The solar power generation market has matured in size, with projects (whether individual projects or a combination of smaller projects) reaching a scale that would require the financing of traditional power and infrastructure projects. Therefore, financing of large-scale solar projects requires rigorous assessment and diversification of technical and commercial risks, one of the main risks being the assessment of solar energy resources. The solar technologies described below are generally limited to photovoltaics (PV) and concentrated solar power (CSP).
Because solar radiation varies naturally between hours, days, months, seasons, and years, solar radiation at a location cannot be “on-demand”. At the same time, solar radiation is also affected by extreme natural events (volcanic eruptions, forest fires) and human factors (urban air pollution). The intermittency of solar energy resources necessitates an evaluation of the long-term performance and financial recovery of solar projects. Experienced lenders will come to realize that year-to-year variability in project fund recovery is within a narrow range (approximately 10%), with larger monthly or quarterly variability.
Therefore, the intermittency and variability of the “fuel” of solar power projects can lead to uncertainty in revenue. This uncertainty is exacerbated if there are short-term (such as quarterly) debt service requirements. Changes in revenue create uncertainty about the overall financial performance of the project. In order to ensure the security of financing, it is necessary to clarify, quantify and disperse the risks arising from the uncertainty of solar energy resources in a way acceptable to all parties to the project transaction.
As the solar industry matures and the scale and volume of solar technologies increases, so does the importance of assessing and quantifying solar resource uncertainty. While renewable electricity generation does not represent a high percentage of North American and world total electricity generation, power systems that make high use of intermittent renewable resources require better forecasting of these resources to determine baseline loads, storage capacity, and these resource flexibility. These physical requirements will affect technology development and project contractual responsibilities, and link the solar resource to the project’s financial performance.
Project financing generally refers to a financing method often used in infrastructure and power projects. It is based on debt, which is secured by the assets used to finance it (this type of debt is called “non-recourse”). This is very different from the more traditional approach to corporate financing, in which the debt of corporate financing is for a specific purpose, and the security of the debt is the economic strength of the entire organization. This definition also includes limited resources, that is, creditors have limited or pre-established recourse against the project owner. The lack of recourse to creditors in this type of project financing requires a higher standard of technical reliability than other types of lending. The appeal of non-recourse project financing from an asset perspective is that it provides a means by which the liabilities of a given project can be separated from the parent company’s balance sheet.
A facility that can successfully obtain non-recourse financing has a number of key characteristics, one of which is a long-term offtake agreement with a reputable entity for the electrical energy produced by the project. Of course, creditors will often require third parties to confirm and certify the relevant power production status, which depends not only on project design and location, but also on available resources.
A project financing transaction involves many participants (sponsors, equity investors, creditors, contractors, equipment supplying electricity, etc.) with varying tolerances and tolerances for risk. Therefore, for a solar project, the focus should be on the solar resource and the assessment of the resource and the risks posed by changes in natural conditions.
The project owner is the entity that ultimately bears most of the risk to the solar resource. Because creditors want a fixed return, they will try to minimize the impact of resource risk through due diligence and financial restructuring. The financial structure can be determined based on the size of the debt, based on conservative measures, increasing the debt reserve account, and using all available funds to pay the debt in years of low production. In addition, if the solar resource is higher than expected, the equity can also be increased significantly.
The risk assessment primarily addresses the requirements for non-recourse project financing, and the approach discussed applies to all solar projects.