By Henry Vehovec
Mindfirst Senior Associate Rob Sinclair co-wrote this article, which should be of particular interest to entrepreneurs looking to develop and finance solar projects.
As soon as the Feed in Tariff (FIT) program rules were finalized on September 24th, developers of large scale solar projects (larger than 500 KW) jump started their activities in preparation for submitting project applications during the FIT initialization period ending November 30th.
While some projects appear to be quite far along the development curve with signed product and service supply agreements and financing, many developers are struggling to pull together the financial and technical resources required to submit strong applications. This will certainly limit the number of projects that receive FIT contracts and even those that do may experience significant difficulty in financing and building their projects.
Our involvement in financing clients representing more than 30MW of solar capacity provides unique insights. Early indicators suggest:
- There are deep pools of equity funding available, from domestic, US, European and Asian sources.
- Investors take many forms from private individuals, retail investment funds, sovereign wealth funds, and industry players with balance sheet capacity.
- Debt financing seems to be harder to come by and appears to be focused on medium term paper (3-7 years) at rates ranging from 6%-8%. This could have long-term negative impacts on equity investors if rates rise as expected.
- For most projects, debt pricing above 8% would leave very little return for equity investors and at rates above 10% most projects would not be financeable.
The risk averse nature of Canada’s big five banks make them unlikely early leaders. Our expectations are that they will wait out the initialization period and enter the market well into 2010, when the rules governing the program are made clearer and the players in the industry shakeout a bit. In the near term we believe large European debt houses with experience in renewables globally, will be first on the scene as they have existing expertise with structuring deals and identifying the most critical factors for success.
Therefore, it is likely that (like the RESOP program) some early contract winners will flounder due to a lack of financing opening the door for stronger players to consolidate good projects and allow weaker players and projects to fade away. Further compounding the difficulty in financing projects, is uncertainty around the new REA process and the supply of project critical components that meet local content requirements.
If these issues manifest we believe that a significant portion of the contracted system capacity that will be awarded during initialization will become available over the following 18-24 months as proponents fail to meet COD commitments. This will allow that capacity to be re-allocated to new applicants and provide availability until the next wave of transmission and distribution system upgrades come online in 2013-2015.
Henry is President, Coach and Chief Strategy Officer of Mindfirst Inc. Visit Henry at Mindfirst.