Solar Refinancing: When Asset Management Steals the Show

Originally posted on Renewable Energy World.

We all know that asset management is in many respects the under-loved function within a solar company. Solar asset management involves the ongoing management of financial, commercial, and administrative tasks necessary to ensure the optimal financial performance of a solar PV plant or portfolio of plants. From an executive-level perspective, it’s easier to invest in developing a new solar project, buy an early-stage project, or invest in a project finance team to try to get better financing terms (as these functions are understood to drive value) than it is to invest in asset management.

In most businesses, revenue is the clearest driver of profitability. So, it’s an easy decision for executives to invest in their sales activities. Similarly, in solar, acquisitions and project finance are commonly prioritized, whereas asset management is oftentimes an afterthought.

However, there is at least one point (often multiple points) in every asset’s 25- to 30-year life when asset management steps into the limelight: the refinancing of a solar project.

What is refinancing? Refinancing is when you take an existing, operating asset and then get a new loan from your bank—ideally with better terms, since the project has been de-risked.

Taking a step back to understand financing: Banks have appetite for solar investments, but loans are carefully structured to avoid even the smallest risk of default. Consequently, banks size deals to the asset’s downside and assign conservative terms on loans. This conservatism results in an inefficient pricing of risk—banks apply about a 25 percent haircut for commercial and utility-scale solar projects, and a nearly 35 percent haircut for residential portfolios — known as debt service coverage ratios).

Today, the single-biggest cost of a solar project is actually an invisible one: the cost of capital. In this context, refinancing is particularly valuable because it presents an opportunity to reduce that single-biggest cost. What magnitude of savings can be gained from refinancing? According to Ahana Renewable’s Director of Asset Management Philip Williams, “savings could be up to a couple percentage points better than the original terms,” which translates to tens of millions of dollars of value on a large portfolio.

While the total installed price of solar has continued to decline, non-module costs now comprise the majority of the total installed price of solar. Since 2010, reductions in inverter and racking costs represent a smaller share, roughly 20 percent, of the decline in total non-module costs. The sizeable remainder can thus be attributed largely to declines in various soft costs. Credit: Lawrence Berkeley National Laboratory.

Asset management is critical for refinancing. Williams noted, “when refinancing solar assets, a lender is about to shine a light on every dark corner of your portfolio. So, from the very start, you actually need to think years ahead, to consider what software systems you need, what first-class preventative maintenance you want your O&M to perform, how this information will flow into your existing data infrastructure, etc.”

It’s true: To justify better terms, you need to prove to the bank why this is a better asset. You need to have strong documentation of your warrantees, the energy production data must be centrally managed, you have to make sure you have good O&M records of how you’ve taken care of this plant, and so forth. Assets can only be refinanced if they are proven to be higher-quality assets than they were last assessed several years ago.

Furthermore, new opportunities have recently emerged for assets with good asset management. For example, my company offers an insurance product that guarantees up to 95 percent of a project’s estimated energy production, which reduces the “haircut” that a lender would normally assign. But if an asset is falling apart, no lender or insurance carrier will be willing to touch it.

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Opinion: Silicon Valley InsurTech

By Matthew Neill, originally posted on Insurance Insider.

The sun-kissed avenues of Northern California which house the technologists who have come to run the world are thousands of miles away from London.

And at first glance it appears that the cultures of its (re)insurance world is several multiples of that distance apart from the traditional strongholds of London, Europe and the US East Coast.

But with the rise of InsurTech in the last two years, Silicon Valley has become the epicentre of the biggest figurative earthquake to rock the industry for some time.

While other parts of financial services industry have been fundamentally changed by technology, (re)insurance has remained relatively unchanged, particularly in London.

Brokers still shuffle to and from Lloyd’s laden with stacks of papers, underwriters come to their box and approve policies with a stamp, and the pubs remain encouragingly full at lunchtime in spite of those who would see it otherwise.

But the winds of change have blown over the Atlantic now, and London is sitting up and taking notice.

The question is – what is going on in Silicon Valley that is going to make it to the other side of the pond?

From all my conversations with venture capitalists, start-ups and investors on the West Coast, one theme continued to rear its head: seriously technically savvy people with no prior experience of insurance are paying attention to the issues in the industry.

And they think they can do a better job than the incumbents.

There are many reasons why they claim to be able to do this: No legacy technology noose around their necks, the capability to change tack quickly and innovate as and when issues appear – offering the same product for a much lower expense level.

But the one thing that stood out above all was their ability to gather enormous clumps of data on specialist industries and, through technological alchemy, transform it into (re)insurance gold.

Take kWh Analytics as an example. Before entering the (re)insurance world, the start-up was a benchmarking tool for the global solar energy industry, aggregating data on the price and quality of solar panels all over the world for the use of investors.

Now it has shifted into insurance, using that data to not only underwrite more effectively, but to give its Lloyd’s backers access to a market they were previously unable to enter on the terms they want.

For the moment, these companies want partnership. They have no desire to take on the regulatory and capital requirements demanded of full balance sheet carriers.

But as these businesses begin to increase scale and gain momentum, there is a distinct possibility they will decide to strike out on their own.

Big data is no longer a buzzword – it is a daily reality that the industry must get to grips with.