Here are some of the more common structures of financing renewable energy project. They vary

in the type of participants, source of financing and allocation of benefits.

Corporate Financing

One corporation develops the project and finances all costs. There are no other investors or

lenders involved. The project may be set up as a subsidiary of the corporate parent. However,

with 100% ownership, the subsidiary would have to be consolidated into the parent's financial

accounts.

Naturally, the corporation reaps all the benefits of the project.

The corporate parent must have sufficient capacity for tax credits and benefits to be of use.

In the renewable energy sector, this is structure is rare and only used by utility companies

themselves. 

Sale before Construction

The developer acquires lease and land rights, permits, interconnection agreements, power

purchase agreements and any renewable certificates or feed-in-tariffs.

The developer sells the developed project to a strategic investor and receives a development fee

from the investor.

The strategic investor (possibly a utility company) constructs the project on its balance sheet or

arranges bridge finance for the construction. The strategic investor owns and operates the plant.

The developer's risk is limited to the development capital.

Sale after Construction

The developer seeks bridge financing from lenders:

Construction Loan: Bank is repaid in full at completion of construction. Alternatively, bridge is

converted into long-term loan.

Cash Equity Bridge: Bank is repaid at completion of construction with funds from sponsor.

Developer may provide limited guarantee for cash equity.

Tax Equity Bridge: Bank is repaid at completion of construction with funds from tax investor,

who will only come in once the plant produces tax credits.

Investor Ownership Flip

The investor contributes almost all of the equity and receives a pro-rata percentage of the cash

and tax benefits prior to a flip in allocation.

At a given level of IRR (internal rate of return), the ownership flips back to the developer, after

which most of the cash and tax benefits are allocated to the developer.

Only the production tax credits will continue to go to the tax investor even after the "flip".

If the investor is a tax investor rather than a strategic investor, the pre-flip allocation may not

be pro-rata, and all tax benefits may go to the investor instead.

Leveraged Ownership Flip and Pay-As-You-Go ("PAYGO")

This is the most common project finance structure.

The tax investor makes contributions before production begins, though a portion may be

deferred until the project receives production tax credits, which are initially allocated to the tax

investor, though a high percentage is paid to the developer as an equity contribution. This serves

as a claw-back should the project not perform.

The leverage is at project level with long-term debt of up to 18 years, based on the PPA (Power

Purchase Agreement).

This structure also includes a return-based flip in the allocations.

As the term for the production tax credits is usually, an additional loan may be secured against

those flows.

Back Leveraged Structure

Similar to the Investor-Ownerhip-Flipstructure. However, the developer is leveraging its equity

stake in the project using debt financing.

The tax investor commits equity upfront.

Pre-Flip: Initially, 100% of cash goes to the developer until return of investment (similar to a

development fee). Then 100% goes to the investor.

Post-Flip: After the investor's pre-agreed IRR (typically 7% - 10% depending on project risks) is

reached ownership and cash flow allocations go back to the developer, including most of the tax

benefits.

Leveraged Lease

Construction is funded by sponsor equity and a construction loan. Once constructed, the

sponsor sells the project to the investors that have formed a trust and immediately leases it

back.

The develpoper repays the construction loan from the sale proceeds. The trust is financed with

cash equity and a non-recourse term debt. Lease payments are likely to be assigned to a lender.

For tax purposes, a minimum of 20% equity is usually required.

Leasing generates a "time value of money" cost saving achieved by deferring tax payments. It

also improves cash flow.

If set up as Operating Lease, the lease may only be for 5 years with the option to re-lease.

Homeowner Model

When homeowners invest in renewable energy generators, they will own 100%. However, quite

frequently, they can get bank finance, in some cases up to 100% of the capital costs!

Depending on the jurisdiction, homeowners may have to set up a company to run the generator,

in whcih case they will also be able to profit from tax benefits.

However, unless they can offset the investment against profits elsewhere, the overall tax

benefits are not significant. The lack of tax benefits, however, is often compensated for by higher

feed-in tariffs for small installations..

The Optimum Financing Structure

With so many different financing structures to choose from, which one is the optimum? That very

much depends on the project itself as well as the participants. As with other infrastructure

projects, capital intensive energy projects are often financed as stand-alone entities (Project

Finance) rather than as part of a corporate balance sheet (Corporate Finance). The main

advantages of project finance are:

Non-recourse/limited recourse financing: There is no or only limited recourse to the project

sponsor's assets for the liabilities of the project. Thus, the project preserves the sponsor's debt

capacity.. Also, lenders will be more keen to participate in a workout.

