Introducing the Solar Put: Insurance for Cloudy Days at the Farm

Originally posted on Bloomberg.

  • Swiss Re provided solar revenue put to guarantee 95% of output
  • Solar put can cut risk, make financing cheaper: KWh Analytics

Insurance giants like Swiss Re AG, with the help of a San Francisco firm, now have a way of guaranteeing production from solar farms — not an easy feat considering supplies from these plants rise and fall with the sun.

The product that at least one insurance company is now offering is called a solar revenue put. It was developed by risk-management software firm KWh Analytics and can guarantee as much as 95 percent of a solar farm’s expected output, according an email the company sent to clients Tuesday. Swiss Re has now sold one for three Virginia projects.

This insurance policy stands to strip away uncertainty surrounding solar projects. With a put in hand, lenders may be willing to offer financing at better terms, driving down the overall cost of a farm, said Richard Matsui, KWh Analytics’s chief executive officer.

“In the solar business, risk is cost,” Matsui said in an interview, and the “cost of capital is the single biggest risk.” Swiss Re referred questions to KWh.

A Floor for Solar

Here’s how a put works: The policy sets a floor for electricity output from a solar farm. The client pays a premium, and if a plant doesn’t generate enough power to reach the floor, the insurer covers the difference. While it may cost about 1 percent of a project’s revenue, it also allows project developers to get 10 percent to 15 percent more debt, at better terms, Matsui said.

Underpinning these puts is a database of historical production from solar farms that KWh uses to predict output from planned projects. It forecasts performance based on specific components inside existing plants, Matsui said. Using this, KWh prices the risk for insurance carriers like Swiss Re.

According Nathan Serota, an analyst with Bloomberg New Energy Finance, a product like this could make clean energy cheaper to finance and bring down the price of solar power. “It’s advantageous to project developers because it allows them to lower their cost of capital, and solar power prices as a result,” he said.

To offset tariffs, US solar market looks to financial innovations

Originally posted on S&P Global Market Intelligence.

Proponents of two new financial innovations in the renewable power industry are hoping they can soften the impact of tariffs imposed on solar equipment imported to the U.S.

With the Solar Energy Industries Association projecting that the tariffs could eliminate as many as 23,000 jobs and GTM Research analysts estimating the industry could see an 11% decline in installations compared to baseline forecasts, the race is on to find ways to cut costs.

The steady growth of aggregation and fundraising platforms, taken with novel new hedging products and persistent declines in module costs, appear collectively poised to be part of the solution, according to industry participants contacted by S&P Global Market Intelligence.

Back to the future

Goldman Sachs estimates the tariffs will push costs on panels up 10 cents per watt in 2018, triggering a $3/MWh increase to power purchase agreement, or PPA, prices on utility-scale solar projects, which represents a cost increase of 5% to 10%.

The cost impact on residential-scale and commercial and industrial is expected to be less because solar panels represent a lower share of overall costs of installations. The 10-cent-per-watt increase could equate to about a 3% cost increase for residential systems, and a 5% increase for commercial and industrial installations, according to Bryan Birsic, CEO of commercial-scale solar lending firm Wunder Capital, whose platform oversees an estimated $1.5 billion solar project pipeline in 2018.

For some in the solar industry, the impact of the tariffs will simply be to roll the clock back a year or two to when panel prices were higher.

“From a pricing perspective, we just reset to early 2017, lose a year if you will, while gaining some new efficiencies,” Birsic said. “It’s a little more expensive for our customers, but we know what the numbers are now and we can move forward and close deals.”

Deutsche Bank similarly pointed to a reversion back to mid-2016 module pricing, noting that lending conditions in the bank market have improved, particularly for smaller-scale projects versus utility-scale, which may face pressures from a tightening tax equity market due to the reduction of corporate taxes.

Aggregation nation

Matchmaking platforms are emerging as one potential solution for the growing field of Fortune 500 companies looking to satisfy their clean energy goals, a market Goldman Sachs’ analysts expect could spur demand for 50 GW of new capacity in the U.S. between 2017 and 2030.

LevelTen Energy Inc. is among a growing cohort of platforms catering to corporate interest and making it easier to purchase clean energy.

By aggregating the demand needs of several buyers into a single virtual PPA, blending prices among small- and large-scale projects, LevelTen believes buyers can trim as much as 40% of costs from a 50,000 MWh purchase, effectively obtaining the economies of scale of large projects. So far, LevelTen said it had fielded 50 GW of proposed solar projects and 40 GW of wind from U.S. developers ahead of its Jan. 23 launch.

Not all of LevelTen’s project pipeline will get financed and built on the back of aggregated PPAs, but the introduction of the marketplace itself is seen as enhancing price discovery for PPAs, which in turn will continue to facilitate demand, and potentially help reduce soft costs.

“The top quartile of projects are very competitive,” LevelTen founder and CEO Bryce Smith said, pointing to a broader misalignment of the buyers and sellers in the market, rather than tariffs alone. “When we mobilize that capacity, we’re going to see a lot of solar get built because that PPA is the final straw.”

