Solar power plant project financing

In recent years, the construction of solar power plants in Europe, the Middle East, South Asia, Latin America and Africa has been progressing rapidly.

This reflects the desire of governments and businesses to reduce dependence on fossil fuels, ensure energy security and environmental sustainability over the long term.

Finding low-cost sources of financing for photovoltaic projects is becoming an important challenge for the development of renewable energy sources. 

In general, solar power plant project finance using various sources within the framework of individual financial models is considered more attractive for initiators of large projects compared to traditional bank loans.

Top 10 countries by the amount of investments in solar projects according to BNEF:

Rating	Country	Investments in 2018, USD billion	Investments in 2019, USD billion
1	China	41,0	29,8
2	USA	22,0	24,7
3	Japan	15,3	14,4
4	India	8,1	6,9
5	Spain	3,0	6,1
6	Germany	3,3	3,8
7	Netherlands	2,1	3,0
8	Brazil	1,4	3,5
9	Taiwan	1,5	1,3
10	Great Britain	0,2	0,6

The benefits of project finance include long-term cooperation, low operational risk, high stability and predictability of payment flows.

All this makes PF an ideal instrument for investment lending.

On the one hand, photovoltaic systems and solar thermal power plants require high initial investments. On the other hand, there are virtually no replacement and maintenance costs during the operational phase, which allows for more efficient debt service. Long-term power supply contracts and active government support in many countries make it easier to plan future cash flows.

LBFL can help you find funds for solar projects on favorable terms.

Our team of European experts provides a full range of financial advisory services, including calculating your project parameters, modeling financial performance and finding tailor-made solutions.

The proposed combined financing schemes allow us to minimize the contribution of the project initiator to 10%.

Together with our partners, we have successfully implemented numerous energy, industrial and infrastructure projects in many countries around the world.

Our rich practical experience and well-established contacts with leading banks in Spain and other European countries will guarantee your success.

Financing options for the construction of solar power plants

The term "financing" covers all operational processes for the provision of financial resources necessary for the implementation of the project.

The investor's decision to participate in financing is made taking into account the risk, expected income and liquidity of the assets of a particular project.

Investors are mainly looking to maximize return on equity in the face of liquidity and security constraints. For this reason, it makes sense to carefully analyze the risk profile and profit forecast of the future power plant before choosing specific financial instruments and combining them into an appropriate financing structure.

The profitability of solar power plants mainly depends on a realistic forecast of energy production and the stability of future cash flows in case of deviations from the plan.

This requires the involvement of qualified engineering companies to analyze the project.

All of the options for financing photovoltaic projects described below assume that the solar power plant as a whole is profitable. Depending on the resources, scale and structure of the project, a distinction is made between traditional financing (loan or leasing) or the attraction of external funds through structured project finance.

Bank loans

The most common way to finance renewable energy projects remains a bank loan.

This is a debt financing mechanism.

This type of financing is most suitable for small photovoltaic projects where the loan amount is relatively small and usually covers all investment costs.

According to the loan agreement, one party (lender) transfers to the other party (borrower) the agreed amount of funds for the project.

The amount provided, increased by a certain interest rate, must be returned by the borrower within the agreed period. Financial terms are agreed between the interested parties individually, depending on the amount requested by the project initiator.

When it comes to applying for a bank loan to finance the construction of a solar power plant, a company can turn to one of the many commercial banks that finance renewable energy projects. If the project meets certain bank parameters, administrative procedures for the borrower are simplified, and financial conditions become much more favorable (lower interest rates).

The solar project will receive the planned funds only if it meets the expectations of investors.

In the case of banks or financial institutions, the term bankability is used, summarizing the numerous criteria used to assess the feasibility of financing photovoltaic projects of various types and sizes.

One of the most important advantages of this form of financing is that the borrower, although he must provide certain guarantees, retains full ownership of the solar power plant.

Leasing

Leasing is an alternative mechanism for financing energy projects.

