be adapted to countries with mature roof-top markets such as Singapore and Japan ▪ Due diligence that shifts from project-based to process-based: – Energy modeling – Technology qualification – Design and construction quality – Contract review ▪ In traditional project finance, we scrutinize these areas individually and the resulting confidence allows lenders to base financing on p50 projections ▪ How can we achieve similar levels of confidence without reviewing each and every project against similar criteria? 8 Public
  9. 9. DNV GL © 2018 Energy modeling ▪ Does the Sponsor have access to high quality irradiance data? ▪ Does the Sponsor have access to up-to-date satellite imagery? ▪ Does the Sponsor process include a site visit for shading analysis? – With documented rejection criteria? ▪ Does the Sponsor have a well-documented list of loss factor assumptions and associated criteria? ▪ Does the Sponsor have a training program for employees tasked with finalizing energy yield and guarantee values? ▪ Does the Sponsor have a process to update processes based on field data? ▪ How much field data is available and how has the Sponsor’s projections compared with actual values? 9 Public
  10. 10. DNV GL © 2018 Technology review ▪ Easiest approach (most common): – Develop a short list of tier 1 suppliers – Perform IE review of each and ensure participation in a reliability test program – Define return rate criteria for dropping suppliers ▪ Most flexible approach: – Develop and document a product qualification process – Have IE review the process by which new products can be added so that new products can be incorporated into the portfolio without further IE review – Sponsor’s product qualification process must inherently mimic the IE review process 10 Public
  11. 11. DNV GL © 2018 Design and construction quality ▪ Does the Sponsor have: – Requirements for electrical fault protection? – Requirements for structural loading calculations? ▪ Photo documentation of every project ▪ Continuous installer review process for safety and field problems ▪ Building inspectors generally don’t consider: – System performance – Best practices (code update cycles lag field problems) ▪ Statistical audit samples across combination of installer, mounting system and roof type ▪ Ensure comprehensive commissioning records and check 100% ▪ Is the monitoring system reliable and accurate? 11 Public
  12. 12. DNV GL © 2018 Offtake contracts ▪ Standardize on contracts for both PPA and lease arrangements – Leasing is often preferable for finance – Sophisticated C&I customers often dictate PPA structure ▪ Utilize consistent approach to guarantee structure; strong guarantees may: – Increase risk of performance penalties – Complicate administration – Result in multiple guarantee types to track ▪ Common approach is to guarantee p90 performance on a rolling 2-year basis – Not a great guarantee for the customer; valuable to the customer only as a catastrophic backstop (though may be perceived as better than that) – Valuable to financiers because it significantly reduces penalty payment risk 12 Public
  13. 13. DNV GL © 2018 Portfolio effect 13 Public
  14. 14. DNV GL © 2018 Portfolio effect ▪ Sacrifices in uncertainty in the energy modeling is largely offset by portfolio effects ▪ Portfolio effect considers that: – Technology variation mitigates risk of supplier default, excessive degradation and serial defects – Geographic variation mitigates weather/soiling risk – Contractor variation mitigates construction quality issues ▪ Dependency between variables is identified based on the actual geographic and technology distribution ▪ Greater independence of variables = lower uncertainty 14 Public
  15. 15. DNV GL © 2018 Conclusions and recommendations 15 Public
  16. 16. DNV GL © 2018 If you are a sponsor ▪ Energy modeling – biggest challenge – No shortcuts – Must document a nearly faultless, repeatable process to estimate energy generation quickly and reliably – Access to high quality satellite imagery and solar resource data – Robust shading evaluation (must be conservative if no site visit) – Must have rejection criteria ▪ Technology – utilize an IE pre-qualified list of equipment suppliers ▪ Design and construction quality – establish a consistent set of technical requirements and commissioning procedures and verify 100% compliance ▪ Offtake contracts – standardize contracts and performance guarantees to reduce penalty risk and to avoid burdensome administration 16 Public
  17. 17. DNV GL © 2018 If you are an installer ▪ Talk to financiers about the legal and commercial due diligence ▪ Seek input on contracts from potential finance partners ▪ Seek input on design and construction from an IE – Have impeccable track records with local inspectors and customers – Insist on wind tunnel test data from racking suppliers – Have a monitoring system option that utilizes established third party monitoring providers – Photo document all installations – Perform exhaustive commissioning tests – Offer O&M services and have field failure data – Don’t mistake code requirements for a design manual – safety and building codes are continually updated to address new risks, but are inherently always a little behind 17 Public
  18. 18. DNV GL © 2018 If you are a financier ▪ Understand the trade-offs in the technical due diligence – We will rely on the Sponsor’s energy figures, but mitigate risk by: – Auditing their process and their historical actual vs predicted data – Considering the portfolio effect of many systems – Ensuring appropriate rejection criteria – We can’t inspect every system, but mitigate risk by: – Periodic audits – Robust electrical/structural design tests – Comprehensively documented commissioning procedures ▪ Develop standardized PPA and lease contracts for installers to use – Financiers may be better positioned to develop contracts 18 Public
  19. 19. DNV GL © 2018 SAFER, SMARTER, GREENER Thank you for joining us! For more information: 19 Jackson Moore, Head of Section – Solar Technology, North America Public