I had the opportunity to present our lack of solar irradiation protection cover at the Intersolar Europe in Munich, the world's leading exhibition for the solar industry. My presentation was embedded in a session called 'Merchant Photovoltaic Power Plants - The Role of Rating Agencies & Insurances'.
The renewable industry is under enormous pressure to come up with innovative and economically viable ways to finance new projects and ensure future growth. The cuts on governmental subsidies and reduction in feed-in tariffs are two of the challenges the industry is facing. Based on some of the presentations and interesting discussions at the Intersolar, it looks like the industry is very creative and innovative when it comes to tackling these problems. Crowd-funding and green bonds were two of the innovative financing models discussed at the conference.
It was very interesting for me to learn that crowd-funding platforms are quite popular in Germany, Great Britain and France. With this model, the investors become co-owners of the plant. In the past only small plants (such as neighborhood associations) were realized in this way, whereas nowadays also large-scale Photovoltaic (PV) projects are being realized with crowd-funding.
Even more booming than crowd-funding is the issuance of green bonds to finance renewable energy projects. With 93.4 bn dollars issued bonds, 2016 was a record year with an increase of 120 percent in issuances compared to 2015. According to Moody's, this figure will more than double to a predicted issuance of 206 bn dollars in 2017. One of the main drivers behind this growth is the momentum generated by the 2015 Paris agreement. The fact that US president Trump decided to withdraw the US from the Paris agreement will hardly reverse this process. New emission-cutting policies will continue to come from states like California and New York as well as from European and Chinese leaders, and oil and coal companies will be under pressure from activists to reduce their carbon footprint.
The strong investor’s interest for green bonds is an additional powerful driver for the above-mentioned growth. An important investment criterion for investors is the rating of the bond, which is given by a rating agency after a thorough investigation and assessment of all information related to the project. A simple "up" or "downgrade" can severely affect – positively or negatively – the capability of a project to raise the needed funds. Probably the single most important determinant for defining the final rating of the project is the so-called Debt Service Coverage Ratio (DSCR), which is the ratio of future annual cash flows generated by the project to its annual debt obligation. This includes both, principal and interest repayment.
A PV project with a DSCR of less than 1.2 will hardly make it into a BBB rating category and will hardly find enough financing at attractive conditions.The presentation about the importance and the role of the rating agency was a perfect segue to my presentation. Protection against lack of solar irradiation can indeed positively impact the financing of a new solar power plant project. Before financing any new project, not only the rating agencies but also lenders invariably look at the DSCR. The criteria is that the project meets a minimum DSCR – of say 1.2, so as to ensure that the cash flows would be more than sufficient to cover the debt obligations on an annual basis. Based on the DSCR, the lender decides whether and to what extent to finance – so called leverage, and at what interest rate. To calculate this DSCR, the lender would assume a stream of future cash flows from the project over the term of the debt based on a certain annual generation expected from the project. To be conservative, the lenders and the rating agencies usually consider lower generation values, so as to have a higher level of certainty.
The protection against lack of solar irradiation cover guarantees a higher generation. This translates into a higher revenue, which consequently increases the level of future cash flows even after the adjustment for the additional premium to be paid for the cover. In this way, the guaranteed higher revenue of the project can be used more confidently by the bank for calculating an improved DSCR which is a precondition for a higher rating and allows the borrower to get more money. This increases the leverage and/or improves negotiated terms and conditions including a lower interest rate, thereby securing an overall more attractive and sustainable outlook for both investors and developers in this growing industry.
Please contact me for further material and information on the above.Franco Ciamberlano, Head Engineering Medi, CEE & Middle East.
Make sure you check out this video on Financing resilient energy infrastructure.
Category: Sustainable energy: Solar
Location: Munich, Germany