Challenges to finance solar power plants

Solar project finance poses certain challenges that have made development of solar plants relatively difficult in the United States.

• Front loaded investment: Unlike traditional forms of energy generation assets, almost all of the investment takes place at project inception. With the exception of the inverter that may need replacement after ten to fifteen years and small maintenance costs, there are no other material costs. Therefore, a system owner must be prepared to make a relatively large capital outlay in a relatively short time frame.
 
• Complex set of cash flows to recoup investment: Since solar is still dependent on government incentives, it is important to accurately project future cash flows in order to properly assess the return on investment. Unfortunately, there are a myriad of federal, state and local incentives that have to be understood and modeled. In addition, the incentives landscape is constantly shifting, creating additional challenges.
 
• Critical issues associated with a long term investment: Some state incentives are justifiably based on power production and not on project cost. That means that the plant has to perform as expected over the project’s expected life-time of twenty five years. Thus, project financiers look for system performance warranties from the installer for a similar duration. Therefore, only credit-worthy installers are generally qualified by institutional investors and lenders.
 
• Technology issues: The key component in a solar plant is the module used. Today, there are dozens of large manufacturers located in many countries. Again, due to project financing considerations, the key is to rely on a technology that possesses the expected longevity. The manufacturer therefore must also be of institutional quality.
 
• Regulatory risks: Since solar is very much dependent on government incentives, there are risks that incentives maybe pared back or eliminated, especially in an era of budget defecits. In particular, many would argue that solar electricity is expensive and impractical. Therefore, investors are rightfully concerned that their ability to recoup their investment may be impacted, especially if the cash flows are projected to have a twenty-five-year life span.
 
• Legal aspects: The process leading to a third party financing of a solar plant is fairly complex as several parties are often involved. Those parties can include the investor, the offtaker, the landlord, the tenant, the lender and the installation firm. The complexity increases exponentially by the number of parties who all seek maximum protection throughout contractual agreements. The developer’s role (IPPsolar) is to align all parties. Thus, the process requires a very good understanding of solar project financing and negotiation skills.
 
• Credit issues: Credit analysis is an important aspect in solar projects. Investors tend to prefer the best quality credits like government users and top corporations. Conversely, it is very difficult to finance projects with poor credit counterparts.
 
• Construction, permitting and interconnection issues: While solar has the main advantage of being one of the least challenging energy source from a technical point of view, permitting standards and interconnection protocols that vary among municipalities and utilities create additional challenges. In addition, while designing and installing a solar system is relatively straightforward, there are many examples of comparable plants located within few miles of each other that have meaningfully different performance. Poor design is a common scenario.