Given the growth of the solar industry in the U.S., with 2014 year-end operating capacity reaching 18.3 GWdc of solar PV and 2.2 GWac of concentrating solar power (CSP), many companies and investors are turning their attention to managing this huge fleet of solar projects.
Asset management in the solar industry is relatively new and technically focused. It is often equated with O&M capabilities, contract compliance, or preparation of financial information and accounting capabilities. Keeping pace with the growth of the industry, asset management has proven far more comprehensive than this, and is the reason why companies like Sol Systems have developed an internal asset management department.
Managing solar assets entails identifying and mitigating risk on a project or portfolio level in order to protect and maximize investments, including loans, equity funds, SRECs or any instrument on which an entity expects a return.
How it works
In both the solar industry and general project finance, asset management begins when the project documents are executed (financial close), and extends through the life of the asset, investment, or loan. It covers three pillars: construction management, O&M, and financial management.
Certain data metrics and risk information flows from the construction management and O&M teams to the asset managers in the financial management pillar. The asset managers, with input from technical and legal teams, then synthesize the risks, score the risk factors and determine how the story behind the metrics impacts the return on investment. The metrics that are monitored during the construction and operational phases are synthesized into various risk factors that are analyzed to determine the financial impact to the original investment. For example, if a project is delayed due to permitting, the asset manager will assess the impact of the delay on the overall milestone schedule, capital contribution schedule, loan disbursement schedule and quantify the lost revenue if the permitting issue results in a delay of the operational date. During the operational phase, if a project is impacted by severe weather, as occurred in the Northeast this past winter, the asset manager will assess the insurance implications of damaged or frozen equipment, lost revenue due to lost production or production guarantee penalties. During this process, the asset manager will be able to determine the level of impact, or materiality, of these events on plant performance, cash flow and return on investment.
Once the materiality and the driver(s) of the risks are understood, the risks can be mitigated. If there is no clear mitigation, a strategy will be put in place to monitor the risk so that all parties understand how the investment will be affected. The risk factors vary depending on the industry but generally include construction completion, operations and performance, management, market, and cash flow. Management risk is often one of the most important yet most overlooked risk factor. If a project has a management team that is able but unwilling to work with investors or stakeholders and abide by the rules set out in the project documents, compared to unable and willing, the returns on investment will eventually be jeopardized.
The metrics that are tracked are usually tailored to the investor or stakeholder, the type of deal structure, and company. This general framework is transferable between industries and companies, including parties such as, equity investors, lenders, and contractors.
A second function of asset management is reporting on the technical and financial performance of the project or portfolio. In addition to risk assessment reports, asset management completes reports for investors or stakeholders on the performance of the assets. This helps investors and stakeholders make informed decisions about maintaining, selling (exiting) or buying assets and creates a feedback loop in improving the structure of transactions before financial close.
As the solar industry continues to evolve, so will its understanding of the critical role of asset management and companies will realize that asset management is a clutch player on a championship team.
ABOUT SOL SYSTEMS
Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for nearly 200MW of distributed generation solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. 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.solsystems.com.