Third Party Solar Financing- Establishing a Bankable Process

1. DNV GL © 2018 SAFER, SMARTER, GREENERDNV GL © 2018
Third Party Solar Financing
Establishing a bankable process
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Jackson Moore
Head of Section – Solar Technology, North America
DNV GL – Energy
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Agenda
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▪ 3rd party financing considerations
▪ Process-based due diligence
▪ Portfolio effect
▪ Conclusions and recommendations
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3rd party financing considerations
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Traditional project finance vs. 3rd party finance
▪ Traditional non-recourse project finance is common for utility-scale solar projects
– Legal and technical processes are rigorous, but well defined
– Reliance on a single asset to cover DSCR and generate expected equity return
▪ 3rd party finance and securitization presents due diligence challenges
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How does the risk profile change
considering that we may not be
able to review every project in
detail but there are a portfolio of
assets to support the financing?
How can we due diligence
hundreds or thousands of
projects in a time- and cost-
effective manner?
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The situation
▪ Sponsor’s target market is residential or commercial/industrial (C&I) roof-top
▪ Sponsor originates leads and desires to offer financed solar on either a lease or
PPA basis
▪ Sponsor may have internal construction capabilities or may work through installer
partners
▪ Sponsors may desire to raise capital for:
– Construction bridge financing through COD, or
– To securitize constructed assets to return capital to the Sponsor for additional
projects (e.g. via bond offering or sold to a YieldCo)
▪ Financiers require adequate due diligence of the Sponsor’s portfolio
▪ Cash-sale installers looking to expand their market by adding a finance option
▪ Installer partners also need to understand the credit requirements to position
themselves to be “bankable” partners
– While this is routine for utility-scale contractors, smaller installers typically do
not have experience with finance
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The approach
▪ May still result in financing terms (e.g. DSCR vs PXX) more conservative than
traditional project finance in today’s market
▪ Expected to improve over time as risks are compared with real performance
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How does the risk profile change
considering that we may not be
able to review every project in
detail but there are a portfolio of
assets to support the financing?
How can we due diligence
hundreds or thousands of projects
in a time- and cost-effective
manner?
Performance analysis
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Portfolio effect
Process-based review
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Statistical auditing
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Process-based due diligence
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Bankable processes
▪ Well-documented, rigorous internal processes are critical
▪ Recommendations are based on several due diligence engagements in the United
States and Australia that can be adapted to countries with mature roof-top
markets such as Singapore and Japan
▪ Due diligence that shifts from project-based to process-based:
– Energy modeling
– Technology qualification
– Design and construction quality
– Contract review
▪ In traditional project finance, we scrutinize these areas individually and the
resulting confidence allows lenders to base financing on p50 projections
▪ How can we achieve similar levels of confidence without reviewing each and every
project against similar criteria?
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Energy modeling
▪ Does the Sponsor have access to high quality irradiance
data?
▪ Does the Sponsor have access to up-to-date satellite
imagery?
▪ Does the Sponsor process include a site visit for shading
analysis?
– With documented rejection criteria?
▪ Does the Sponsor have a well-documented list of loss
factor assumptions and associated criteria?
▪ Does the Sponsor have a training program for employees
tasked with finalizing energy yield and guarantee values?
▪ Does the Sponsor have a process to update processes
based on field data?
▪ How much field data is available and how has the
Sponsor’s projections compared with actual values?
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Technology review
▪ Easiest approach (most common):
– Develop a short list of tier 1 suppliers
– Perform IE review of each and ensure participation in a
reliability test program
– Define return rate criteria for dropping suppliers
▪ Most flexible approach:
– Develop and document a product qualification process
– Have IE review the process by which new products can
be added so that new products can be incorporated into
the portfolio without further IE review
– Sponsor’s product qualification process must inherently
mimic the IE review process
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Design and construction quality
▪ Does the Sponsor have:
– Requirements for electrical fault protection?
– Requirements for structural loading calculations?
▪ Photo documentation of every project
▪ Continuous installer review process for safety and field
problems
▪ Building inspectors generally don’t consider:
– System performance
– Best practices (code update cycles lag field problems)
▪ Statistical audit samples across combination of installer,
mounting system and roof type
▪ Ensure comprehensive commissioning records and check
100%
▪ Is the monitoring system reliable and accurate?
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Offtake contracts
▪ Standardize on contracts for both PPA and lease arrangements
– Leasing is often preferable for finance
– Sophisticated C&I customers often dictate PPA structure
▪ Utilize consistent approach to guarantee structure; strong guarantees may:
– Increase risk of performance penalties
– Complicate administration
– Result in multiple guarantee types to track
▪ Common approach is to guarantee p90 performance on a rolling 2-year basis
– Not a great guarantee for the customer; valuable to the customer only as a
catastrophic backstop (though may be perceived as better than that)
– Valuable to financiers because it significantly reduces penalty payment risk
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Portfolio effect
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Portfolio effect
▪ Sacrifices in uncertainty in the energy modeling is largely offset by portfolio
effects
▪ Portfolio effect considers that:
– Technology variation mitigates risk of supplier default, excessive degradation
and serial defects
– Geographic variation mitigates weather/soiling risk
– Contractor variation mitigates construction quality issues
▪ Dependency between variables is identified based on the actual geographic and
technology distribution
▪ Greater independence of variables = lower uncertainty
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Conclusions and recommendations
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If you are a sponsor
▪ Energy modeling – biggest challenge
– No shortcuts
– Must document a nearly faultless, repeatable process to estimate energy
generation quickly and reliably
– Access to high quality satellite imagery and solar resource data
– Robust shading evaluation (must be conservative if no site visit)
– Must have rejection criteria
▪ Technology – utilize an IE pre-qualified list of equipment suppliers
▪ Design and construction quality – establish a consistent set of technical
requirements and commissioning procedures and verify 100% compliance
▪ Offtake contracts – standardize contracts and performance guarantees to reduce
penalty risk and to avoid burdensome administration
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If you are an installer
▪ Talk to financiers about the legal and commercial due diligence
▪ Seek input on contracts from potential finance partners
▪ Seek input on design and construction from an IE
– Have impeccable track records with local inspectors and customers
– Insist on wind tunnel test data from racking suppliers
– Have a monitoring system option that utilizes established third party monitoring
providers
– Photo document all installations
– Perform exhaustive commissioning tests
– Offer O&M services and have field failure data
– Don’t mistake code requirements for a design manual – safety and building
codes are continually updated to address new risks, but are inherently always a
little behind
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If you are a financier
▪ Understand the trade-offs in the technical due diligence
– We will rely on the Sponsor’s energy figures, but mitigate risk by:
– Auditing their process and their historical actual vs predicted data
– Considering the portfolio effect of many systems
– Ensuring appropriate rejection criteria
– We can’t inspect every system, but mitigate risk by:
– Periodic audits
– Robust electrical/structural design tests
– Comprehensively documented commissioning procedures
▪ Develop standardized PPA and lease contracts for installers to use
– Financiers may be better positioned to develop contracts
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Jackson Moore, Head of Section – Solar Technology, North America
Jackson.moore@dnvgl.com
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