Project Pitfalls: Four Red Flags that Kill Solar Deals

12 Dec 2013

If you are a solar developer wondering why any of your projects has had difficulty securing third party financing, have no fear; our developer advisory services team has put together a list of four common project pitfalls that may kill your solar deal, as well as strategies to overcome them. By identifying fatal flaws early, developers can reduce soft costs and focus on opportunities that are the most attractive to prospective investors. While no single one of these issues is unequivocally lethal to a project, they can significantly narrow the gate to success if they go unmitigated.

Solar Red Flags

1.         Non-financeable Offtaker

Offtakers (the purchaser of a project’s electricity) with poor credit will have trouble attracting investment, so developers should understand an offtaker’s credit standing early in the development process. Some signs of poor offtaker credit include:

-The offtaker does not seem to be cash flow positive;

-The offtaker  has been around for fewer than 5 years;

-The solar project’s value would amount to a large portion of the offtaker’s assets.

If an offtaker does not pass these criteria, or has other credit concerns that would impair an investor’s confidence, an alternate strategy is to find a guarantor. A guarantor could be a parent company, a municipality, a school district, or really any credit-worthy entity that could serve as a backstop if the offtaker were to default on the Power Purchase Agreement (PPA). Additionally, if the offtaker is located in a desirable location, an investor may value the prospect of future hosts paying the PPA in the case that the original offtaker is unable to continue operations there.

2.         High Site Lease Costs

Even if a solar project meets an investor’s return hurdles despite high lease payments, investors may balk at heavy ongoing lease costs.  The primary reason is that projects with high lease payments face more risk in the event that electricity output is less than expected. However, developers and offtakers can put a deal back on track by aligning the interests of the host and the investor, while fairly compensating hosts for their valuable space. For example, a lease payment could be changed from a fixed amount into a percentage of PPA revenue. This aligns the interests of the host and the project’s owner, and assures an investor that they will not be paying high lease costs in the event that a system does not perform as well as expected.

3.         Roof Condition Issues

Roof replacements and repairs are costly, and any upgrades that are not directly related to the solar project are not ITC-eligible. A roof upgrade can significantly increase the cost of a project without improving the value of the solar asset. When investors evaluate roofs, they want to be confident that the roof will support the solar panels through the life of the PPA. A warranty is the best way to verify the roof’s quality, and investors are typically most comfortable with roofs that have at least fifteen years left on their warranty.

If a roof requires significant upgrades to support a solar project, it may be necessary for the host to bear a portion of the costs of a roof repair. An investor will either look to the host to pay the roofing costs or will essentially finance the roof with the PPA (if possible). If the host accepts at least some of the costs of roof repair, investors are more likely to take the project on at a lower PPA rate.

4.         Unproven Hardware and Technology

“Tier 1” is a nebulous term in the solar space, and there is a fairly short list of equipment manufacturers that investors consider to be bankable. Unfortunately, regardless of the actual quality of the modules, inverters, racking, and trackers, solar investors are not often willing to take on the cost of additional diligence to verify the viability of components that they have not seen before. Unless the equipment manufacturer has attractive company financials, a production guarantee does not necessarily inspire investor confidence.

Solar investors like precedent. If a technology has been used successfully in previous third-party deals, it is more likely that it will be used in future deals. This can trap developers who have commitments to non-standard equipment in a chicken-egg scenario. If a deal is tied to a non-standard technology with no track record in third-party financed projects, the project may come to a halt, even if it is flawless in every other respect. An independent engineering report from a reputable firm can help build investor confidence to move the deal forward.

Fight or Flight?

If a project presents any of these issues, a developer should make an early decision to address and mitigate the challenges, or pass on the opportunity altogether. This is not to say that developers should only pursue flawless projects- but learning a project’s strengths and weaknesses early allows developers to reduce the resources spent on projects that will never come to fruition. This will also free up the developer to spend more resources on developing more attractive projects and increase the quality of their pipeline and the efficiency of pursuing deals.

Sol Systems is a solar financial services firm with extensive experience in placing capital in its developer clients’ project opportunities. To date, Sol Systems has facilitated financing for 70 MW of solar projects on behalf of its investor network.

About Sol Systems

Sol Systems is a boutique financial services firm that offers investor clients direct access to the solar 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 facilitated financing for thousands of projects and facilitated hundreds of millions in investment on behalf of Fortune 100 companies, private equity, family offices and individuals.

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Thomas Larson

Thomas Larson