US solar operators have had to reposition their businesses after recent falls in PV panel prices have shaken up the industry. European sovereign debt worries have darkened the outlook for solar, along with cuts to national feed in tariff prices, which propped up manufacturers and develop­ers in more mature solar markets like Germany and Spain.

It’s hard to overstate the effect of low cost manufacturing from Asia, particularly China. A glut of panels means that higher-cost firms need to reshape their strategy to avoid missing out on US solar growth. Significant market consolidation is likely.

DoE tries to minimise Solyndra fall-out

When PV panel manufacturer Solyndra filed for bank­ruptcy last month, it was not the first manufacturer to succumb to the tough market conditions, but it caused much attention as it was the first non-automotive manufacturing project to get a loan guaranteed under the DoE’s loan guarantee programme.

Following the Chapter 11 filing by Solyndra, there has been much political wrangling over the due diligence that the department carried out during its guarantee documentation. Critics have speculated it may have been processed quickly to demonstrate results.Most of the deals in the loan application programme are generation projects, which benefit from offtake contracts and established sponsors.

Solyndra was caught out by the slump in PV prices, as it had hoped its high-efficiency panels with lower installation and maintenance costs would outweigh higher upfront costs than more established PV modules. The department’s ability to maximise recoveries in Solyndra’s Chapter 11 filing will be of interest to other developers, though its experience will provide few guides to other potential workouts. As part of a restructuring earlier in 2011, the department is understood to have subordinated its loan, for the construction of a manufacturing plant, to $75 million in new debt from exist­ing equity investors. Critics of the programme may jump on the wisdom of agreeing to this position, though they rarely mention that the department did receive a security interest in Solyndra’s intellectual property, probably the most certain source of recoveries.

PV or not PV?

The growth in US solar has been consistent, if not remarkable, and much of the activity has been in the south-west. PV continues to be the most popular technology, and as some projects being developed are around the 500MW capacity mark, developers need to procure significant amounts of panels. The significant performance history of PV panels gives comfort to lenders and is one reason PV remains the favoured solar type.

Relative to many other energy projects, the timeframe for PV plant construction is fairly short, and while the timely delivery of panels is important, the uncertain outlook for some suppliers also means project participants are closely scrutinising the warranties attached to the panels.

One lender says warranties from low-cost Asian suppliers have become fairly standardised, around 20 years in length. “Generally you are getting a 20-year warranty from top tier suppliers...a degradation of, say, 0.75% per year and you are looking for certain availability [performance] guarantees-they are pretty standard,” he says.

Developers have settled on thin-film PV and concentrating solar power technologies for many of the larger projects applying for loan guarantees. Thin-film is considered as more viable for large projects, where land costs are suffi­ciently low, since the traditionally low-cost, low effi­cien­cy panels require sufficient land area.

Thin-film manufacturer First Solar is looking to close financing on three large-scale thin-film PV projects which have been awarded $4.49 billion in conditional loan guaran­tee commitments under the DoE’s 1705 scheme. Pacific Gas & Electric has agreed PPAs of 20 years and upwards for the three projects, and the DoE guarantees are split between $680 million for the 230MW Antelope Valley Solar Ranch 1, $1.88 billion for the 550MW Desert Sunlight plant and $1.93 billion for the 550MW Topaz project. Financing must close on all three facilities by September 30.

The $1.4 billion Antelope Valley project received a 1705 full loan guarantee, while the $2.8 billion Desert Sunlight project is in the application phase for a 1705 financial insti­tutions partnership programme loan. The Topaz project’s costs are estimated at $2.6 billion, and the developer also expects to use FIPP-enhanced commercial debt. First Solar can use these large projects as key destinations for its thin-film panels, and help support its sales at a time of strong competition from cheap alternative products.

If it follows the same route as for the loan guarantee-approved 290MW Agua Caliente solar project, First Solar will sell the project on to a generation company. The Agua Caliente project was sold to NRG Energy in August following close on a $967 million DoE loan guarantee.

The slump in global PV panel prices has made thin-film technology seem an expensive alternative for many smaller-scale PV projects, lenders say. Market prices have certainly changed since Eurus Energy America and NRG Energy closed financing on its 45MW thin-film Avenal solar plant, in September 2010. At the time it was the largest PV solar project in the US to close commercial bank debt, with lenders providing $209.5 million to the project. Natixis and UniCredit, joint lead bookrunners, provided the $132.5 million fully amortising 16-year construction and term loan, $53.9 million cash grant bridge loan that matures shortly after commercial operations start and $23.1 million of seven-year letters of credit. Banco Santander, Credit Agricole, Mizuho and Sumitomo Mitsui Banking Corporation joined as joint lead arrangers.

