Borrowers may underestimate the extent to which they need to be prepared before soliciting project financing. There are six key documents essential for obtaining capital for financing any solar project.
How To Access Financing For Your Next Commercial Solar Project
Graham Smith | Open Energy Group
Tell us about Open Energy and what the company does.
Open Energy provides innovative financing solutions to support the growth of the United States commercial and industrial solar energy infrastructure. Open Energy’s financing approach is based on a technology-driven underwriting process that allows us to dramatically drive down the traditional cost of capital. For developers and asset owners, Open Energy offers increased access to capital and a time- and cost-efficient loan application process. By utilizing an efficient application and document gathering system, and automating parts of the due diligence process, we provide project financing to enable the execution of a wide range of commercial and industrial solar projects. Commercial solar is in need of this type of streamlined approach and affordable financing, as it has experienced negative growth over the past few years. Our ultimate goal is to unlock billions of dollars in project capital to enable borrowers to grow their solar portfolios.
Why is the commercial sector underserved compared to residential and utility?
Despite its immense growth potential, the US commercial solar market has stagnated in comparison with the residential and utility markets. The fundamental challenge impeding the growth of commercial and industrial solar is access to tailored financing solutions. While the residential solar sector has a standardized method of rating consumer credit, there is no equivalent universal credit rating model for the solar power off takers in the commercial and industrial market. This results in complex due diligence and contract negotiations, which can in turn require significant expenditures of of time and money. The high transaction costs relative to deal sizes often make small and mid-size projects uneconomic. While utility-scale solar lacks standardization as well, the deal size can bear the high transaction costs.
What are the most common misconceptions developers have about financing?
Borrowers may underestimate the extent to which they need to be prepared before soliciting project financing. There are six key documents essential for obtaining capital for financing any solar project: 1) a power purchase agreement (PPA), 2) a land lease or site control, 3) the interconnection agreement, 4) the necessary permitting documents, 5) the engineering documents and 6) an engineering, procurement and construction (EPC) contract. Financiers need to see these materials in advance and have a clear understanding of their current status – for example, whether the EPC contract is drafted or executed. Simply put, without the documentation in order, a commercial developer significantly reduces the likelihood of success in financing their project in a timely manner. With the right documentation and a clear plan in place, commercial developers can efficiently unlock project financing and drive growth in the commercial solar sector.
How can developers identify quality partners with good credit to utilize the solar power?
Identifying a quality partner with good credit to purchase the energy produced by a solar system is critical, as part of the project due diligence process involves a financier assessing the creditworthiness of the counterparty. Developers can take initiative by conducting an initial credit evaluation of their prospective off-takers to ensure a streamlined financing process. If an off-taker is not publicly rated company, they should seek at least three to five years of strong and stable financials. If the off-taker is a publicly rated entity such as a utility, developers should seek a credit rating at or above BBB.
Are there any “hot” markets that are easier to pursue than others?
Currently, the residential sector is seen as a booming market in the solar industry. The residential market is relatively homogeneous, making investment simple and accessible. Financiers can differentiate and segment residential borrowers using FICO scores, ensuring the same risk levels across the nation, whether the homeowner is located in New York or California. Consistency in residential solar reduces the significant costs and resources associated with due diligence processes, documentation, and finance negotiations. However, the commercial sector also has significant potential that remains largely untapped. Wiser Capital estimates that there is a $67 billion investment opportunity for commercial solar in the Northeast United States alone. With the growth of innovative financing solutions and financial technology, we can address the obstacles facing commercial solar and help it meet its growth potential.
What is the first step solar developers should take in obtaining a debt commitment?
Developers should ask a few key questions before starting the financing process. The information that developers should seek includes: the financier’s history, the amount of time it typically takes from the application to issuance of funds, the transaction, legal, and closing costs, whether the legal fee is included in the costs, whether costs are fixed, whether costs can increase if unexpected challenges arise, and whether there are hidden costs such as future refinancing costs.
After researching various financiers, developers also need to determine the type of financing that their project requires. They may need a construction loan, a term loan, or a combination of both. The details to look for when examining different loan structures include the term of a loan, the interest rate, fees and transaction costs, whether the interest rate is variable or fixed, the length of the amortization period and whether the loan is recourse or nonrecourse.
About Graham Smith
Graham Smith, CEO and Founder, Open Energy Group Graham has over 15 years of experience in renewable energy finance and building capital markets brokerage platforms. He founded Open Energy in 2013 to use financial technology innovation to unlock capital and drive debt financing in commercial solar. Prior to Open Energy, he founded two brokerage firms – Axiom Global in 2004 and Phoenix Partners Group in 2006, co-running the latter for seven years. Under Graham’s leadership at Phoenix, the company generated $15 million in revenue within the first two years. Graham also started and managed Phoenix Greenworks Capital, a renewable energy advisory business, and secured $75 million of construction finance for 15 megawatts (MW) of some of the U.K.’s first utility-scale solar projects. Under Graham’s leadership, Open Energy has developed an innovative online platform that has reduced total transaction costs for commercial solar loans by up to 70 percent. Through its unique marketplace lending model, Open Energy offers investment opportunities for non-recourse secured project debt with long-term, non-market correlated and strong risk-adjusted returns. Graham studied at both the University of Cambridge and University College in London. He also represented Great Britain in rowing at the 1996 Olympics in Atlanta.
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