Commercial Solar Power Funding: Establishing Viability

by Jarrah Harburn on June 28, 2012

Private equity, renewable energy, solar powerLate 2011 and the first half of 2012 has seen global investment in renewable energy reach new, unprecedented heights. Solar power has now surpassed wind power as the most popular renewable technology for investment and here in the UK our solar market emerged onto the international photovoltaic (PV) scene thanks to the tried and tested method of Feed-in Tariff (FiT) reduction. Despite being mismanaged by the government, the UK FiT’s have generated the spark required to move commercial solar investment into the realm of reality. This article will take a look at the current state of commercial solar investment in the UK, what kinds of projects are being considered and by whom.

Investment and funding of commercial solar power projects in the UK has never been a more diverse market. A significant market of investors with many millions of pounds at their disposal has interest in the opportunities the solar energy industry is presenting. Knowing who has the control of this funding, what kind of projects they are interested in and how to produce viable, attractive proposals for the market of private equity and public investment is becoming an increasingly important and lucrative skill.

Here at Solar Selections Commercial we are competent with the understanding and sourcing of highly suitable clients and interested lenders and would be happy to assist anyone with commercial projects in need of funding to move their projects forwards.

Firstly let’s look at how this market has established itself and where it currently stands.

Large Scale Solar Power in the UK

The first standalone MegaWatt (MW) solar power installations in the UK represented a milestone. Understandably they involved forward thinking blue chip utilities such as Thames Water, major renewable energy manufacturers such as Canadian Solar and offshore equity investment groups like Isolux Corsan. The risk assessments and returns were no doubt scrupulously appraised by all involved and this is testament to their eventual success. This has in turn opened up the market for other scales of projects, smaller lenders and less established clients to become involved.

What we are seeing now and through 2012 has been more farmersprivate conglomeratesproperty owners and investors becoming involved in the MW scale of solar PV investment. Of crucial importance to all of this local councils, energy utilities and infrastructure services have also adapted their once somewhat prohibitive policies to make solar a more straightforward, viable and attractive investment opportunity. Renewable Obligation Certificates (ROC’s) are present and despite an upcoming review in early 2013, are providing some stability on Return On Investment (ROI) figures. On top of the obviously attractive and stable energy production control and distribution aspects that come with large scale solar PV, the UK has indeed a growing and suitable prospective market.

Establishing Viability

As with all investment some opportunities are more attractive than others. With PV in the UK the types of variables involved include cost of grid connection, planning applications and projected generation figures to name just a few. Let’s look at these in greater detail.

We can separate ground and roof mounted solar power systems because the criteria differ slightly for each. It is important to note that whether the funding be private equity based or public, these factors hold equal importance.

Ground Mounted Solar Installation

The more of these considerations a potential site adheres to positively, the better chance that investors are going to be interested and the better returns are going to be involved. Please note that this is not a comprehensive list, but a starting point. There are a number of other important factors that would be verified by a professional consultant.

    • The history of the land – especially including previous production capacity such as for agriculture or industry.
    • The size and location of the land.
    • Presence of rocks/debris.
    • Proximity of the area from major roads, communal areas and foot traffic.
    • Proximity of the land from protected regions of natural beauty.
    • Status of the land as ‘Derelict’.
    • The rating and age of the connection to the grid – energy capacity and phases present are of special interest.
    • Proximity to a suitably sized energy substation.
    • The presence of other renewable energy technologies on site.
    • Potential of a potential Power Purchase Agreement (PPA) client.
    • Energy usage on site.

How does one know whether the energy usage or substation status of any one potential site is considered positive or not? Best to consult a professional such as Solar Selections; in short, it differs.

Roof Mounted Solar Installation

Roof mounts are similar in most respects. Again factors that can affect viability include:

    • The roof space available for panel installation.
    • Location of the site.
    • Orientation and pitch of the roof.
    • Visibility of proposed panel location to highways and major thoroughfares.
    • The number of energy meters on-site (triple phased especially).
    • The presence of other renewable energy technologies on site.
    • The status of the site as protected or heritage listed.
    • The rating and age of the connection to the grid.
    • The proximity to a power station or substation.
    • Presence of a potential PPA client.
    • Energy usage on site.

Types and Sources of Investment

Sites that can tick the boxes on the above considerations are in amazing demand at present. Private equity sources running through brokerages or consultancy firms are especially interested, with many looking for sites that suit the above to purchase as outright sites they can self-develop. Depending on the company however, rates for commissions to purchase the entire opportunity, finance the required capital or pay as a rental amount differ greatly. For a better idea on what is available for your potential site, contact Solar Selections.

