By: Michael Tingle, Director, Corporate Business Development at ORTECH Consulting Inc.
handshake and sunlight background
You have received your power purchase agreement, feed-in tariff (FIT) contract offer or request for proposal (RFP) win; now you are thinking “I need to get my project debt financed!”
Enclosed is a list of best practices to make this process as easy as possible. The example below is based on either a ground mount or rooftop solar facility that is not constructed. However, this process can be used for other installations such as constructed projects or energy storage projects with some modifications.
Also note, there will be regional requirements that are not listed in this guide, so check with your debt provider for any additional material that is required.
Getting started:
Tip #1: Agreeing to use the debt providers IE can simplify the process
Debt providers will have their preferred technical due diligence service providers often referred to as Independent Engineer (I.E.). Some developers may indicate that they have their own favorite . However, the IE needs to be truly independent.
Tip #2: Get all your documents in order
The first phase of technical risk management services conducted by the I.E. typically includes the provision of essential documents for review (see below for list). The requested documentation will be dictated by the status of the facility under consideration (e.g. early development, pre-construction, post-commissioning, etc.). To complete the review efficiently and to minimize scope creep, the I.E. will typically start the review once all documentation is provided.
Tip #3: Missing documentation is a major red flag and will cost time and money to complete the review. Do it right the first time
It is common that the initial batch of documentation provided is not complete. This means the I.E. will need to review the preliminary batch for completeness only (i.e. not a technical review at this stage) and notify the developer of key documents that are missing if any. It is important to note that initiating the formal technical review while documentation is missing or deemed insufficient will ultimately be reflected in the draft I.E. report.
Tip #4: Save costs by providing all the documentation up front, at one time
Following the document review, the I.E. will issue a draft examination of documents report providing analysis and commentary on the reasonableness, accuracy and completeness of the documentation and identify the main risk factors and possible impact, if any, on the ability of the facility to generate the expected level of energy/revenue. That last part is key to any debt provider. The review must indicate an ability to service the debt.
Tip #5: Use up-to-date documentation because the site visit will end badly if you don’t!
Following document review, a site visit should be performed. The site visit will involve physical inspection of critical components for consistency with the provided documentation and confirmation of overall Facility design and compliance with the major contract parameters including:
-Facility type (i.e. rooftop or non-rooftop solar) and physical location
-Nameplate capacity including approval of DC overbuild and record of inverter production, if visibly accessible
-Main equipment components (panel, inverter and racking suppliers)
-Connection point location
-Review of power production or data log information, if available, for the purpose of performing a high-level check of the facility’s ability to achieve maximum capacity
What documentation do you need to prepare?
Essential documentation that will be reviewed for accuracy, completeness and technical suitability as applicable and available before the site visit, may include the following:
-Previous due diligence report, if applicable
This can save time and provide the debt provider with a sense of comfort if another I.E. previously reviewed the facility. If you have a previous report available, provide it.
-Power purchase agreement / FIT documentation: Includes contract, contract assignment and term buyback documentation, if applicable. This provides important confirmation that the Facility is “real” and viable.
-Key project design documentation: Includes as-built, signed/stamped electrical single line diagrams (SLD), main equipment specifications (panels, inverters, racking) including capacity, efficiency, warranty, the status of warranty assignment (if applicable) and facility layout drawings. The design documentation is important and should meet industry standards. This documentation will be compared with observations made during the site visit, if there are differences, explanations will be required and documented.
-EPC warranty and commissioning report: Includes warranty contracts and reports from the EPC signing off of the project including performance testing reports. Understanding warranty is important from a debt provider hold back point of view, and the commissioning report will provide valuable information to the I.E. as to the ability of the facility to perform over time.
-Grid connection documentation: Includes a metering plan (if applicable), LDC connection cost agreement and status of assignment, if applicable. Jurisdictions will not allow a facility to connect to the grid without following a process. This documentation will help to mitigate risk in the eyes of the debt provider f that the distribution company has signed off on the facility.
-Environmental permitting and documentation: Includes permitting approval documents from the local government agency. Environmental permitting is important. Facilities cannot begin construction until the required permits or approvals are in place. The debt provider is also interested in the conditions of the permits and whether the ongoing costs to meet these conditions are adequately considered when assessing the ability of the facility to service the debt.
-Land status documentation: Includes confirmation that a lease agreement is in place for suitable duration, building permit or certificate of completion. The debt provider wants to understand any risks associated with the lease agreements like length of term or that zoning will not allow for buildings that can cause shading to be built.
-Energy output information: Includes calculations and /or solar resource assessment
This is very important. If you provide a poor quality resource report that is not consistent with industry standard, the I.E. will likely raise this as a red-flag and/or may require the analysis be redone costing additional time and money.
-Financial model: Includes a breakdown of main capital cost items (panels, inverters, racking, roof upgrades, other) and operating cost items (O&M contract, monitoring, lease, roof repairs, insurance, administration, other) and debt service calculation, if available. This will be reviewed in depth so ensure the assumptions and costs can be validated
-Constructability assessment documentation
The I.E. will look for any issues that might cause unusual challenges during the construction of the Facility (e.g. geotechnical study).
-Notice to proceed (NTP) related documents
For construction financing, this confirms the facility has been approval to begin construction. This is very important document when shopping for debt financing.
-Commercial operation date (COD) related documents
This confirms that the project has been signed off. This document can be called a number of things in different markets.
-Operation and maintenance documentation
The I.E. will want to understand the plan, cost and approach. The debt provider will want to see how these costs, including key component replacement, are accounted through the entire life cycle of the facility.
Spend the time to get your documentation together. Provide the I.E. with a complete package of documentation and provide access to your facility. You do not want to give the I.E. or the debt provider a reason to question your facility, if there are issues, work collaboratively with the I.E. to resolve them.
Print out this “tear sheet” for an easy reminder of all the documents you need when seeking debt financing.
This blog was originally published on ortechconsulting.com