Risk Sharing: By setting up a separate legal entity, the project risk is isloated and can be

allocated to the parties that can best control, understand and mitigate the risks involved.

Consequently, incentives for all involved are optimized. This includes political or country risk.

Favourable Tax Treatment: Project Finance structures allow tax benefits to be allocated to

entities that can make use of them.

Improved Financing Terms: The project may obtain more favourable finnacing term than it

would based on the sponsor's credit profile alone. This way projects can be carried out that would

be too big for one sponsor.

However, all of these benefits come at a high transaction cost, higher interest rates and insurance

coverage.

How to choose the Financing Structure?

The developer who initiates the project decides which finnancing structure best meets their needs

for a project based on multiple considerations.

Consideration / Motivation

ContextMost

suitable structure

Project SizeIf the project's value is less than $50m, the transaction costs of Project Finance will outweigh the benefits.

Corporate

Developer can use tax benefits

If the developer wants to use tax benefits, the project needs to be on its balance sheet. However, often, developers are much smaller than the projects they develop and have no capacity to use all the tax benefits.

Corporate

Developer can fund project

costsIf the developer can fund project costs

CorporatePAYGO

Low Project IRRIf the project's projected internal rate of return (IRR) is low, increasing debt levels will help increase the equity holder's rate of return.

Leveraged Structure

Developer wants early

cash distribution

Due to the large capital expenditure there are no early cash distributions available if developed on own balance sheet. The developer either needs to sell early, or device a structure wehereby the developer receives a large proportion of cash.

Project SaleBack-leveraged

PAYGO

Re-financingIf the projeect already exists, but just needs re-financing, possibly after construction, options include a pay-as-you-go structure or leasing.

PAYGOLeveraged Lease

Impact of financing structure on returns and the cost of energy

The investor's internal return and the plant's levelised cost of energy vary with the choice of

financial structure.

We have calculated the weighted average cost of capital, investor's internal rate of return and the

levelised cost of energy for investment in a 1MW solar park for different financing structures.

The levered structure yields the highest return and lowest cost of ownership because of the lower

cost of debt and the tax shield provided by the debt. Also, the debt lowers the average cost of

capital, though increases the expected return for the investor.

The cost of ownership is highest in the "sales after construction" scenario, as the interest for

financing the construction before the sale has been added to the capital cost of the whole plant.

Contract Framework

Constructing and operating a power plant or any other infrastructure facility requires a number of

contracts with all participants. They don't just document the legal structure. Contracts are also an

essential part of a risk mitigation strategy. The diagram below provides an overview of the

contract framework.

Financial & Control

Site Survey: A survey carried out by an independent experton feasibility of the project and

expected annual energy supply.

Security: Any loan agreements that are secured with lien on the land or other assets

Shareholder Agreement: Includes the capital structure and governance of the project

company.

Management Contract: specifying management incentives.

Project Documents

Supply Agreement: Fixed price & date models may not be available due to the fact that

preparation of foundation (for instance for off-shore farms), turbine or panel sale and the

balance of plant are governed under separate contracts.

Balance of Plant Contracts: As most BOP contractors lack credit ratings, lenders will require

holdback of some payment until completion.

Land Agreements: The term needs to be similar to the useful life of the plant (20 - 25 years).

Contract includes definition of payments (usually based on gross revenues), audit rights of

landowner, exclusivity, non-disturbance provisions and scope of indemnities.

Planning Permissions

Environmental Consent: For most projects, consent will only be given by local authorities if

certain conditions are met with respect to safeguarding the environment. This contract may

impose restrictions on the operations times or demand additional investments.

Insurance: Risks that the sponsors and lenders cannot allocate may have to be insured

against, for instance political risk.

Operations Documents

Interconnection Agreement: Construction of grid connectivity, long-term feed-in agreement,

completion schedule

Turbine / Panel Service Agreement: Provided by the supplier with term duration of the

warranty - needs to correlate to other O & M work. Compensation usually based on a fixed fee.

O & M Contract: Includes the scope of work, compensation and separate fees, liability,

compliance, remedies and dispute resolution

Operating Licenses: If using patented technology, the project company may have to pay for

operating the technology under license. Length must aligh with useful life of plant.

Marketing Documents

Power Purchase Agreement: The Power Purchase Agreement (mostly with a utility company)

includes details on what is being sold (i.e. power, credits, certificates), peak or off-peak tariff. It

also specifies if the electricity has to be purchased if not taken or what happens if electricity is not

produced.