This is a long-term contract under which the tenant company operates a solar power plant, paying the leasing company an amount that will cover the value of the asset plus interest.

This model is usually applied to the financing of small and medium-sized solar power projects. As a rule, it is focused on the duration of payments of at least 8-10 years. In many cases, the parties agree to include in the contract the option of buying the power plant by the lessee, although there are other options after the end of the contract.

Under the terms of the lease agreement, the lessee is usually responsible for insuring the power plant against damage, including natural disasters, theft of equipment, and the like.

Project finance

The construction of solar power plants through project finance refers to the so-called structured finance.

This model is characterized by the presence of several partners.

Each participant in such a project requires a high degree of awareness and rights to control and intervene at the time of a possible crisis in the project.

The list of partners includes financial investors (e.g. investment funds), banks, landowners, an engineering company (EPC contractor), a solar power plant operator. In some cases, this includes the consumer of the generated energy, which can potentially assume controlled business risks during the project implementation.

One of the features of project finance is that a solar power plant is transferred to a legal entity created specifically for a photovoltaic project (Special Purpose Vehicle, SPV).

Solar power plant project finance: the basics

The term "project finance" is defined in the literature as financing of an independent, clearly separate economic unit (project).

Interest payments and debt repayment using this financing model is made exclusively from the current cash flows of the investment project.

The assets associated with the project serve as collateral.

Funding for any solar project involves planning, building and operating, with the construction phase requiring the highest investment over the life of the project. To make a decision on financing a solar power plant, the initiators must provide a full-fledged technical documentation, which contains rational technological processes, a clearly limited implementation period and the necessary financial and material resources.

To implement a photovoltaic project, a legally independent project company (SPV) is usually created, which can enter into loan agreements as a legal entity.

Thus, the funds are allocated directly to the project company.

Project sponsors are usually only liable for the funds invested, unless specific guarantees are provided.

From a lender's perspective, project finance is a typical example of profit-driven lending. Loan approval is based on an assessment of the future chances of success of the planned project.

Unlike the traditional lending business, it is difficult to verify the feasibility of building a future facility and requires careful analysis. There is no information about the previous situation with assets, including the past situation with profit and liquidity. Meanwhile, this information is key to assessing a company's creditworthiness.

Analytical data and expert predictions about the likelihood of success of a photovoltaic project, obtained during the analysis process, are critical to the financing decision.

Despite the uncertainty, research shows that project finance is associated with less risk than classic corporate loans. Among the reasons for this, experts call careful monitoring by investors and managers, as well as a clearer structuring of financing.

In general, three important aspects of project finance can be identified, namely the orientation of cash flows, the distribution of risks between project partners, and the principles of off-balance sheet financing.

Cash flows

Cash flow is the accumulation of funds for the period resulting from planned payments.

The cash flow from a photovoltaic project, net of taxes, shows the amount of free financial resources that a company can use in the future, for example, to pay off debts.

The stability and sufficiency of cash flow are important indicators of any investment project. Thanks to a carefully designed cash flow plan, lenders can determine the feasibility of a project and predict the return on investment.

One of the most important performance indicators is the return on investment (RoI), which helps investors in deciding whether to participate in a project.

Distribution of risks between partners

Since the solar resources needed to generate electricity are readily available, the risk is usually limited by the predictability of future solar radiation in a given climate zone.

Risks can be associated with both the uncertainty of expert forecasts and the uncertainty of the level of solar radiation.

When forecasting for a period of 15 years or more, the error can reach 3-4%. This deviation is the result of the influence of a large number of factors, such as the quality of basic meteorological data, local conditions, etc.

There are also deviations from the planned forecasts due to power losses of solar modules and due to increased operating costs as normal wear and tear of electrical equipment.

Project participants can counteract risks arising from project completion delays or cost overruns by requiring partners to sign a project completion guarantee. The risks of force majeure arising from fires, floods or hurricanes can be avoided by insuring the project. The latter leads to an overall increase in the cost of building a solar power plant and is mainly used in unstable areas.

