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A Primer for the Financing of Renewable Energy Projects
by Don Madden
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If you are in the process of putting together a Renewable Energy Project congratulations… you are doing good, and you should do well. You are however ahead of the curve. Much of the finance community doesn’t understand how these projects work, consequently they either don’t lend on them, or it takes too long to convert lenders to the value in renewable energy. In short financing for renewable energy can be akin to “pushing a rock up a hill.”
The emergence of large scale renewable energy is new. Asking an outside party to provide you several million dollars for a “cutting edge” project is going to take some effort. Fortunately there are some lenders who recognize that renewable energy is good business. These lenders understand; PPAs, Interconnectivity, Hosting and the like. They are not green idealists, at least not professionally. They are solid finance people who are operating in a very constricted economy, yet they are still willing to invest.
Renewable Energy financing is a document driven process
Click and Download Summary Form
The question arises “How does one approach lenders for financing a renewable energy project?”
Frankly you have to focus on the development details of your project BEFORE you make a formal application for financing.
Lenders want to know a deal is REAL before they commit any time (never mind money), to it. A Real Deal is not just a plan; a Real Deal is a plan plus a series of completed project development steps that are verified with signed documents.
In this economy, and with so few good renewable energy finance resources available, your project is competing for financing attention not merely on the merits of your deal, but you are up against other projects with similar profiles that are further along on the checklist of steps that are required for a project to be considered “finance ready.”
Lenders and investors want to see more than an eye popping ROI in the projects they review. They want to know that the project is fully permitted, partnerships are established and that the planning and design work is done. If your finance application is lacking in any of these areas, your project will likely be passed over in favor of another whose preliminary work is more complete. Finance people want to commit to projects that are ready to go, that means all the development details have been worked out prior to applying for financing.
What do lenders want in renewable energy finance applications?
Experience:
No surprise here. Lenders do not welcome novices. Has your management team done this sort of project before? When? Where? How big? If you don’t have experience you should consider getting someone on your team with a background that includes projects similar to yours. Experience begets confidence.
Description of the project:
Among other things lenders want to know the size, design specifications, EPC contractor (with experience), and vendors and component specifications in your project. Detail your partnerships, development and construction schedule, and identify the issues that you have yet to resolve and your plans for doing so.
Project Site:
Where is the project going to be located? Who owns the site? Is there a P& S agreement? Lease? Option to buy / lease? Are permits in place? Applied for? Have feasibility studies been done? Provide a map with indications of interconnectivity points.
Interconnectivity:
Which utility is going to be involved? Is there a connectivity plan in place with costs? Is there an interconnectivity agreement in place or applied for? If not, why not. Who is the contact?
PPA:
Who is buying the power? Has the agreement been signed? What is the background of the buyer, years in business, credit status, (etc.) Lenders want to know the buyer has a stable history.
Business Plan:
Do you have a detailed business plan? A capital plan? Have you identified tax or other incentives? What deposits have been made? Have development costs been calculated? Has a price for the sale of the energy been determined? Is there an equity partner plan?
Be sure to focus the business plan on the deal that is on the table. Don’t go deeply into the series of future projects that will follow this one.
Time Table:
What is your schedule for moving forward? Provide a list of key dates for all preliminary steps, construction dates, and the target operation date. Also list partners and their commitment to the schedule. If there are signed documents and detailed plans, missing from your application the second best route is to include Letters of Intent. Be aware this is a second best alternative. Your
application is still competing with other projects with all the preliminary steps completed.
Resources
Contacting an Independent Financing Consultant early in your project’s development stage can be useful for a number of reasons:
·Identifying issues before they become problems.
·Introducing your project to multiple lenders with interest and experience in similar projects.
·Packaging your project for presentation to lenders to highlight the value in the project.
·In addition finance consultants know which lender is a match for which project. Knowing who is a match for your project can greatly decrease the time required to get financed.
I hope you found this brief piece useful. If you have any questions regarding the financing of your renewable energy project
feel free to contact me.
Don Madden
donmadden@thetaracompany.com
978-356-9813
Editor’s Note:
Don Madden, owner of The Tara Company, is a valued collaboration colleague with Commercial Funding Network, Inc. Visit Don’s profile on Linked-In where he belongs to many renewable, solar and wind energy groups. Thank you, Don, for contributing this excellent article.
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