Renewable Energy Certificate Qualification: (or similar) - a certificate from government agency

that project qualifies for feed-in tariffs or production tax credits.

Instruments & Sources for Renewable Energy Projects

Instrument Sub Category Function Source

Equity

Ordinary SharesRsik capital from developer or sponsor

Sponsor

Preference Shares

Senior to ordinary shares, typically from tax investor; sometimes proviiding a cumulative dividend.

Institutional InvestorsInvestment FundsTax Investors

Debt

Subordinated Loan / Mezzanine

Usually fixed rate, long-term and unsecured. May be considered as equity. Can be used to cover construction overruns or other guaranteed payments

Lenders specialising in mezzaninen debt

Syndicated Loans

Loan provided by two or more lenders, governed by a single loan agreement. May have different agreements for construction and operating phase of project. Provide long-term finance

Banks

Senior Debt - unsecured / secured

Large unsecured loans are only available to creditworthy corporations. Banks tend to limit their risk to 5 - 10 years.

Commercial banks

Development Loan Financing provided during development of project to a sponsor with insuffiicient resources.

Lender with project experienceWorld Bank (only if project can not secure borrowing at reasonable rates from any other sources)

Vendor

Intermediary Loan

Export-Import bank lends to a financial intermediary (commercial bank), which in turns lends to the project.

Export Credit Agency

Private Placement Direct sale of long-term debt / equity

Sophisticated investors including insurance companies, pension funds, trading companies

Eurobond

Issued in amounts averaging $100m without prior registration or approval by any particular government. Terms usually range from 10 - 15 years. Loans may be made in any currency, fewer covenant than syndicated bank loans, and accessible through a large and liquid market. However, a credit rating for the project entity is required which could be both costly and time-consuming to obtain. Also, bond issues tend not to allow changes to the underlying project.

Capital Markets

Guarantee Exchange Rate Risk A commercial lender provides a loan to the project entity (the

Export Credit Agency

importing entity), at below market interest rates. The Export-Import bank provides compensation for the difference between commerical rate and below-market rate

Political Risk

Limited protection against risks of sovereign non-performance and against certain Force Majeure risks.

Word Bank

Tax ReliefTax CreditsTax HolidaysDuty exemption

Individual governments may offer tax incentives

Host governments

PROJECT FINANCE

Renewable Energy project financing is a relatively young industry, where transaction structures continue to evolve.

Due to the unique nature of risks in most renewable energy financings, transactions need to be constructed with a fine balance of risk allocation.

GLOBAL SOLARIS GROUP offers meaningful insight on maintaining this fine balance and works with the most reputed and experienced Renewable Energy investment firms. 

OVERVIEW 

Project finance is a structure employed to finance capital-intensive projects that are either difficult to support on a corporate balance sheet or that have become more attractive when financed on their own. Renewable energy projects in the United States are typically financed using project finance and generally include a mix of project equity investors, tax equity investors and project-level loans provided by a syndicate of banks. Terms set forth by both lenders and equity investors are based on the project’s perceived riskiness and its expected future cash flows.

The project finance structure revolves around the creation of a “project company.” The project company holds all of the project’s assets, including its contractual rights and obligations. The project company is typically a limited-liability company (LLC) or, in some cases, a limited partnership (LLP). Project-level loans are usually non-recourse, meaning that they are secured by the project’s assets and paid off by the project’s cash flow: the investors’ assets are shielded should the project be unable to meet loan repayment terms.

Most renewable energy projects require a signed power purchase agreement (PPA) in order to reach financial close and commence construction. The commercial terms of the PPA and the engineering, procurement and construction (EPC) contract, together with the project’s associated market and technology risks, will largely determine whether lenders consider the project “financeable.” The maturing of the wind power market in recent years has allowed some major wind parks to receive project financing in the absence of a long-term PPA (known as “merchant projects”), but solar projects rarely receive financing in advance of a PPA being signed.

I - Direct Equity

Project equity (aka “cash equity” or“private equity”) is supplied by private equity firms or the developers themselves. Direct equity investors invest a specified amount in a project in return for a certain stake in the project’s future cash flows.

II - Tax Equity

Renewable energy project developers typically do not have tax liabilities large enough to efficiently capture the full amount of tax credits available for large projects. To circumvent this issue, project developers can pair with a tax equity partner that is better able to utilize a project’s tax benefits. Traditionally, tax equity investors have been large investment banks, commercial banks and insurance companies with a high tax burden that seek to offset some portion of their expected tax liability. In some cases, large equipment manufacturers are able to provide tax equity.