The project has a 20-year power purchase agreement with Pacific Gas & Electric and a warranty of more than 25 years from rated Sharp Electronics (A, S&P) for the solar panels. There was much lending interest on the project and financing was oversubscribed and priced at roughly 225bp over Libor, a discount compared to renewables project finance pricing at the time.

Though market conditions have changed, projects now go­ing through the DoE application process are much larger than Avenal, an aspect which may favour thin film technologies.

US production of thin-film is also set to rise, driven by firms such as First Solar, but thin-film still occupies a minor share of global PV panel production and faces fierce com­petition from Asian manufacturers of other types of PV panels.

Andrew Carstensen, senior director of US renewables at Nord/LB, says non thin-film panels are currently selling as low as $1.20, down perhaps 20% this year. “In the long run, I think thin-film is still competitive. I’m not sure how long the other panel prices will stay this low,” Carstensen says. Market consolidation is likely to narrow the gap between supply and demand and could support prices going forward, he says.

Impact on CSP

The surge in PV-based projects is affecting the development of solar thermal in the US, despite the stimulus packages. In August, German concentrating solar power specialist Solar Millennium said it had decided to change the technology on what would be the world’s largest solar plant, at Blythe, California, from large-scale parabolic troughs to PV.

The plant developer is Solar Trust, which is 70% owned by Solar Millennium. The developer pulled its 1705 loan application for the project, saying it would seek debt from the commercial markets, and halved the project in size to 500MW. In April, the DoE awarded a $2.1 billion con­ditional loan guarantee to the project, which at the time had a capital cost of $2.9 billion.

“The simultaneous sudden price increases for raw mater­ials and construction would have reduced our return on equity and risk provisioning for our construction share in the Blythe CSP project to marginal values,” Solar Millennium said.

The company unveiled a strategy move to focus more on PV, but not excluding tower, fresnel and hybrid PV/CSP plants. It also said it would expand its development, con­struction and operation services. The US market is currently focused on peak load supply, for which the PV panels are more attractive, it said. In May, Solar Millennium created a joint venture with German PV specialist SolarHybrid to develop PV projects in the US. One of the reactions to strong competition in the manu­facturing sector has been to grow downstream into development activities, as a way to secure product placement.

The surge in PV projects in the US and abroad has left behind CSP, but there are several CSP projects going through the DoE loan guarantee process and lenders value a diversified portfolio of different technology types, bearing in mind the banks’ limited resources.

The profile shapes of some PPAs suit certain technologies, with some local load profiles favouring baseload – and hence storable solar power – and others requiring output over peak demand periods during the day, typical of residential consumer patterns. By building a portfolio of deals with different suppliers within those technology types, lenders limit their risk to any one manufacturer.

Many banks are yet to get involved with CSP deals, and there are certain elements to the construction of the plants which require more work, like the thermal power system.

The CSP projects operate using a closed heat transference system turning a turbine, and when parts need to be replaced the system does not benefit from the more modular setup of inverters and panels in PV plants. “I do think banks will get comfortable over time,” says one lender, adding that con­struc­tion risks are more in line with traditional power projects.

Fortune favours the big

The close on 29 August of NextEra Energy Resources’ 250MW Genesis solar project in California shows there is sufficient appetite – not just from the DoE – for lending on the right CSP deals. The financing backs construction of two 125MW parabolic trough solar plants that are located near Blythe.

The $1.2 billion project gained a DoE FIPP guarantee of over $700 million. The $935 million in non-recourse financ­ing is mostly made up of guaranteed and un guaranteed bonds, and also includes a $30 million unguaranteed loan and a $83 million letter of credit (LC). NextEra is to provide around $370 million of equity to the project, around 30% of total project costs. Credit Suisse was underwriter and lead arranger as well as lender applicant for the project’s loan guarantee, while BBVA provided the LC.

Under a 25-year power purchase agreement, Pacific Gas & Electric (PG&E) pays $174.10 per MWh for electricity gen­er­ated using dry cooling technology and $162.50 per MWh for wet cooling. Fitch Ratings rated the guaranteed bond tranches AAA and the unguaranteed tranches A-. The rating of the nonguaranteed debt is tied to PG&E’s credit rating, currently A-, negative outlook, while the rating of the guaranteed debt is tied to its US sovereign rating of AAA, stable. The minimum debt service coverage ratio (DSCR) is 1.64x and the average is 2.61x, according to the rating agency.

Fitch said the project had limited completion risk, with NextEra Energy Capital Holdings providing a completion guarantee. The DoE might be looking to give unproven technologies the boost they need, but it still seems more comfortable with large corporates wrapping technology risk. It would probably be the least of the loan programme office’s problems if the perception formed that it favoured developers with stronger balance sheets. The recent rigour with which it has approached recent deals means that rich-sponsor wraps have been the best way for developers to beat the deadline in a cost-effective fashion. ■