Project finance for commercial solar rests on two pillars:
- Contracted revenue
- Underwriting a project’s risk
At SolMarket, we work with developers all over the country to help them secure financing for their solar projects. As these projects are published on the site, our investor partners, we have around twenty of them, pencil out the numbers to determine whether the revenue clears their hurdle rate. If projected revenue looks good, they move forward to underwrite the project’s risk.
Risk allocation for commercial project is often a bit more complex, and includes, but is not limited to, construction risk, construction counterparty risk, operational risk, host counterparty risk, electricity offtake counterparty risk, performance incentive counterparty risk, political risk, performance risk, and force majeure risk. In each one of these categories, an investor must review the contracts in place and identify if, and where, the project company has made itself vulnerable. This is where the majority of projects are thrown out. In short, it is typically not the underlying economics or incentive structure that kills projects, instead it’s the inherent underwriting risks imbedded in projects. An investor often has to weight whether a particular set of risks to the project company against the costs of trying to resolve these risks through contract rewrites – and often finds the costs of rewriting is higher than the potential reward of investing in the commercial asset.
Standardizing the underwriting principles and acquisition process for commercial solar would address this concern. If developers utilized standardized documentation, and a marketplace was created to acquire the assets, the market would be both more transparent and liquid. Asset liquidity, in particular, would significantly benefit the solar market. A secondary market for take-out finance (either through securitization, or through large-scale infrastructure funds) would mean that investors putting development risk capital to work would have the opportunity to refinance their projects and reinvest their efforts, and capital, in new projects. A combination of increased liquidity and standardization would produce a significant reduction in financing, unlocking the potential for commercial solar.
Standardization of the marketplace is not a particularly new or original idea. Go to one of the many solar conferences out there, and if you sit in on a finance session, and you will hear panel participants and audience members advocate for standardization. Investors constantly lament that developers are executing contracts that are not financeable or reinventing the wheel with each deal – sometimes negotiating terms with host entities that kill the deal later in the process. The truth is, trying to coordinate developers to utilize standardized contracts and processes is like herding a pack of cats.
At SolMarket, we are making the investments and creating the resources to achieve standardization, and ultimately securitization.
As a first step, SolMarket has created a financing ecosystem for solar project developers and investors that provides standardized origination and diligence tools. We have borrowed heavily from the social networking paradigm, and each project developer , each developer and each project has a normalized ‘profiles’. we created in consultation with several of our investor partners. The profile requires the information and documentation necessary for an investor to run diligence.
Once a profile is published, an executive summary is released to our network of investors which, in aggregate, have over $1.9 billion in capital. A potential sponsor can pencil some numbers, and to the extent interested, request more information on the project. In this diligence phase, the sponsor reviews the project’s risk allocation through SolMarket. This work flow gives structure to the acquisition process as a first step towards standardization. With over 180 projects, and over 300 MW, looking for financing, SolMarket is developing a streamlined infrastructure for project acquisition.
And this ecosystem is evolving.
SolMarket is now developing algorithms to rate projects based upon the underlying risk allocations strategies (or lack thereof). This is comprised of two pieces.
First, SolMarket rates projects by the ability and speed at which a sponsor could diligence the quality of the risk allocation strategy for a project. Projects with complete and substantiated documentation receive higher marks than those project profiles that do not substantiate information. This way, our investor partners will know immediately if a project opportunity is verifiable and if diligence can be initiated.
Second, SolMarket rates projects by their underlying risk allocation strategies. SolMarket does not rate the quality of the risk allocation strategy per se, but we do group risk allocation strategies, and chart these strategies by the project’s verifiability. In this way, SolMarket is initiating the formation of asset classes for our investor network.
While we acknowledge that these are first steps, we think these steps are incredibly important and will be a significant contribution to the industry as we move towards the maturation of the solar industry and potential securitization. At the end of the day we feel that while it’s interesting to talk about industry standardization at conferences, somebody has to step up and spend the time, and money, to develop the infrastructure to see it through. That’s what we’re here for.
SolMarket is a transaction-driven ecosystem for the solar industry that catalyzes investment in solar energy by transforming how solar projects are financed. SolMarket provides investors and developers with the tools they need to efficiently originate, evaluate, finance, and construct renewable energy projects. SolMarket has over $1.9 billion in committed partnership funds seeking qualified solar projects and hundreds of users from the solar community. SolMarket is a wholly owned subsidiary of Sol Systems, the country’s oldest and largest SREC aggregator. Sol Systemshas facilitated over $100 million in solar development through long term SREC financing. For more information, please visit www.solmarket.com.