The two primary tax equity financing structures of renewable energy projects in the U.S. are the sale-leaseback model and the partnership flip model.

1 - Sale-Leaseback ModelThe sale-leaseback model allows a project developer to recoup its entire investment in a project, eliminating the need to invest directly. In this model, the developer finances and installs a project and then immediately sells it to a tax equity investor at full value. The tax equity investor then leases the project back to the developer at a fixed rate for a period exceeding the PPA schedule. The developer uses PPA revenue to fund rent payments to the tax equity investor, who also claims all tax benefits associated with the project. At the end of the lease term, the tax equity investor either remains the owner of the project or the developer can buy the project back at its residual value.

The benefit of the sale-leaseback model is that the tax equity investor is able to pass tax savings on to the project developer in the form of lower rent payments. In turn, lower rent payments result in a lower PPA price and lower rates charged to end customers.

2 - Partnership Flip ModelA partnership-flip model is structurally more complex than a sale-leaseback model, but gives more freedom to the project developer within the partnership. The project developer and tax equity investor form a partnership company (typically a limited-liability company), through which they co-own a project. The partnership becomes the formal owner of the project, receiving all associated revenue and tax credit. Once formed, the partnership will negotiate over the distribution of revenues and tax credits, which is done on a project-by project basis. In all cases, the tax equity investor requires a certain rate of return within a certain time frame (typically six to ten years). For example, during this time frame the tax equity investor may claim 99 percent of revenue and tax incentives within the partnership and the developer just one percent. Once the tax equity investor achieves its required return, the partnership structure flips and the developer may receive 95 percent of revenue and the tax equity investor receives five percent.

A benefit of the partnership-flip model is that the project developer receives assistance in financing the construction of the project from the tax-equity investor; financing is often difficult to source for large-scale projects.

III - Debt

Project debt is supplied by a bank or a syndicate of banks, which lend against the expected future cash flow of a project. Debt packages inevitably vary by project size and technology, but most solar, wind and geothermal projects incorporate one or more of the following:

1 - Term LoansTerm loans are a basic vanilla commercial loan. Term loans typically have fixed interest rates with monthly or quarterly repayments.

Term loans for renewable energy projects are typically “long term,” with maturity dates generally between 10 and 20 years (though tenors dropped significantly directly following the financial crisis). The collateral for term-loans is typically the project itself.

2 - Construction LoansThe potential risks and returns to an investor during the construction period differ from those expected once a project has reached commercial operation. As such, most large renewable energy projects have a construction loan component in the overall project-financing package. Construction loans are generally distributed in several installments. After the first installment , and through the term of the construction loan, the borrower makes interest only payments on the installments received to date. When construction is complete, payment is due for the entire amount. In some cases, construction loans will automatically convert to term loans once commercial operation is reached. The interest rate on construction loans is generally higher than on term loans.

3 - Equity Bridge LoanEquity bridge loans have grown in popularity since the introduction of the ITC cash grant in 2009. Because cash grants (which cover 30 percent of a project’s installed cost) are made 60 days after the project commences operation, developers still need bridge financing to get through the project’s construction phase. Equity bridge financing is often furnished by equity investors until the grant comes through, at which time the investor is typically repaid. Cash grant bridge loan spreads are similar to term debt spreads, if not somewhat lower.

IV - Other

There are several additional financing instruments available: 144A bonds, Clean Energy Renewable Bonds (CREBs), which are available to co-ops and municipalities, Class B memberships, and prepaid service contracts. 

POWER PURCHASE AGREEMENT (PPA)

The Solar Power Purchase Agreement (SPPA) is an alternative to financing and owning the system. It offers you an opportunity to install solar or wind power at your facility without paying upfront costs or worrying about system operation and maintenance. Sometimes referred to as a “third party” ownership model, this approach lets you focus on your core mission, while solar experts manage your energy system. For 15 to 20 years, you enjoy predictable, pre-set electricity prices, and power from a solar system that is a source of pride for your organization.

PPA TERMS 

Disclaimer: this document is only intended to illustrate a possible scenario. A wide range of variables can and will alter the possible outcomes. All terms are fully negotiable. 

The Parties

Buyer is the purchaser of electricitySeller is the seller of electricity, i.e. a limited partnership owned by GLOBAL SOLARIS GROUP

1- Term

A base term is established with one or more extensions options.The term may vary from 15 to 20 years. 

2- Effective Date

The PPA becomes binding from the date it is signed. 

3- Commercial Operation Date

The PPA term starts from the “commercial operation” date also called “placed in service” date. 

