Project Bond Focus Issue 4 bis | Project Bonds: New Energies – Solar Project Bonds: New Energies – Solar Crédit Agricole CIB, a leader in the global Project Bond market, is authoring a series of articles covering key topics for issuers to consider. Update Renewable Project Bonds first gained traction in North America, followed by projects in Europe and Latin America, demonstrating the increasing comfort and global Since the release of our “ Projects Bonds: New Energies – appetite among investors for renewable assets. Solar” article in December 2016, some rating agencies have updated their criteria and methodologies for solar While renewables offerings have gained wider acceptance projects. In particular, Fitch released updated criteria on over time, there are challenges that need to be considered March 1, 2017 reflecting lower DSCR guidance for prior to approaching the Capital Markets. Lessons learned investment-grade solar transactions. This positive from past renewable financings can help ensure future development demonstrates the increased comfort of rating successful executions. agencies for the asset class. This article provides a review of historical Project Bond issuances for utility-scale solar assets globally. This article replaces our previous publication and updates the rating agency criteria and market trends previously detailed. Solar Project Bonds New Energies Solar Project Bonds (Global volume in $MM equivalent) 5,000 The volume of Project Bonds issued for renewable energy 4,500 projects has steadily increased in recent years. 4,000 3,500 3,000 The Capital Markets opened its doors to renewable energy 2,524 2,500 1,896 projects with a wind Project Bond in 2003, followed by 2,000 1,780 1,446 1,500 1,284 solar Project Bonds a few years later in 2010. 1,034 1,000 These trail-blazing transactions allowed investors to gain 500 258 0 familiarity with the technologies, risks, and contractual 2010 2011 2012 2013 2014 2015 2016 Source: PFI, CA CIB arrangements related to renewable assets. They also paved the way for future issuances, as rating agencies started publishing specific methodologies dedicated to this Historically, the first solar Project Bond issuance was the newly accessible asset class. €196MM Andromeda Finance offering for a 51MW utility- scale PV Italian solar project in December 2010. In 2011, Renewables have grown to represent more than 50% of the $702MM Project Bond for NextEra Genesis Solar, a power Project Bonds and nearly 15% of total Project single-site Concentrating Solar Power (CSP) project with a Bonds issued in just over a decade. In 2016, renewable capacity of 250MW in California, marked the opening of energy projects accounted for $6.4BN of Project Bond the US Debt Capital Markets for solar projects. Since then, issuances globally. more than $10.2BN has been raised globally for 41 utility- scale solar projects with individual issuances ranging from Power Project Bonds €17MM to $1,000MM. Solar Project Bonds have (Global volume in $MM equivalent) successfully been executed in 6 different currencies. 20,000 North America is a highly active region for renewables 15,054 15,000 issuances with 19 solar projects financed to-date out of 41 3,486 globally. Both the US and Canadian Capital Markets have 10,950 10,992 welcomed large transactions such as the $1,000MM Solar 10,000 9,099 1,758 7,108 6,413 Star Funding transaction in 2013 and the C$613MM 3,668 5,448 4,877 2,409 11,568 Grand Renewable Solar in 2016. 5,000 925 9,192 1,774 4,523 4,699 5,431 4,579 3,103 0 2010 2011 2012 2013 2014 2015 2016 Power (excl. Renewables) Renewables Source: PFI, CA CIB March 2017 1 Confidential Project Bond Focus Issue 4 bis | Project Bonds: New Energies – Solar Solar Project Bonds – Geographies of Assets Solar Project Bonds – Project Status at Closing (% of aggregate global volume) (% of aggregate global volume) Asia-Pacific $0.1BN (2 Projects) EMEA 1% $2.5BN (20 Projects) 21% Operating 45% $4.6BN (27 Projects) 55% Greenfield $5.6BN 78% (14 Projects) North America $7.6BN (19 Projects) Source: PFI, CA CIB Source: PFI, CA CIB With 20 offerings to-date, Europe is the largest region by Many Project Bonds have financed greenfield projects, as number of transactions for solar Project Bonds and both rating agencies and investors are comfortable with regularly sees transactions for projects of various sizes. the low construction risk involved for solar projects. Also, Outside North America and Europe, solar Project Bonds the construction period is generally short, thus negative are less frequent but these financings are emerging in carry can be more easily mitigated. Project Bonds issued Asia. In 2015, the ¥3,000MM offering for Aomori-Misawa, to refinance operating solar projects have also been successfully placed. a 10MW operating solar farm, was the first Capital Markets transaction for an Asian solar project. It was Utility-scale solar assets are mostly contracted through followed the same year by the ¥6,200MM Canadian Solar long-term Power Purchase Agreements (“PPAs”) with an Portfolio offering for a 21MW PV solar project. offtaker such as a utility or a public entity (State, municipality, etc.). Project Bonds have allowed issuers to Solar Project Bonds – Technology Type fully monetize these contracts with amortizing structures (% of aggregate global volume) over the full tenor of the underlying PPA, i.e. without any tail. Maturities of 20 years or more are the norm for this CSP $1.5BN type of transaction, with average weighted lives above 10 (5 Projects) years. 