Solar developers and investors alike often ask us the same question: what is the secret to making middle market solar projects work? Often, the key is knowing when to walk away before the transaction costs become too much to bear.
In other words, a project can seldom overcome serious obstacles facing two or more critical financeability metrics, such as:
- Project Size – A one-off 1MW+ project is almost always more attractive than a one-off 200kW project. Bundle that 200kW into a 1MW+ portfolio with different off-takers, and it is still less attractive to an investor than the one-off 1MW+ project with a single off-taker.
- State Market – Certain solar markets are more attractive than others to investors. Flip through the “markets” section of past Project Finance Journals, and you will see what those markets are
and what incentives they offer, though some should be obvious (DC, CA, & MA are generally more attractive than IN, PA, OH).
- Host / Off-taker Credit – Municipalities, universities, schools, and hospitals (MUSH) hosts with investment grade credit are the most attractive, and unrated credit is the least attractive. Perhaps counterintuitively, unrated credit with three years of audited financials falls somewhere in the middle, very much depending on a real read of the customer’s situation.
- Project Development Status – Projects with an executed PPA, site control, interconnection, approval, and completed permitting are most attractive to investors. Earlier stage projects will have a hard time securing financing until they have reached these milestones.
Though there are exceptions to every rule, the further your project is from these desired characteristics, the least likely they are to receive financing. And, the further that projects are from this spectrum, the more costly the complexities are.
At this stage in the evolution of our industry, if you haven’t seen your proposed financing model “in the wild,” it’s not because no one else has thought of it; it’s because it is unlikely to work. The reality is if your creative project development idea sounds too creative to be true, it probably is; complexities don’t add, they multiply. Or, as one of us here is fond of saying, “every minute of explanation on top of the base deal is another basis point on the returns.” In a market sector where transaction costs weigh down relatively smaller project opportunities, it is better to walk away before you burn too much time on a deal that won’t make it. Your time is much better spent on a cleaner project.
The above is an excerpt from our Solar Project Finance Journal, a monthly electronic newsletter analyzing the solar industry’s latest trends based on our unique position in the solar financing space. To view the full Journal or subscribe, please e-mail firstname.lastname@example.org.
About Sol Systems
Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 171MW distributed generation solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. It has over $550 million in assets under management as of September 2014. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management. For more information, please visit www.solsystemscompany.com