A recent bank survey about 2020 solar project finance trends provides an optimistic outlook for 2021. The survey, Lendscape by kWh Analytics, tracks the solar industry’s most active lenders and tax equity investors in the U.S. market and is the go-to resource for project sponsors looking for financing partners. In the latest 2020 survey, 85% of the leading project finance lenders in solar said that little-to-none of their business came from refinancing in 2020, laying the foundation for a refinancing boom in 2021. This projected broom is driven by three factors:
- Solar asset maturity
- Spreads
- Historic underperformance
Solar Asset Class Maturing
According to the Solar Energy Industries Association (SEIA) and WoodMackenzie, installed solar capacity reached 97.7 GW in the U.S. in 2020 with the bulk of these assets installed in the last five years, beginning with a large install spike in 2016. Given that sponsors financed most of these projects with tax equity structures with a five year lifespan due to tax provisions, refinancing tends to occur around the five year mark of being placed in service. This means that the 14 GW of solar installed in 2016, comprising approximately 15% of the installed fleet, is no longer subject to tax provisions, opening up the landscape for creative refinancing opportunities.
Figure 1. Approximately 15% of Installed Solar Will be Eligible for Refinancing in 2021
Installed solar capacity in the US 2010 – 2020.
SEIA/Wood Mackenzie Power & Renewables US Solar Market Insight 2020 Year in Review; kWh Analytics Analysis
Spreads Back to Pre-COVID Levels
Additionally, 95% of lenders in the Lendscape survey reported that spreads were lower than they were six months ago. While that’s not a big surprise given the spike in spreads a year ago caused by the initial COVID surge, the big surprise is that 79% of lenders report that spreads are now at or below pre-COVID levels. Therefore, it’s likely that sponsors will now complete 2020 refinancings in 2021 due to the more favorable market environment. The confluence of that combined with the potential for the market to be entering a rising interest rate environment creates an added sense of urgency to completing refinancings this year.
Project Underperformance
The third factor driving refinancing is more nuanced. Recently, kWh Analytics collaborated with 10 of the 15 largest owners of solar assets to conduct the Solar Generation Index report. This analysis included more than one third of non-residential systems in the U.S and compared actual production against third-party P50 estimates, a project’s target production over a three year period from 2016 and 2019. The analysis showed that systems underperformed by 6.3% on average, even after adjusting for weather. This means the median solar project performed at approximately 94% of expected production in the last few years. However, the results also illustrate that more than one quarter of solar assets performed below 90% of expected production. At these levels, the projects start to raise concerns amongst lenders and provide an impetus for resculpting the debt to a more manageable debt service in line with actual project performance.
Figure 2: Solar Projects Underperformed P50s by 6.3% on Average from 2016 – 2019, Providing Opportunity to Resculpt Debt
Weather adjusted performance by region in the US.
kWh Analytics and Clean Power Research, Solar Generation Index, 2020
Conclusion
In most mature asset classes the volume of refinancing tends to far outstrip the volume of financing for new build assets. In contrast, solar asset financing has primarily focused on new build assets, as illustrated by the proportion of lenders focusing on new builds in 2020. However, given recent market trends in solar project maturity, spreads, and historic project underperformance, the market is ripe for a refinancing boom in 2021.
