Many small- and medium-sized power projects are simply not large enough to gain the interest of highly sought-after institutional investors. The complexity and related costs of smaller projects means risks and inefficiencies that threaten stakeholders’ return on investments. However, there are actions developers can take to make projects more attractive to investors.
With the shift from fossil fuels to renewable energy, and environmental, social, and governance (ESG) investing trends accelerating through the pandemic, the old solar financing trends are catching up to the new reality. Financing, and merger and acquisition (M&A) activity, in the first half of 2021 has created unprecedented opportunities for large and small players alike.
Total corporate funding for solar is up 193% in the first half of 2021 ($13.5 billion) compared to the same period last year ($4.6 billion). Announced debt financing increased 125% in the first half year over year ($8.2 billion in 32 deals compared to $3.7 billion in 17 deals). Solar corporate M&A transactions more than doubled between the first half of 2020 and the same period in 2021.
This recent uptick in M&A activity, particularly among the largest incumbents in commercial and industrial (C&I), and municipal, university, school, and hospital (MUSH) distributed generation solar, has created strong financial pull among these well-capitalized players. As such, these large players are able to aggregate projects to create efficiencies and cost savings. This trend in aggregation, in which large funders bundle several small- and medium-sized projects, exists because these projects can be complicated to underwrite and originate, and carry high costs compared to the size of the deals. This makes it harder for small developers to achieve their own financing to develop other or larger projects that will help facilitate growth.
There are, however, steps that smaller developers can take to get the financing and resources they need. Finding a partner that can add value at various points of the development lifecycle can make a big difference for smaller developers lacking access to institutional, generally low cost, capital. Additionally, standardizing contracts, leases, and other important documents will make it much easier to attract a partner that can provide competitive financing.
Finding the Right Partner
For developers, energy companies, or anyone looking to develop a solar project, a team mentality is the best approach. A wide range of expertise is required, and often it must be brought in from the outside, either via consultants or partners who align well with your goals (Figure 1). A lack of expertise or the wrong person on the wrong task can result in significant delays or unexpected costs that put undue pressure on projects or even kill them before they get started.
1. Partnering with a knowledgeable project development company can be vital for success, especially for small- and medium-sized projects being undertaken by inexperienced owners. Courtesy: Distributed Solar Development
Before choosing a partner, it’s vital to understand your timeline, which can be simple conceptually but much more complicated to execute. First, you want to ensure your project is ready to sell as soon as you are far enough along in the development process to make the sale as efficient as possible.
It has always been challenging for developers to find the right point of entry for partnerships. Large financial aggregators often look to acquire or get involved with a project after it’s completed to minimize their risk throughout the development process. That is not optimal for many developers, especially those that may want to sell a project at notice to proceed.
But looking for a suitable partner doesn’t have to feel like trying to find a soulmate. Consider whether your partner can help raise your profile with a strong diligence program and the right insights for your financing counterparties. Does your potential partner have the tolerance for development risk? An ideal partner should have a track record of successful acquisitions, strong financial backing, and a history of prioritizing the end customer.
If you can streamline processes and focus on best practices, you’ll mitigate delays and project disruptions. If you’re able to better serve your own customers by combining strengths through the relationship, you’ll be able to achieve growth while helping to drive the industry forward.
Standardizing Documents Is Time Well Spent
The amount of documentation involved in a solar project can be staggering (Figure 2). Different project contracts, power purchase agreements (PPAs), piloting agreements, and more must be accurate and recent for a financing partner to ascertain value and make a sound assessment of their investment. It’s essential to know the timing of which documents are up to date and when they must be refreshed.
2. Most projects require a staggering amount of documentation to satisfy investors. Standardizing the process is often worthwhile. Source: Shutterstock
When it comes to paperwork related to site control, such as easements, and interconnection permissions and agreements, a deep understanding of project details is necessary. The same can be said of the expertise required for environmental documents, like a Phase 1 Environmental Site Assessment (ESA), enabling compliance.
Banks, lenders, and potential partners who are large solar developers with strong financial backing will be most interested in conducting efficient transactions, so every opportunity should be made to bundle high-quality projects together, and reduce legal diligence and financing transaction costs. By focusing on the right partners and efficient documentation, small developers can get the financing they need to start building their own portfolios and keep their customers happy while potentially developing repeat business.
If a company develops five different sites, it should avoid providing five different leases to a financing counterparty. The actual contract, and all the terms and conditions, will generally be the same, so providing a more standard set of documents will create value in the eyes of a financial partner, particularly those who can demonstrate potential for scale by saving time and therefore money.
Like any good partnership, commitment is required. That means it’s important to invest the time and resources upfront to find and integrate the right partner and properly standardize documents. In the end this extra lift will pay off handsomely in the form of accelerated project timelines and higher quality transactions.
The best part about this approach for small developers is the built-in growth trajectory. Over time and with success, they begin to develop their own ecosystems that feed off their partners, streamlined processes, and completed projects, delivering value and bringing even more solar installations to fruition for their customers.
—Jamie Hutson is the Chief Investment Officer at Distributed Solar Development (DSD). He has more than a decade of experience in renewable energy financing and has raised several key financing packages during his time at DSD and GE.