Sebastian Leyton 9/23/13
Small renewable projects represent a market that has not been fully taken advantage of, mainly due to issues relating with their access to financing. This doesn’t refer that the projects itself have issues, but implies that lenders mainly involved in project finance are more interested in larger projects, which involve sums over USD 100 million. Those projects are able to support the costs of a time intensive transaction and the corresponding fees, and represent a good opportunity of striking a good deal by achieving financial closing to most parties for the amounts involved. However, this doesn’t imply that small projects are not a lucrative market to be exploited and clearly represents a business opportunity.
The benefits of small projects are well known, and imply moving forward in the incorporation of renewables in the generation market, not only in the U.S., but worldwide. The prime spots for large-scale renewable projects, with proper access to the resource, access to transmission grids with sufficient capacity (unless if there is an interest to invest in such facilities) and proper infrastructure are getting scarcer. As I can speak for the Chilean market, small projects represent a clear opportunity for a power market that doesn’t have the capability of incorporating large projects properly, but with still has high solar radiation and has high credit rated off takers, such as mining companies.
In order for obtaining higher returns from financing smaller projects, this will require that costs must be carefully be watched. Efficiency is essential, and can be obtained by proper structuring of the project itself and of the financing process. Small projects sometimes implies smaller developers that may have less knowledge of the development standards that lenders normally look for, so lenders must either assume an early go/no go analysis at an early stage, or be willing to develop a long term relation. This will imply that lenders will need in certain occasions to “educate” developers with their first projects, investing time and money in creating a relationship, a business model and contractual structure that serves the final purpose. Therefore, standardization is of the essence in this kind of deals. From the developer side, those “costs” may imply providing for the initial projects a higher level of guaranties or securities, providing evidence that there is a pipeline of projects, and it has the expertise to achieve its goals. Once the relationship has been properly developed, such costs would be reduced.
As in any commercial transaction, financing smaller projects requires proper incentives to both parties. Developer’s incentives are clear, but for lenders providing a single long-term loan for a 5 MW might not be attractive, unless such project is part of financing a pipeline of projects or a certain volume of MWs. Achieving a proper match of the incentives and risks of smaller projects, will imply the proper development of this niche market.
Sebastian Leyton is a LL.M. Candidate (2014), University of California, Berkeley. He obtained his JD degree at Universidad de Chile, Santiago, Chile (2010). He is an associate of Morales & Besa (www.moralesybesa.cl), and is part of its Natural Resources & Energy Practice, since 2010. His practice mainly focuses on development of power generation projects