“By aggregating data from all these developers in the market, the best projects will rise to the top, projects with the lowest cost of capital,” Smith added. “Just bringing clarity to the analytical process and allowing customers to see every project in the market will allow buyers to get off the sidelines and actually execute on these PPAs.”

Hedging innovation

While securing PPAs remains a chief priority for solar developers, the roll-out of the industry’s first revenue hedge signed between kWh Analytics Inc. and Coronal Energy announced on Jan. 30 may offer yet another pathway to uncovering cost efficiencies.

The hedge itself has been placed on a trio of solar projects in Virginia totaling about 40 MW and guarantees up to 95% of the assets’ projected revenue based on average output, according to kWh Analytics. The hedge is backed by an undisclosed global insurance house rated AA- by S&P Global Ratings, which will warehouse the risk on its own balance sheet, kWh Analytics added.

kWh Analytics believes that the hedge can support additional debt on a project by insuring its revenue streams long-term, thereby slimming the need for costlier equity and trimming project costs overall by about 5 cents a watt, offsetting about half of the new import tariffs.

“This product pays for itself because you’re able to unlock so much more debt, and get the banks so much more comfortable with these assets,” Richard Matsui, CEO and founder of kWh Analytics said, noting his team has quoted more than 1 GW of solar in the last month. “Putting a floor on 95% of expected energy production creates value, because it’s the same way hedges in the gas-fired world work to firm up the revenue, it allows the banks to feel good and come through.”

Response to the hedge, dubbed “Kudos,” has been strong so far, attracting several lenders ascribing a 1.1 to 1.15 debt-service-coverage ratio, or DSCR, to certain new projects, shifting down from a previous 1.35 DSCR benchmark, as a result of the guaranteed revenue stream. That means the margin between the project’s hedged revenue is moving closer in line with the amount needed to make debt service payments.

“If unit costs go up in one part of the project, the first thing that any sponsor is going to do is ask how do we wring the costs out of some other part of my project to make the numbers work,” Matsui added. “If you can get more debt on the deal, that can make it pencil very quickly.”

kWh Analytics, Coronal Close the First Solar Revenue Put

Originally posted on pv magazine USA. Additional information available on Business Insider.

The company says that the new product has the ability to reduce up to 5 cents per watt in financing costs.

With so many in the solar industry and outside it fixated on the potential impact of tariffs on solar deployment, it is important to note that a big part of system cost reduction has been and will continue to be driving down “soft”, non-hardware costs. Some of the most important soft cost reductions have involved driving down the cost of solar finance, such as the securitization of solar assets pioneered by SolarCity.

Yesterday kWh Analytics and Coronal Energy announced a new development in reinsurance that kWh Analytics says can significantly reduce the cost of solar finance, closing on the industry’s first solar revenue put for three solar projects totaling 30 MW-AC in Virginia.

kWh Analytics’ Solar Revenue Put is backed by an un-named “global” insurer and provides a guarantee that investors will get paid for up to 95% of a solar project’s expected output, even if the plant itself falls below this. The product provides insurance not only against cloudier-than-expected weather, but also panel failure, inverter failure, snow and system design flaws.

“If you are an investor or a bank looking at a project, your number one concern is cash flows,” kWh Analytics Founder and CEO Richard Matsui told pv magazine.

“The idea itself is not new,” he observes. In fact, Matsui notes that all of the combined cycle gas plants in the United States built in the last decade have carried some sort of hedge to cancel out uncertainty of the project, which usually involves the risk of lower-than-expected power prices. Similarly, the wind industry depends heavily on fixed-shape hedges, which put a floor on prices.

And while Matsui says that a number of insurers had expressed interest in a similar product for the solar industry, they lacked the necessary actuarial data on PV plant performance. This is where kWh Analytics came in, and Matsui says that his company is able to draw upon the data that they have gathered from monitoring an estimated 20% of the large-scale PV plants in operation in the United States.

“By and large the (solar) asset class performs very well,” declares Matsui. “Everyone who is in solar knows that, but we just happen to have the best data to prove that.”

Matsui notes that in the past three months, his company has already seen seven lenders issue term sheets at 1.10x or 1.15x DSCR against P50 revenue when the Solar Revenue Put is in place. He notes that this compares to a standard “haircut” of 30%, meaning that project developers were typically able to only borrow 70% of a project’s estimated income.

If banks are willing to lend more towards the value of projects, that means a potential lowering of financing costs. And while differences in the available rates and types of finance between different projects makes it inherently hard to determine what the overall impact on cost will be, kWh Analysts estimates that developers and project owners could see a 5 cent per watt reduction in certain projects.

“In the solar business, risk is cost. In fact the cost of capital is the single largest cost in a solar power plant,” states Matsui. “Using data, we at kWh Analytics reduce risk. Lower risk means lower costs means more solar.”

“In 2018, 1.10x DSCR will become the new normal.”

