Solar Financing Alternatives

Solar financing normally comprises of two parts: an equity investment and project financing to cover the debt portion.

Prior to any kind of investment, project evaluations identify the risks and methods of mitigating any risks. Where the project has inherent risks, the exposure to these risks
will be negotiated between the parties and reduced wherever possible with insurance

The equity sum is provided by the developer or which comes from equity partners that sign letters of intent to purchase the projects from the developers. These partners can be listed as individual firms, developers or equity funds managed by management firms.

The funds can also be used as the seed capital to begin the process of construction which is normally done following the completion of the design and environmental studies, legal analysis, permit applications and grid connection applications. The equity amounts for around 15-20% of the total project investment cost.

Moreover, in some cases, the equity partner provides operations management for the project over the long term.

In some parts of the world, it is normal to see equity partners and developers form a special purpose vehicle (SPv) to develop a solar project. This is the equity vehicle which owns the project and plant when constructed. The SPv signs the EPC and O&M contracts, and the project revenues, in turn, are paid to the SPv. The working capital requirements and debt servicing are taken from the revenue to determine the dividends.

The debt portion is usually provided by an investment bank providing project finance or leasing finance. The debt portion typically accounts for 80-85% of the total project cost.

Despite, the recent upheaval in the international credit markets, individual projects from smaller developers may receive financing with a loan to value (LTv) ratio of 80% (dividing the amount borrowed by the appraised value of the property, expressed as a percentage) whereas portfolios of solar projects from experienced developers may be financed with a LTv ratio of 85%. The usual term for these project finance loans is approximately 18 years.

Large corporations and utilities may also develop solar plants without the need for project finance; these projects are financed from the corporate balance sheet. But the corporation or utility will still conduct a similar review before submitting project funds.