On-the-Ground Challenges and Opportunities in Solar Implementation

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So You Want to Build a Solar Project?

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4 Players in Every Project

• Project Owner/Developer – sell electricity for profit• Off-taker – purchase electricity cheaply• Lender – repayment of credit with interest• Contractor – build a facility for profit• A successful project balances everyone’s interests• Not unusual for parties (or subsidiaries) to take on multiple

roles – contractor as a lender; developer as a contractor; off-taker as a developer

• Other parties – grid operator, government agencies (incentives and regulations), consumers, environmental concerns

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4 Steps in Every Project

• Planning Where? What?

• Financing How do we pay for it?

• Construction How do we build it?

• Operation How do we ensure its success?

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Site Selection

• Site Selection Good solar irradiation level Adequate site size (purchase or lease) Access to grid interconnection Local incentives for solar development No serious environmental issues Limited potential local opposition

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Due Diligence

• Review of all aspects to determine if the project is commercially viable Technical feasibility – Is this the best technology for this location? Financial feasibility – Can the project’s income service its debt? Commercial feasibility – Is there a reliable purchaser of the

project’s output? Regulatory/environmental/social feasibility – Are there significant

roadblocks to successful completion? Are there incentives for project development?

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Financing Options

• Equity financing – one or more partners (investors) provides capital/services to the project co. in exchange for equity

• Non/limited recourse financing (project financing) – credit is secured against assets of project co. only; project income services debt

• Project is rarely financed exclusively through equity or non-recourse loans, often a hybrid

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Equity Financing

Rich Partner Poor Partner

Project Co.

Provides $45M cash = 50%

equity

Provides $5M cash + equipment

= 50% equity

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Non-Recourse Financing

Sponsor

Project Co.

Equity (100%)

Lender

Loan

Security + Income

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Typical Blended Financing

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Key Financing and Project Documents

• Financing Documents Credit/Loan Agreements Shareholder Agreement Security Agreements Disbursement Agreement

• Project Documents Power Purchase Agreement (PPA) Engineering, Procurement, and Construction Agreement (EPC

Agreement) Operation & Maintenance Agreement (O&M Agreement)

• One document you don’t need with solar – fuel supply agreement!

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Financing Documents Key Provisions

• Senior Loan – often a short-term construction loan converted to a longer term loan upon successful start-up

• Subordinated Loan – provided by investors/contractors; should parallel senior loan

• Intercreditor Agreement – governs rights and responsibilities among lenders

• Security Documents – assignment of all project assets and revenue to lenders; typically a UCC filing or equivalent

• Disbursement Agreement – governs the “waterfall” of project revenue; typically O&M expenses, debt service first

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Financing Documents Key Provisions (cont’d.)

• Financing documents should work together (and with project documents) to ensure adequate liquidity to build and operate the facility while protecting the lenders’ interests

• Risk Allocation Debt structure/repayment Interest rate risk Change in laws/regulations Technical risk Operational risk Off-taker/counterparty risk Construction risk

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PPA Key Provisions

• Principal asset of the project is the revenue stream provided by selling its electric output

• Price often divided between fixed “capacity” and variable “energy” Capacity charges – capital costs of the facility, fixed O&M

charges, developers’ ROE Energy charges – solar significantly reduces variable costs to

variable O&M charges, taxes, insurance • PPA is a long-term contract (15 – 30 years) – long enough

to repay debt• PPA should limit project owner default and be oriented

towards “cureability”

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EPC Agreement Key Provisions

• Guaranteed completion date with “delay liquidated damages” for each day project is not complete

• Guaranteed performance with “performance liquated damages” tied to performance shortfall

• Warranties on design, materials, and workmanship• Payment schedule may be tied to milestones• Withholding/retainage for final completion of “punch list

items” or LDs• Force majeure provision to excuse delay• Termination in favor of developer• Limitation of liability in favor of contractor

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Commissioning and Operation

• Requirements for commissioning and acceptance Construction completed Grid interconnection achieved Performance test successfully completed

• O&M typically handled though O&M Agreement O&M contractor assumes operational risk for facility Duties include scheduled and unscheduled maintenance,

administration of relevant agreements, compliance with laws/regulations

Payment can be fixed, cost-plus, or incentive-based

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International Issues

• Currency risks include non-convertability, transfer, and devaluation

• Expropriation risk especially high when local government is a partner

• Change in law/regulatory risk including import/export restrictions, local workforce requirements, and price controls

• Political violence/terrorism risk• General issues related to corporate domicile, banking, and

labor laws

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The Solar Energy Market – Sunny or Cloudy?

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Good 2015

• 7.3 GW of solar PV installed*• Year-over-year growth of 17%• Utility-scale solar growth 6%; more than half of all newly

installed solar PV• Residential solar growth of 66% with over 2 GW of new

installed solar• New solar capacity exceeded new natural gas capacity

and represented nearly 30% of all new generating capacity

* Statistics courtesy of the Solar Energy Industries Association

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Better 2016

• 16 GW expected to be installed• 119% growth• 74% of new installation will be utility-scale• Strong growth in residential and commercial markets too• By 2021 U.S. solar capacity estimated to exceed 100

cumulative GW with an annual installation of 20 GW• ITC extended to 2019 with step-down through 2022

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Continued Price Drops

• 17% drop in overall solar PV pricing in 2015• Utility-scale projects enjoyed greatest decrease• Average pricing for utility-scale was between $1.33 and

$1.54 per watt depending on technology• Average pricing for residential was $3.50 per watt• Increased efficiency/economies of scale from contractors

and developers will result in continued price drops, especially in the utility-scale sector

• Lower prices per watt will make solar more competitive with conventional power

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Solar is Getting Noticed

• Warren Buffet’s 2015 Letter to Shareholders noted the effect renewables were having on the electric market

• Buffet: under the old natural monopoly regime “a ‘sloppy’ [utility] could do just fine financially”

• The efficiencies of renewables combined with tax benefits will “erode the economics of the incumbent utility, particularly if it is a high-cost operator”

• Buffet’s utility interest include a $16 billion investment in renewables – 6% of U.S. solar generation and 7% of wind generation

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Not All Sunny Skies

• Solar PV installation will likely decrease significantly in 2017 and not reach 2016 levels again until 2020

• Decrease due to pull-back in the utility-scale sector; residential market likely to continue steady growth

• Why the decrease? Likely over-build in 2016 because of concerns ITC would not be renewed

• Decreased electricity consumption – EIA estimates a 1.1% decline in electricity sales in 2015; 5th decline in 8 years

• Reduction or removal of solar and renewable incentives, especially at the state level

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Oil’s Slide Into Solar?

• Drop in oil prices presents a two-pronged challenge: Dampening investor interest in the energy sector generally More difficult for solar to compete on price

• Link between oil prices and solar development is limited• Electricity generation is less oil and more solar• Solar provides price stability among commodity price

fluctuations – known and controllable start-up costs and only maintenance costs over the long term

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Questions?

ContactFrederick (Erik) J. Heinle

Associate

Duane Morris505 9th Street, N.W., Suite 1000

Washington, DC 20004-2166P: +1 202 776 7874F: +1 202 478 2270C: +1 703 798 8150

[email protected]

On-the-Ground Challenges and Opportunities in Solar Implementation

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