Developer Inks Financing with First Solar Revenue Put

Originally posted on SparkSpread.

A U.S. developer recently closed financing for a 30 MW (ac) portfolio of solar projects in Virginia with what is thought to be the industry’s first solar revenue put.

The deal, which was executed by developer Coronal Energy and a AA- rated insurance company, was structured by kWh Analytics, a solar risk management outfit.

The multi-year revenue put guarantees up to 95% of forecasted P50 energy production at the Coronal Energy portfolio, which is also financed with tax equity provided by an unnamed bank.

By providing an “all risk” insurance policy, which covers losses due to factors including adverse weather and panel failure, the kWh Analytics revenue put has the potential to reduce the debt service coverage ratio (DSCR) required by project finance lenders to 1.10x or 1.15x from a more typical 1.30x.

The lower DSCR could cut the overall cost of solar projects by as much as $0.05/per watt, equivalent to half the $.10/per watt increase expected as a result of the imposition of tariffs on solar panels imported in the U.S.

“In the solar business, risk is cost. In fact, the cost of capital is the single largest cost to a solar power plant. Using data, we at kWh Analytics reduce risk. Lower risk means lower cost means more solar,” Richard Matsui, founder and ceo of kWh Analytics, said in a statement.

Indeed, in the fourth quarter, seven lenders issued term sheets at 1.10x or 1.15x DSCR on the P50 revenue of projects, assuming that kWh Analytics revenue put is in the structure, he notes.

San Francisco-based kWh Analytics is able to asses and price solar project risk via a proprietary database of historical performance data, accounting for some 20% of the U.S. market.

The transaction with Coronal Energy, which closed on Dec. 22, covers the Essex project (20 MW), which is contracted to Dominion Energy; and the Martin and Palmer projects (10 MW, total), which sell power to Central Virginia Electric Cooperative.

“Our work with the kWh Analytics team enabled the portfolio to move smoothly across the finance finish line and on to producing clean, low-cost energy for our utility customers,” Ed Feo, Coronal Energy’s president, commented.

SEIA and kWh Analytics Release the Best Practices for Solar Risk Management

Originally posted on SEIA’s latest news. Additional coverage available on Solar Power World, pv magazine USA, AltEnergyMag, Solar Novus Today, Solar Industry.

WASHINGTON, D.C. – In an effort to simplify the complex world of tax equity and debt investment, the Solar Energy Industries Association (SEIA) and kWh Analytics released today the industry guide on the Best Practices for Solar Risk Management.

Informed by some of the largest financial institutions investing in U.S. solar assets, SEIA’s Solar Energy Finance Advisory Council (SEFAC), and the U.S. Department of Energy’s Orange Button program, this guide is designed to help financiers of solar projects and portfolios successfully navigate their solar investments from start to finish.

“Our goal is to facilitate new sources of investment capital for solar projects across America by communicating and leveraging the standards and practices the industry has already developed to measure and manage risk,” said Mike Mendelsohn, SEIA’s senior director of project finance and capital markets. “This guide will serve as a valuable tool to both experienced investors looking to grow their businesses, as well as newer investors unsure of how to review the relevant risk factors.”

Featuring a risk management checklist, the analysis outlines current industry standards and benchmarks, alongside the solar industry’s robust compliance infrastructure.

“From our experience serving multiple investors, we have a privileged vantage point to help our industry codify best practices and ensure healthy industry growth,” said Jason Kaminsky, COO of kWh Analytics. “We are pleased to have been invited by SEIA to co-author the industry guide that enables investors, large and small, to manage the unique risks posed by the solar asset class.”

SEIA will routinely update the document as needed as part of its ongoing industry coordination efforts to streamline project development, open new sectors for solar deployment, and open new sources of low-cost capital.

To download the complete guide, go to https://www.seia.org/research-resources/best-practices-solar-risk-management.

###

About SEIA®:

Celebrating its 43rd anniversary in 2017, the Solar Energy Industries Association® is the national trade association of the U.S. solar energy industry, which now employs more than 260,000 Americans. Through advocacy and education, SEIA® is building a strong solar industry to power America. SEIA works with its 1,000 member companies to build jobs and diversity, champion the use of cost-competitive solar in America, remove market barriers and educate the public on the benefits of solar energy. Visit SEIA online at www.seia.org.

About kWh Analytics:

kWh Analytics is the market leader in solar risk management. Founded in 2012, kWh Analytics has built the industry’s largest repository of solar asset performance data, with over 100,000 operating systems, representing between 10-20% of the U.S. market.

Customers such as Google (the world’s largest non-utility investor in renewable energy) and PNC Bank (America’s 5th largest bank) rely on software and insurance solutions from kWh Analytics to enhance their investment returns. kWh Analytics is backed by private venture capital and the US Department of Energy.

Media Contacts:

Alex Hobson, SEIA Senior Communications Manager, ahobson@seia.org (202) 556-2886
Sarah Matsui, kWh Analytics Senior Communications Manager, contact@kwhanalytics.com (415) 891-9601