An important feature of project finance is the principle of risk sharing.

In the context of traditional corporate finance, lenders have unlimited access to company assets.

Depending on the legal form, equity investors are liable for corporate obligations with their capital employed or additionally with their personal assets.

A different principle is used in project finance.

Typically, such projects are characterized by large amounts of investment.

Most of the capital requirement is financed by external capital.

The highly specific assets of the solar project and the planned cash flow are not sufficient guarantee for lenders. For these reasons, risks are flexibly distributed among the project participants. Risk allocation is based on the participants' ability to influence and control certain situations in the best possible way.

Ultimately, the risk should be borne by the party that, due to certain professional competencies, experience, resources, technologies, can best cope with it. This creates an incentive for the development of the project and helps it achieve sustainable success.

Lenders can also assume certain risks by limiting their right to timely receive interest or principal (body) of the loan in certain conditions, as well as by providing additional funds if necessary.

Risk allocation is carried out at the stage of contract development, according to which responsibility and risks during planning, construction and operation are assigned to certain participants.

During planning, financial partners take the highest risk. At this stage, professional experience and knowledge of the legal and financial aspects of solar power projects are critical to future success.

Off-balance sheet financing

Due to its legal capacity and creditworthiness, the project company (SPV) can independently act as a borrower.

Thus, project loans are shown as liabilities in the balance sheet of the SPV, and the balance of the project initiators is not burdened with borrowed funds.

The advantage of this structure is that the high share of borrowed capital in the project company will not affect the balance of the sponsors. This allows the implementation of large-scale projects that would otherwise disrupt the financial stability of individual participants.

Since participation in financing the construction of a solar power plant can disrupt the financial balance of the initiator company under certain conditions, the "external" effect is considered to a limited extent.

The main types and models of project finance

Since the assets of a solar project may not be suitable for use or resale, and lenders do not accept them as the only security, the proponents of the project are often involved in its financing to some extent.

A distinction is made between non-resource project financing and project financing with limited or full resources.

Non-resource finance

In the case of the so-called non-resource finance, the initiators of the project are exempt from liability exceeding their share in the capital.

In practice, this type of financing is widely used today, since the lender assumes all responsibility for the project, releasing the initiators from it. At the same time, financial institutions are trying to compensate for the increased risk of project failure with higher risk premiums, which makes this financing model less attractive.

This project finance model is suitable for photovoltaic projects where the property has a high resale value.

Project finance with limited resources

Project finance with limited resources is used in most cases. This model allows financial institutions to use the funds of the proponents of the project only to a limited extent in order to recover the loan in certain circumstances.

The possibility of such a scenario may be limited in time and amount. An investor's obligation to provide additional funds to pay off the credit annuity can be cited as an example of such an obligation.

With a temporary limitation of liability, sponsors, for example, may be held accountable for the completion of a project, while operational risks remain with the lenders. This is a flexible type of financing.

The application of a financing model with limited recourse to the borrower requires comprehensive liability rules for project participants, as well as rational risk sharing.

Project finance with full resources

In so-called full resource project finance, lenders have extensive rights. This actually means that the initiators of the project bear the maximum responsibility for all risks.

For this reason, this type of project finance is assessed as a secured business loan and, in fact, is not a real project finance. This model is rarely used, including due to high transaction costs.

General structure and participants in project finance

In addition to capital providers, other groups are involved in investment lending projects for the construction of solar power plants, which may pursue different goals.

Optimal structuring of the interests and tasks of all participants is the basis for a profitable partnership and project success.

Design Company (SPV)

A dedicated project company usually takes the lead in arranging solar power plant project finance. It provides the necessary external capital. SPV also acts as a contractor for other project participants.

Project initiators

In project finance, project initators, also called sponsors, develop the idea of building a solar power plant and are usually responsible for operating it.

