How to finance your solar project
Financing a solar project is a critical challenge for developers, especially for large-scale endeavors requiring substantial capital. Securing funding while minimizing risk is essential. This guide aims to assist both seasoned and novice developers by discussing the potential issues, and key considerations when choosing financing options.
Table of Contents
The benefits of developing a solar project
Investing in solar energy offers numerous advantages, not only for individuals and companies but also for the environment.
From a financial perspective, solar projects can be highly profitable, and developers and asset owners can benefit from:
- Ongoing income from electricity sales
- Potential profits from selling the project
- Supportive government policies create a favorable investment climate
But before getting to the point of financing your projects, it is worth the time to check out the crucial elements that should be on your solar project teaser.
Selling solar projects
Developers can sell solar projects at various stages, from pre-development to operational. Projects closer to completion typically fetch higher prices due to reduced risk and quicker time to market. The decision on when to sell depends on the developer’s strategy and the stage of project development.
Selling the electricity
The primary financial benefit of solar projects is the sale of electricity. Depending on where you are in the world, a 1-megawatt solar project typically generates between $21,250- $42,500 per acre per year. and significantly more than this in some markets.
While initial land preparation costs are substantial, scaling up by adding more panels can increase electricity output without proportionally increasing costs. Bulk purchasing of solar panels can further reduce expenses.
Government incentives
Governments across the world are keen on encouraging the development of renewable projects for several reasons, including energy security and meeting agreed-upon climate targets, such as the EU’s goal of reducing its emissions by at least 55% by 2030, compared to 1990 levels.
For developers, the push by governments to meet targets means that it is not only a great time to enter the renewable energy sector but also, a great time to turn large profits.
Many governments, from local to national scale, may offer rebates and other financial incentives that can help with the transition to renewable energy. To know more we suggest you look at the EU policies for funding the renewable energy sector.
Challenges in securing funding for solar projects
Despite the environmental benefits, obtaining funding for solar projects hinges on solid economic planning. The cost of solar energy generation has significantly decreased over the past decade, primarily due to cheaper Chinese solar panels and increased manufacturing efficiencies. However, upfront costs remain a considerable barrier.
Additionally, whereas the cost of materials was previously closer to 50% of the initial solar project development costs, this is now closer to 10% for some companies. This decrease in costs can largely be attributed to increases in manufacturing efficiencies and as such, manufacturing costs. However, this upfront cost, among others, still represents a significant and often problematic investment for many businesses and organizations.
The biggest challenge in raising capital is attributed to the large levels of early-stage risk. With all costs taken into account, a 1 MW solar power plant easily sets you back between $890,000 and $1.01 million. but returns on the solar project investment are between 10-20% on average. Most solar farms pay off their system within five to ten years, and then have at least 20 years of almost “free” electricity after that.
These upfront costs include site surveys, feasibility studies, planning permission applications, power generation license applications, legal fees, site preparation fees, cost of materials, and many more. We cover this in more detail here.
Given the risks of permission applications getting rejected or developers’ teams not being able to execute for other reasons, coupled with high fees, early-stage renewable projects can be very risky for investors, which is also reflected in the price they are willing to pay.
However, once planning permission is granted, the projects are mostly considered low risk. Solar development is a rapidly growing industry, and with careful planning, all these challenges can be overcome.
Types of solar project financing
Self-financing
For those with available capital, self-financing allows complete control over the energy produced. This is most common for smaller projects where the energy is primarily for personal or business use. The project owner pays for the equipment and installation costs. The greatest benefit of this option is that the individual or company then owns and has control over all the energy produced; hence it is used most frequently for small projects where most or all energy is to be consumed.
Solar leasing
While some may have the option to absorb the entirety of the cost, this is not always possible or most efficient.
Leasing solar PV systems avoids the upfront costs of purchase and installation. This option, which involves fixed monthly payments, is prevalent in residential rooftop projects and some commercial and industrial (C&I) projects.
Funding for larger-scale projects
Utility-scale solar projects demand significant financial investment, and developers strive to secure the least expensive capital while minimizing their risk exposure. Various financing options are available, each involving different levels of third-party involvement.
In the early stages of development, equity financing is typically the most accessible due to the inherent risks and challenges. For projects that are ready-to-build (RTB), debt financing becomes more viable and cost-effective, provided a predictable revenue stream is established.
From a profit-maximizing perspective, developers often prefer to leverage debt as extensively as possible. This strategy minimizes the need for equity investment and enables rapid access to asset bases without being constrained by their own financial limitations.
De-risking revenue: PPAs
Securing cash flows can be achieved through Power Purchase Agreements (PPAs). These long-term contracts (usually 10+ years) between developers and energy buyers ensure a fixed rate for the electricity generated. Buyers can range from corporations to governmental bodies, each with distinct risk profiles.
PPAs are key to most utility-scale solar projects since they represent a low-risk and predictable source of revenue, given that the buyer is chosen carefully. With a signed PPA, the guaranteed revenue typically unlocks other sources of funding.
Construction and installation
With permits and financing secured, the construction and installation phase of a solar project can commence.
This phase is where the physical solar panels and equipment are installed on-site and connected to the power grid. It includes several key steps that require careful planning and execution.
Bank loans/Debt financing
Debt can finance 60-80% (sometimes more) of a project’s capital outlay. Lenders bear no upside but face full downside risk, making risk assessment crucial. Traditional debt forms, such as personal and company loans, rely on historical financial metrics like repayment history and cash flow available for debt service (CFADS).
For new developers with no cash flow history, leveraging large debt amounts can be challenging and sometimes not even a possibility.
If you’re not put off by the thought of tsking on large amounts of debt to finance the construction of your first projects or to rapidly accelerate the number of projects, then let’s look at project financing.
Project financing
Project finance is transformative for developers, enabling them to isolate risks, secure more borrowing, and accelerate development. Unlike corporate financing, project finance involves creating a Special Purpose Vehicle (SPV), where loan repayments come solely from the project’s cash flows, typically generated by selling solar energy.
This method confines revenue risks to off-taker or counterparty risks, avoiding complications from other corporate activities. It usually features a non-recourse structure, limiting collateral to SPV assets and protecting the corporate owner’s balance sheet.
Equity financing
For capital-intensive projects, equity financing often fills the funding gap left after securing debt. Typically, if a project is 60-80% debt-financed, the remaining 20-40% is covered by equity or shareholder loans, which can be even more efficient.
This involves issuing project equity in exchange for funding. Unlike loans, equity financing doesn’t require repayment; instead, investors receive a share of the project’s profits, which allows project owners to maintain control while providing investors with potential high returns, incentivizing them to undertake higher risks associated with early-stage renewable projects.
How to find the right investor for your solar projects
Whether you’re a new or seasoned developer, you’ve probably already witnessed first-hand that there are many investors out there, many of whom are willing to invest in renewable energy projects.
Although finding investors for solar projects is easy, finding just the right one typically proves itself to be a whole different game, oftentimes taking multiple months, especially if you want to be sure that you also get the optimum price for you project.
Having been in this business for nearly a decade, we know the struggle, but we also know the solution to it.
Read more about how we help developers find the right investor for utility-scale renewable energy projects.
Need an investor for your development projects?
Get in touch and explore how we help developers find the right investor
You might also like
