“I am somewhat afraid of what happens to these banks as we move into 2012,” said Deutsche Bank Director Vinod Mukani at the Smithers APEX San Diego solar event.
“Europe had a leg up because renewables had a head start there,” the German-based bank’s renewables authority said. “Investors were familiar with this asset class. Now, as they delve into the challenges that Basel III poses, they will have to curtail their activities. That is quite apparent if you look at Q4 of last year.”
Deutsche Bank (DB), Mukani said, “underwrote about a billion dollars’ worth of wind and solar assets in Q4, but the bank group that we started with was not the bank group that we ended with.”
And macroeconomic trends, he explained, such as “southern Europe in crisis, a slowdown of the economy in China, and Basel III regulation” will force banks to face “a very daunting task of deleveraging and meeting the requirements of capital ratios,” Mukani said.
But “large-scale solar assets continue to attract more and more capital,” he added, because of “attractive risk and reward profiles.” All in all, “it’s a good environment,” Mukani said. “There is a tremendous amount of capital that still is available. The question is, how do you get it?”
Mukani named five key considerations in large-scale solar financing: technology risk, construction risk, operating risk, resource risk, and risks associated with the physical structure.
In technology, he called crystalline PV projects “easy” but said a thin-film PV project is “somewhat challenging and requires a structure like [the 550-megawatt Topaz Solar project], where the amount of equity was tremendous compared to the debt and leverage ratios were low so the rating agencies felt very comfortable with that.”
There is little construction risk as long as there is “a full fixed-price, fully-backed EPC contract.” But for CSP projects, “there are issues about the credit risk of particular EPC providers.” The question, Mukani said, becomes “what kind of liability structure is built into that EPC contract?”
Operating risk “is reasonably muted as long as there is a good O&M contract” with a good-sized maintenance reserve and warranties, he said. “Warranties,” he added, are “quite interesting, because manufacturers offer 25-year warranties, although there is no certainty those manufacturers will exist for that full period.” Nevertheless, Mukani said, “rating agencies and project finance lenders are comfortable with that.”
Resource risk is much better than “other asset classes,” Mukani said. “There are 30-plus years of data on solar insolation” and lenders and investors take assurance, he explained, from the fact that “inter-annual variability is rather low.” Also, because of their power purchase agreements (PPAs), solar projects are “contracted at cash flows. There is no commodity volatility risk.”
Mukani’s fifth risk consideration is the structure. “What rating agencies are looking for,” he said, are “high cover ratios.” Project finance managers “probably look at lower cover ratios.” But for both, he said, “the covenants, the security package -- all of that has to be well thought out to mitigate that risk.”
Solar, Mukani said, “fares much better than other asset classes within the renewable arena. There is a lot of capital available,” he noted, “as long as the proper discipline in development and structure are followed.”
Big projects come with big challenges, Lund explained. And “any problem that comes with an explanation is not a good problem,” he said. “Go fix it first. That’s not the kind of conversation you have with a bank.”
In answer to a question about current low natural gas prices, Mukani explained that it is not “in competition” with solar. “We are working on a significant number of natural gas projects,” he said, “If the project is good, that’s a project that you are able to finance.” DB has “not made the decision not to finance renewable energy because natural gas prices are coming down.”
Utilities award PPAs to renewables projects because of state renewables standards, Lund added, so “a cheaper PPA for gas will not affect the price on a solar PPA, and in terms of project viability, they’re not directly related.”
In answer to a question about the sharp drop in panel prices, Mukani said he expects vertically integrated companies like SunPower to benefit most. “If you are a vertically integrated company, you have a better line of sight into how prices are going to move, so you are able to take on certain projects that might be passed over by developers without the same access to panel supply or forward pricing.”
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