15% Trends and Highlights 85% A wide variety of utility-scale solar assets has been PV $8.7BN financed through the Project Bond market. Depending on (36 Projects) the characteristics of the project, different structures have been successfully placed. The following section discusses Source: PFI, CA CIB some of these transactions, as well as current trends. Solar projects rely on different technologies to convert Financing Solar Technologies sunlight into electricity. While Photovoltaic (PV), Concentrating Solar Power (CSP) and Concentrating The vast majority of utility-scale projects financed in the Photovoltaic (CPV) technologies are the three main Capital Markets has used photovoltaic (PV) technology. technologies used for utility-scale solar plants, projects PV technology directly converts sunlight into electricity relying on PV technology account for most of the through the acceleration of electrons in the PV cells. In transactions to-date. Capital Markets participants have this regard, PV plants using crystalline silicon (c-Si) also financed parabolic trough systems, the most common panels, including monocrystalline and polycrystalline, have form of CSP technology. been used for many years and are the most common technologies financed with Project Bonds. March 2017 2 Confidential Project Bond Focus Issue 4 bis | Project Bonds: New Energies – Solar Concentrating solar power (CSP) technology, while with construction risk and an investment-grade rating is carrying a slightly higher complexity and operating risk, achievable for greenfield projects. has also been financed through Project Bonds. A CSP Furthermore, sponsors typically secure comprehensive project collects and concentrates the heat from the sun EPC contracts with experienced contractors. Fixed price, with highly reflective mirror panels and focus the heat onto date certain contracts with adequate performance and a receiver filled with a highly conductive fluid, such as delay liquidated damages (LD) clauses are standard in synthetic oil. This fluid is then used to create steam and this industry, and are consistent with investment grade power a conventional steam turbine to generate electricity. ratings. Another technology used for utility-scale solar projects is the Concentrating Photovoltaic (CPV) technology. CPV directly converts sunlight into electricity, as PV does, but Approaching Construction Risk: Case Study uses a lens system to concentrate the sunlight similar to In June 2013, Solar Star Funding issued $1,000MM in CSP. To our knowledge, no projects relying on this series A senior secured notes to finance the construction technology have yet been financed in the Capital Markets. of a 579MW PV project in California. Two locations were Key technology risks include complexity of installation, constructed in parallel over a two-year period. With degradation factor, commercial track record, and $2,740MM of construction budget, this project remains applicability of the solar technology to be used in relation one of the largest ever financed in the Capital Markets. to the geography of the project. The technology and The issuance was rated Baa3 / BBB- / BBB- by Moody’s, proposed design will need to be reviewed by an Standard and Poor’s and Fitch. The rating agencies noted independent engineer before launching the offering. the date-certain, fixed-price contract executed with Approaching Technology Risk: Case Study SunPower, an experienced party, as a credit positive. The contract included milestone payments and a substantial The first offering for a CSP project was the $702MM early completion bonus payment if the project was issuance for NextEra Genesis Solar, a 250MW parabolic completed ahead of schedule. trough solar project in California. Issued in 2011, this transaction was also the first Capital Markets financing for In March 2015, as the project was reaching completion a utility-scale solar project in the US. ahead of schedule, Solar Star Funding issued $325MM in series B senior secured notes (pari passu with the series The project consists of two 125MW parabolic trough solar A) to repay part of the construction costs to the sponsor. fields and corresponding power blocks. The project is Moody’s and Fitch reaffirmed their initial ratings while S&P based on a Rankine power cycle with a reheat steam upgraded its rating by one notch to BBB. turbine generator designed to use solar radiation from parabolic trough technology. Two independently operated 140MW power blocks are fed thermal energy from solar Solar Project Bonds in New Geographies collection systems.