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By Fred Greguras (Palo Alto)

The SolarPraxis PV Power Plants - USA 2011 conference in Phoenix brought together solar project developers, bankers and other investors, utilities, regulators and other stakeholders to discuss the problems and solutions for getting more utility solar projects built, particularly in the Western states.

The conference sessions included presentations on the development and status of renewable energy generation in the Western states comprising the Western Electricity Coordinating Counsel and how these states could work together more effectively. There was a consensus of stakeholders that the current approach of both independent power producer and utility-owned solar projects are needed to meet RPS requirements in western states. Concern was expressed over California's amended renewables portfolio standard (RPS) law enacted this spring. The law has a strong in-state energy sourcing requirement to meet the new goals and limits the eligibility of out-of-state energy and RECs for RPS purposes.

With the fast approaching December 31st expiration of the Section 1603 cash grant in lieu of investment tax credit, there was speculation about whether the cash grant would be extended and, if not, how to quickly and effectively qualify projects for the year-end safe harbors. There were also discussions about how the expiration would impact the financing of solar projects in 2012 and thereafter.

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By Fred Greguras (Palo Alto) and Stan Lewandowski (Palo Alto)

The power purchase agreement (“PPA”) is the primary source of revenue in a solar project financing for debt service to a lender as well as for returns to other investors and the project developer. If the solar facility must be removed from the rooftop or ground site because of foreclosure or other superior rights, then the project cannot generate any more electricity which means there will not be any more revenue from the PPA, from electricity production subsidies such as production-based incentives or from the sale of renewable energy credits or certificates. The predictability of the revenue (or lack thereof) is the key factor in the financeability of the project. There cannot be any revenues if the solar facility is no longer operating. The value of the installed solar equipment by itself is not adequate to protect lenders or investors. While the security interests in a loan financing will include a UCC-1 filed on the solar equipment, the equipment has little resale or salvage value once it is installed and will have little value for a lender or other investor.

Site control means control over the rooftop or ground site where a solar facility will be located for the term of the PPAso that the PPA revenues can be generated without any interruption. A key business objective in financing due diligence is to identify and implement site control protections which increase the probability that the solar facility will generate such revenues for the life of the PPA. A lender will want site control for the term of its loan. The borrower/project owner will want the revenues to continue for the life of the PPA to provide a return for itself and other investors. The investors and project owner have a common interest which should drive cooperation on these issues.   

The title report for the property where the project will be located will identify the deeds of trust, easements for utilities, rights-of-way, mineral and other rights and encumbrances which may restrict or prevent the use of the land for the development of the solar project. For example, a project owner may be leasing the rooftop of a building which is subject to a financing party’s deed of trust. The most common encumbrances on a title report that must be addressed are deeds of trust or mortgages held by parties that financed the property. The risk to the solar project owner is removal of the solar facility if the land owner defaults and foreclosure occurs. The title report should be ordered and reviewed at the outset of the project to identify what site protections may be needed to mitigate the financing risks and to quickly determine if they can be obtained.

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By Greg Brucia (San Diego)

California may have a dominant position within the US solar market, but the US has only a modest position in the global solar market.  That was a key message from two leading solar industry analysts, Paula Mints of Navigant Consulting and Stefan Pietzsch of EuPD Research, at a June 27, 2011 webcast presented by Intersolar North America titled US Solar Market Overview and Future Trends. 

Both presenters emphasized the importance of government support for the development of solar markets. Mints noted early US dominance in the supply market gave way first to Japan and Europe in 1999 and later to China and Taiwan, with increased government support being the common driver for the successive leaders. Not surprisingly, Mints suggested that increased government support would be necessary for the US to return to a more competitive position in the supply market.

Domestically, the speakers agreed government support has been a key to California’s leading position within the US, driven in large part by the plethora of incentives in California –  a leading renewable portfolio standard, feed-in tariffs, utility rebates and net energy metering. Pietzsch noted other supporting factors such as a culture in California that embraces protection of the environment and a willingness among consumers to change behavior to further that goal. This has been particularly important for the development of the residential and small business sector, the historical backbone of California’s solar market. But Pietszsch also sees these factors supporting growth in the utility-scale segment, which is predicted to be the highest growth segment of the California solar market.

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By Fred Greguras, Palo Alto

The California solar market – utility, commercial and governmental – will be a primary focus for global players in 2011 as growth in the major feed-in tariff markets in Europe slows. I made two presentations on California solar project finance 2011 in early December with an emphasis on the revenue and financing sources and other factors which will drive growth in 2011.

The first presentation was at the Solar Praxis PV Utility conference in Las Vegas and the second at a firm event in Silicon Valley. The powerpoint slides can be accessed here. As a special bonus, the participants were able to hear insights from Don Danh of East West Bank, John Huber of Wells Fargo and my colleagues Dirk Michels and Aaron Schapiro. Participants in the Silicon Valley event expressed optimism over the continuing availability of current financing sources, including tax equity, as well as new financing sources entering the project finance market.

Click below for the presentation highlights:

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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.

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