Bringing a solar project from conception to completion is a difficult task, and many solar projects are never built. With the expiration of the 1603 Grant Program, developers must rely more heavily on third party financing in order to fund successful project development. In light of this, it is very important that developers are cognizant of investor preferences, and build projects to meet their standards. Investors value well planned projects, which rely on bankable documents, take advantage of state incentives, are priced competitively, and have appealing economic and risk profiles.
Over the course of the past year, the Sol Systems team has diligenced hundreds of solar projects around the country. We have successfully closed a number of complicated deals, including two projects in North Carolina that leveraged both state tax credits and the federal investment tax credit (ITC), and a 5 MW project in Ohio that utilized new market tax credits (NMTC). We have also financed a number of small, distributed generation projects under 1 MW, which are typically too small for most investor profiles. With this exposure to a wide variety of projects, which vary greatly in terms of development stage, risk profile, and financing needs, we are able to quickly discern a project’s strengths and weaknesses.
By working closely with our investment partners we have learned what most attracts them to a project. We know what they look for in terms of geographic preference, return hurdle, project size, and overall economic profile, and we are able to advise developers on how to tailor projects to the parameters set forth by investors, and bring these projects to financial close. Outlined below is a list of items to consider to attract investor interest when developing a project.
Projects Based on Bankable Documents
Investors want projects that utilize bankable legal documents, which can save a lot of time, headache, and money when trying to close a project. Closing delays are often attributed to the review and negotiation of legal documents and may lead to much higher legal fees. For convenience, Sol Systems offers form legal agreements written by our partner law firm, Cooley LLP, including a template PPA Agreement, EPC Agreement, Mutual NDA, Lease Agreement, and Letter Of Intent. All of the documents are provided free of charge to our clients and are specifically designed for the construction of solar assets.
Projects Located in Target Markets
Market selection is another critical consideration and should be carefully researched. Investors are often looking for projects that take advantage of state incentives, high electricity rates, or some combination of both. Typically, emerging or recently emerged markets are more lucrative for developers than those markets that are already saturated. Some key characteristics of target markets are listed below:
- Markets with High Solar Insolation – States with high solar insolation can boost a project’s return simply because the output of a system per installed kW is higher. These markets include California and Arizona among others.
- Markets with Feed in Tariffs (FiT) – Rhode Island and Vermont both offer attractive FiT programs. Projects located in either of these states with feed in tariff contracts receive particularly strong interest from investors due to their strong economics and reduced risk profiles. Additional FiT regimes receiving interest include GRU, LIPA, and LADWP.
- SREC States – D.C. and Massachusetts both benefit from the best SREC markets in the nation. Although there is a bit of uncertainty surrounding the price of SRECs in Massachusetts and the strength of the Clearinghouse price floor, projects can still pencil in this state. Washington D.C. maintains an undersupplied SREC market, leading to high prices (currently ~$330). However, land and large rooftops are proving hard to find – making sizeable projects difficult to construct.
- State Level Incentives – Connecticut and New York both maintain lucrative state level incentives. Connecticut’s ZREC program is also drawing strong interest from our investment partners, and Sol Systems is currently working to aggregate a portfolio of small ZREC projects together for investment. New York benefits from lucrative NYSERDA grant awards. NYSERDA grants are particularly attractive because they typically pay out over the first 3 years, giving projects a nice IRR boost.
Low Risk Profile
When assessing a project’s risk profile, investors typically look at a multitude of different factors, but some of the most important include the creditworthiness of the energy offtaker and host, the bankability of the modules and inverters, and the strength of the PPA. As mentioned above, the PPA should be a bankable legal contract and should reflect industry standard terms. With regard to the offtaker, investors typically look for a credit rating of BBB- (by Standard and Poor’s) or higher. If the offtaker is not a rated entity, the investor will need to review at least 3 years of financials to determine the strength of the offtaker. If the offtaker and the host are separate entities, the credit requirements are typically less stringent, but still important, as the host is the counterparty on the lease agreement.
Module and inverter bankability is another important aspect of the risk profile. Modules should be “Tier 1” – it’s best not to skimp on product quality and warranty strength to save a few cents per watt. Investors like to see projects using bankable modules and components.
Projects with well managed cost structures and competitive pricing are typically very attractive to investors. A project’s overall cost structure is comprised of EPC cost, developer fee, site control cost, O&M and insurance expenses, and applicable taxes. We have seen a continual fall in EPC cost, and are now seeing a range from around $2.10 to $2.80 per watt. These numbers are, of course, dependent on the size of the project and location. Developer fees typically range from 10%-15% of total project cost, but this number varies with project quality and stage of development.
Developers should manage site control costs and tax expenses to the best of their ability as well. We recommend that site control costs not exceed 10% of gross annual revenue. With regard to insurance and O&M expenses, Sol Systems typically factors in around $25/kW per year, which is more or less the current rate at this time.
Attractive Economic Profile
The overall economic profile of a project is comprised of essentially 3 components: a project’s revenue stream (including incentives), CAPEX, and OPEX. Taking these factors into account, investors typically look for an IRR between 9% and 11%. We are currently working with investors with IRR hurdles as low as 8% and as high as 20%. Keep in mind that these investors are looking for projects with very diverse economic and risk profiles, and in different stages of development. A project should balance costs and revenue streams so that it can stay as competitive as possible.
When building a project, be sure to utilize bankable documents, make the project competitive, both in terms of revenue and costs, and stay mindful of the project’s overall economic and risk profile. These are the projects that garner the most investor attention and are ultimately financed and built.
For additional information on this topic, please listen to our webinar titled “Investor Preferences: Key Solar Project Traits that Lead to Successful Financing” presented by Sol Systems’ CEO, Yuri Horwitz, and SunEdison founder, Jigar Shah, on our SolMarket website.
If you have a project and are seeking financing or would like more information on our company, please contact our team at firstname.lastname@example.org or (888) 235-1538 x2. Our team would be happy to discuss your project with you and assess financing opportunities.
About Sol Systems
Sol Systems is a boutique financial services firm that offers investor clients direct access to the renewable energy asset class and provides developers with sophisticated project financing solutions. Founded in 2008, Sol Systems focuses on meeting the most critical needs of the industry, including SREC monetization, capital placement, tax equity, and New Market Tax Credits. To date, the company has arranged financing for thousands of projects and facilitated hundreds of millions in investment on behalf of Fortune 100 companies, private equity, family offices and individuals.
For more information about Sol Systems, please visit www.solmarket.com.