Project initiators usually have more complex business goals than just selling electricity to the end consumer. These can be companies that expand their own value chains, increase the production of energy-intensive products using renewable energy sources, develop new markets, etc.

In the solar energy sector, photovoltaic panel manufacturers are interested in participating in solar projects in order to expand their markets.

Buyers of the final product strive to ensure energy independence by participating in such projects.

Financial investors

In addition to the project initiators, financial investors can participate in the solar project as capital providers.

They are interested in getting the most out of the capital invested in the project.

Typically, investment companies, insurance companies, pension funds, and venture capital funds act as financial investors. Their strategic role is significantly less than that of the project initiators. However, large projects can often be implemented only with their participation, especially if the project initiators do not have sufficient capital.

Project lenders

Lenders play an important role in financing solar energy projects as they provide most of the required capital.

Leasing companies, development banks, international financing institutions, commercial banks and other financial organizations act as creditors.

In the past decades, the most important source of debt capital for the construction of solar power plants has been loans from commercial banks. Many commercial banks offer special financing programs for solar projects.

Banks not only participate in projects as lenders, but also undertake numerous consulting and service tasks, including the following:

• Carrying out a feasibility study.
• Development of an optimal financing concept.
• General consulting and legal services.
• Fiduciary services (asset management) and so on.

Equipment suppliers and construction companies

Manufacturers and suppliers of photovoltaic panels and electrical equipment, along with construction companies, are responsible for the construction and assembly of the equipment required for operation.

These project participants often work under the direction of a single general contractor under an EPC contract. In addition to on-time assembly and delivery, they can perform tasks such as training local personnel and operating a solar plant for a limited period of time.

Consulting and engineering companies

These companies usually serve as technical consultants.

Their responsibilities include the development of project documentation, feasibility studies and supervision of construction and installation works.

One of the most important tasks of consulting and engineering companies in any solar project is forecasting energy production.

Alternatively, project management can be entrusted to a management company. Its tasks will be regulated by a specific contract. The decision to hire a management company can be justified in different ways.

In some cases, banks require only experienced managers to run the business when approving a loan. Such lending conditions have often been identified in past years, when government agencies were involved in structuring the project and the project organizers usually did not have sufficient knowledge.

Another important motive for delegating authority to the management company is to minimize conflicts of interest between project participants, when sponsors simultaneously perform several functions.

Insurance companies

Solar power plant project finance usually includes an insurance contract that partly shifts the risks onto the shoulders of the insurer.

However, insurance companies charge significant premiums for the assumed risk, which negatively affects the cash flow of the solar project.

This is considered promising for high-risk projects. For example, in the case of investment lending for the construction of solar power plants in regions exposed to the risk of earthquakes and floods, insurance against the risks of "force majeure" is widely used.

State bodies

The customer group and government regulatory authorities are of particular importance for renewable energy projects.

Often the state acts as a customer for the construction of solar power plants and directly evaluates the quality at all stages of work.

In the case of project finance, the state also performs the function of a licensing entity, which approves the implementation of projects and also determines the conditions for its functioning.

Our solar power project finance services

LBFL is an international company that offers a wide range of services in the field of engineering design, construction, operation and financing of solar projects.

Our solar power plant project finance services are not limited to financial modeling and professional advice. We are ready to find interested partners for your project in Europe and beyond, using our extensive business contacts in many countries around the world.

After defining the project profile and the number of participants, as well as their tasks and obligations, our financial experts will offer you the optimal project finance structure for a solar power plant.

Combined financial models reduce initiator contributions by up to 10%.

A combination of equity, debt and mezzanine capital, along with a rational choice of economic instruments, can be the key to the success of your project.

The choice of financing instruments depends on many factors, such as project risks, SPV structure, investors' expectations of profitability and risk, project scale, political and economic conditions in the country and preferences of the project initiators.

Are you looking for funding sources for a future solar power plant?
Are you planning to build, modernize or expand your business?

Contact us for a free consultation at any time.