Solar Refinancing: When Asset Management Steals the Show
April 19, 2017
Image: Richard Matsui (CEO & Founder of kWh Analytics) and Philip Williams (Director of Operations at Ahana Renewables) at “Financial Optimization of Operational Assets - Refinancing” Panel, Solar Asset Management North America Conference. March 29, 2017.
In most businesses, revenue is the clearest driver of profitability. So, it’s an easy decision for executives to invest in their sales activities. Similarly, in solar, acquisitions and project finance are commonly prioritized, whereas asset management is oftentimes an afterthought.
However, there is at least one point (often multiple points) in every asset’s 25- to 30-year life when asset management steps into the limelight: the refinancing of a solar project.
What is refinancing? Refinancing is when you take an existing, operating asset and then get a new loan from your bank—ideally with better terms, since the project has been de-risked.
Taking a step back to understand financing: Banks have appetite for solar investments, but loans are carefully structured to avoid even the smallest risk of default. Consequently, banks size deals to the asset’s downside and assign conservative terms on loans. This conservatism results in an inefficient pricing of risk—banks apply about a 25 percent haircut for commercial and utility-scale solar projects, and a nearly 35 percent haircut for residential portfolios — known as debt service coverage ratios).
Today, the single-biggest cost of a solar project is actually an invisible one: the cost of capital. In this context, refinancing is particularly valuable because it presents an opportunity to reduce that single-biggest cost. What magnitude of savings can be gained from refinancing? According to Ahana Renewable’s Director of Asset Management Philip Williams, “savings could be up to a couple percentage points better than the original terms,” which translates to tens of millions of dollars of value on a large portfolio.
While the total installed price of solar has continued to decline, non-module costs now comprise the majority of the total installed price of solar. Since 2010, reductions in inverter and racking costs represent a smaller share, roughly 20 percent, of the decline in total non-module costs. The sizeable remainder can thus be attributed largely to declines in various soft costs. Credit: Lawrence Berkeley National Laboratory.
Asset management is critical for refinancing. Williams noted, “when refinancing solar assets, a lender is about to shine a light on every dark corner of your portfolio. So, from the very start, you actually need to think years ahead, to consider what software systems you need, what first-class preventative maintenance you want your O&M to perform, how this information will flow into your existing data infrastructure, etc.”
It’s true: To justify better terms, you need to prove to the bank why this is a better asset. You need to have strong documentation of your warrantees, the energy production data must be centrally managed, you have to make sure you have good O&M records of how you’ve taken care of this plant, and so forth. Assets can only be refinanced if they are proven to be higher-quality assets than they were last assessed several years ago.
Furthermore, new opportunities have recently emerged for assets with good asset management. For example, my company offers an insurance product that guarantees up to 95 percent of a project’s estimated energy production, which reduces the “haircut” that a lender would normally assign. But if an asset is falling apart, no lender or insurance carrier will be willing to touch it.