The Devil is in the Details: Financing of Solar Projects Starts with the Terms
By Fred Greguras (Palo Alto)
I see a number of press releases about large pipelines for solar project development. But many of these projects may never be built because they can't get financing. There are a number of important considerations involved in obtaining financing -- including the creditworthiness of the offtaker -- but the terms of the power purchase agreement (PPA) and site lease agreement (SLA) for the solar facility are the starting point for legal review.
A key economic consideration for the lender is the certainty of the facility’s revenue stream. And yet, PPA terms may not provide enough certainty that revenue will actually be received from the offtaker. Similarly, the terms of the SLA may not provide enough certainty that the facility will have the land rights needed to operate throughout the duration of the PPA. The terms in these agreements vary widely and each agreement must be carefully reviewed. Based on my experience in working with lenders, it seems that many developers sign these agreements without careful review -- either because they hope that changes can be made later using the leverage of an investor or because they simply don't realize the terms present financing risks.
My recommendation to lenders evaluating such projects is to obtain these basic agreements as part of initial due diligence, to identify problems in them and then to determine quickly whether the offtaker will accept the amendments needed to provide revenue and land rights certainty. Otherwise both the lender and its advisers may be wasting a lot of time.
Many of the financing issues I see are not rocket science. For example, for a lender to have a predictable revenue stream for debt service requires that the offtaker not be able to terminate the PPA easily. Some PPAs I have seen have very vague obligations, may be terminated for any default and lack a cure period for the alleged default. In drafting and reviewing PPAs, developers and lenders should be sure that only a material breach of the agreement can lead to termination and, if there is an alleged default, the offtaker must give both the power provider and the lender notice of the default and adequate time to cure the alleged problem.
I have also seen a PPA where the lender had a right to step in and cure, but didn't need to be given notice of a default. Of course, the lender needs notice in order to be able to step in and operate the facility to continue the revenue stream. The value of the facility is the continuation of the revenue stream, not just the right to sell what may be junk on the roof. This means the PPA and SLA should both be assignable to the lender without additional approval by the offtaker.
A poorly written SLA is another flag for lenders. I sometimes see an SLA that is very different from the PPA for the same project, as if one form came from one website and the other from a different website. It is critical for the agreements to be closely coordinated. For example, the SLA needs to run for the same time period as the PPA and must be extendable for the same periods as the PPA. Provisions relating to cure rights, permitted assignments, force majeure, etc. need to be the same under both agreements. Such inconsistencies can leave gaps and therefore jeopardize funding.
While agreements can sometimes be amended during the financing process to the satisfaction of the lender, it is a less risky path to securing financing if attention is given to the financeability of these agreements at the outset of the process.
