There’s nothing more challenging to a project’s viability than taking it through the project finance process and the hurdle of achieving bankability on the road to reaching financing. As an industry we work tirelessly to bring projects to fruition. The early stages involve business development teams and designers rapidly assessing hundreds if not thousands of sites to see which, if any, stand a chance.
Alternatively, we might have to scramble a team to respond to RFPs, which put IPPs in a bidding match against each other in a race-to-the-bottom best bid, caught between the equally frustrating choices of making wildly optimistic assumptions or missing out on the potential for more projects.
In this fast-paced environment, teams must model the project to forecast the equipment, size, and energy production given limited information. However, the moment of truth arrives when the minority of projects that survive design and business development vetting proceed to project finance, where the assumptions, equipment, and energy assessment are placed under even more scrutiny.
Even for a developer who does not need to finance projects and instead sells it to an IPP, you will still have the buyer’s side scrutinizing your most-likely-too-optimistic numbers and experience a smaller than expected purchase price for your projects. By getting the initial energy assessment correct, developers at all stages are able to save time and increase the likelihood that more projects make it through financing and development.
Financing is the lifeblood of the vast majority of solar projects. Be it by a bank, fund, or an insurance agency, the ability to take out debt to pay for the project is how most projects in the industry are financed. Much like a person who takes out a mortgage on a house based on the house valuation, developers take out loans to build the project against the future earnings of the asset. This makes the assessment of the project paramount, as any discrepancy between our forecasts and the validator’s assessment can lead to a reduced project valuation and, consequently, a smaller loan.
Independent Engineers (IEs) act as the bank’s assessor for solar projects and are the standard to which our projects are compared against. While there are many facets that the IEs look at, nothing is more important than the energy assessment where a single percent deviation can jeopardize hundreds of thousands of dollars (or more) of expected value.
Energy model bankability is therefore of utmost importance. In simple terms, bankability means that a project’s technical and financial risks are low enough to be acceptable to a lender. Even when a project can be deemed bankable, discrepancy in the energy assessment can arise between what the developer produced during the project development phase and IE independently modeled during the financing phase. When there is a difference the bank will likely apply a ‘haircut’ on the energy (and revenue) projections by accepting the IE’s numbers in lieu of the developer’s, leading to much lower returns than anticipated during the development phase.
The question is then how to avoid, or at least minimize, this haircut. The primary way we do this is by minimizing the difference between our energy assessment and the IEs, but how?
There are two crucial parts of energy assessment: the energy model itself and the inputs and assumptions we feed into that model. The gold standard model in the industry has been PVsyst, a cornerstone of financing projects for almost three decades. Another bankable model is DNV’s SolarFarmer, which has risen to offer a truly competitive model against PVsyst with over 2 GW of projects reaching bankability. But even a trusted model requires robust and defensible assumptions to live up to IE scrutiny. Therefore, not the model chosen but also the granular engineering assumptions impact the viability of the energy output.
With a bankable model and sound assumptions, developers can help ensure the projects they design in the early stages can live up to bank scrutiny. Think about all of the projects declared dead by project finance, all the time spent on those dropped projects whose fatal flaws could have been foreseen by better energy modeling. The choice for developers is clear: invest in accuracy upfront or continue to waste resources on projects destined to fail at the financing stage.
Author: Rocco Fucetola, chief operating officer, Solesca
Solesca Energy, Inc. offers pre-CAD software for C&I and ground-mount solar. It has helped evaluate over 100 GW of projects.
The views and opinions expressed in this article are the author’s own, and do not necessarily reflect those held by pv magazine.
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