Depending upon the assets, working capital, balance sheet, turnover, site suitability and objectives of a client or freeholder, there are many ways funding can be found. Let’s start at the top and work our way down through the various parties and possibilities involved.

‘Low Risk’

Client: For a freeholder or client to be considered low risk, they would need to be substantial, well established and profitable businesses. Colloquially known as ‘blue-chip’, we are talking about organisations from HM Government to Tesco’s and British Gas to McDonald’s. To give an idea, Tesco’s had a turnover of £62.5 billion in 2010.

Fund: Large, international asset finance groups and commercial fund managers not specifically interested in renewable energy technologies. They would provide excellent rates of interest but only after comprehensive checks in the client’s suitability. There is usually no upper limit on funding available for projects at a ‘Low Risk’ level with a minimum spend of £150,000 being the norm.

An example of this would be Commercial Asset Finance Group Australease (CAFGA) who have an Operational Lease Funding arrangement openly available in the UK. The client needs to be suitable as outlined above and also the freeholder of the site. As well as this they would need to consume the majority of energy from a proposed PV installation on-site. For more details, contact Solar Selections on 020 7205 2267 or go to www.solarselections.co.uk/commercial/commercial-solar-finance-package

Approach: A plethora of options from competitive out and out finance provision to tax-break inclusive operational lease arrangements and roof/site rental agreements with eventual transfer of ownership. Depending upon the requirements of the client and their preferences so long as site suitability is high an appropriate procurement method can be arranged.

‘Medium Risk’

Client: Established business with healthy balance sheets and turnover in the general range of £1,000,000 to £50,000,000 or public sector clients such as councils. Turnover could differ significantly for private clients on this scale, and comprehensive vetting process would take place to verify assets and suitability.

Fund: Far more open than low risk opportunities, the specifics of site viability come into play more than before. These firms will usually possess some kind of interest in renewable energy above more mainstream investment markets like shares or bonds. Incredibly suitable sites owned by businesses with relatively weak security assurances would still be considered and the funding is sought from fund managers, finance companies and private equity firms interested in professional risk assessment without the blue-chip requirements of their larger international equivalents. It’s as much about who you know as what you know in the finance market so best to consult with a professional such as Solar Selections for further advice.

Approach: More likely to involve partial generation benefit for the client with a view towards eventual ownership after a fixed term or perhaps a site rental arrangement. The tariffs and earnings would be allocated towards the fund until such time as it was recompensed for its loan and proposed interest and it transferred ownership of assets to the client. Still a very attractive prospect for the client considering the lack of Cap Ex required.

‘High Risk’

Client: A renewable energy enthusiast with some land or property looking to how they could generate income from an installation. Generally this would be anyone from a farmer, freeholder of land to estate managers and smaller scale building developers that cannot provide large private or business turnovers or security assets. Realistically high risk clients aren’t going to have much hope of installing systems with capital outlays over £20,000 so this limits the system size and funding that would be interested.

Fund: Generally smaller, less prohibitive and capital heavy private equity lenders specifically interested in renewable energy. They can also take the form of PV installation companies and their direct partners. Vetting would still take place of the client, with a view to establishing the property or land as security to provide attractive rates of return and finance.

Approach: The Rent-A-Roof scheme is an example of this at a domestic level, as is the the more recently advertised cash-flow positive domestic finance. Essentially the client would receive the installation for no or nominal cost but receive limited benefits for the first 10 years or so and then be handed ownership and full benefit.

Summary

It’s a complex and often fruitless task marrying up sites, clients and funding in the one project. Each party has it’s own variables and opinions on how best to go about installing a MW or large scale commercial PV installations. On top of this, solar installers differ massively in their capacity to provide experienced, timely and professional installation services. The success or failure of a project can come down to the meeting of deadlines and information provisions  as well as the ability of a fund or installer to provide their services as proposed, so vetting is of incredible importance within a potential project.

Solar Selections work with some of the most prominent, experienced utility and large scale solar installers in the world. We also have a network of funding partners such as the aforementioned CAFGA with which we can provide funding solutions for installers with their own clients or direct to clients looking for a complete management service. For specific assistance or advice on commercial solar project viability, funding or installation contact Solar Selections 020 7205 2267 and one of our commercial team will get in touch with you today.

Written by Jarrah Harburn

jarrah@solarselections.co.uk

020 7205 2267

© 2012 Solar Selections Ltd

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