4- Installation, Testing, Start-up

The PPA will include an obligation from the project owner to install and test the system. It will also set a “placed in service” date that relates to when the sale of electricity becomes active. 

5- Contract Rate

The rate is fixed for the duration of the agreement with an escalation clause reflecting inflation. The rate is designed to create lifecycle savings for the consumer by targeting an increase rate that is less than from utilities.The PPA starting rate is usually set at a discount from the rate paid to the electric utility company.The contract price is based on the amount of electricity generated by the project. 

6- Environmental Attributes

The environmental attributes will attach and be available to the seller during the term of the PPA.The PPA states the energy is sold without the environmental attributes. The sale of Renewable Energy Certificates is the prerogative of the owner of the system. 

7- Interconnection

The PPA requires the seller to bear the cost of interconnection. 

8- Operation & Maintenance

The PPA outlines the seller’s responsibility to operate and maintain the project in accordance with prudent operating practices. Such duties include regular inspection and repair, as well as completion of scheduled maintenance.The PPA also provides for access to the project. 

9- Net Metering

Metering is most important as it determines the quantity of output for which the seller is paid.Under Arizona law, net metering allows the consumer to receive credits for excess electricity produced.The PPA assigns those credits to the buyer. 

10-Purchase Options 

Timing: During the PPA purchase options can be exercised only from 6 years after “commercial operation” date up to the end of the term.Pricing: Pricing is established at fair market value and a discounted present value of the electricity produced by the system for the remainder of its useful life. 

11-Billing & Payment

The PPA determines how invoices are prepared, when they are issued, and how quickly they are paid.The PPA sets forth procedures for raising and resolving billing disputes, and the interest rate and penalties that apply to late payments. 

REITs & Securitization

SOLAR REITS 

Real Estate Investment Trusts are a financing method in which individual investors invest in a fund that buys property or makes loans for real estate

assets or invests in other “good assets” applicable to real estate. As long as the REIT annually pay its investors at least 90% of the REITs profits, the REIT itself isn’t taxed. Instead, only the individual investors are taxed on their REIT dividends, thus avoiding double taxation.

Recently, the IRS made a so-called “private letter ruling” that—under certain conditions—allows solar equipment to be a “good asset” as part of a REIT.

To comply with IRS regulations, NREL has outlined three strategic options: 

I - Utilize a taxable REIT subsidiary (TRS) to own PV projects

REITs can create a TRS that can develop, finance, and own rooftop solar PV systems. The TRS can then receive the benefits of the 30% Investment Tax Credit and also make income by selling the power generated to the building tenants. The TRS then returns this after-tax income to the main REIT fund.

II - Utilize a TRS to develop and construct PV projects

A REIT can utilize a TRS to develop and construct PV projects, but instead of owning the project after construction, the TRS can sell its ownership interest to an investor or utility. Electricity generated by the project is retained by the utility or is sold to an offtaker under the conditions of a long-term power purchase agreement (PPA). In this case, the TRS only acts as a construction contractor, and the parent REIT collects rent for leasing the rooftop space to the project owner, which is considered good income by the IRS

III - Lease space to solar developers and project owners

In this case, a REIT owns rooftop space or land but does not form a TRS to construct or develop the PV project. Instead, the REIT will lease the rooftop or land to a PV project developer, which will pay the REIT monthly rent. This rental income is considered good income by the IRS

SECURITIZATION 

The introduction of solar asset-backed securities, commonly referred to as “solar securitization,” has been “the next big thing” in energy finance for the past three to four years. Whether the first real solar securitization happens this year or in the near future, securitization is coming to solar finance.

As state and federal support for renewables shrinks, the industry must find ways to continue to reduce costs, and access to less expensive capital will be a vital piece of this process. Securitization will enable the solar industry to access a much larger and more diverse investor base, which will eventually help to reduce the long-term cost of capital to a likely range of 3% to 7%, compared with the

8% to 20% rate required by some project finance equity and tax equity investors in the current market.

In the most basic form of a solar securitization, the holder, or “originator,” of a portfolio of solar assets identifies and isolates contracted revenues from a series of solar projects. The originator then bundles the contracted revenues into a “reference portfolio,” and sells the revenue stream (but not the physical solar asset itself) to an issuer, typically a special purpose vehicle. The SPV then issues a tradable, interest-bearing security to investors in the capital markets. The revenues generated by the reference portfolio fund a trustee account that passes through payments, either fixed or floating, to the investors in the new security. These investors are senior to equity investments and for stable income producing assets like solar projects represent a relatively low risk investment.

Sources: NREL & Power Intelligence