Financing solar-plus-storage

Introduction

Norton Rose Fulbright recently assisted with the financing for the world’s largest operational solar-plus-storage system located in Hawaii. We have also worked on financings for distributed-scale projects, comprising portfolios of rooftop solar systems and batteries. These projects present unique contractual, regulatory and legal issues. Here we share three key takeaways for financing solar-plus-storage projects in the US.

Performance guarantees and warranties from creditworthy counterparties are a must for addressing key technology risks

Storage projects have a shorter operating track record than gas, wind and solar because the technology is newer. Project finance lenders and tax equity investors do not like technology risk. The key technology risk in a storage project is capacity degradation. Financiers will look for a performance guarantee or capacity maintenance agreement under which the service provider refreshes the battery with new cells to maintain capacity at minimum, albeit decreasing, levels over time. The cost of disposal and recycling of the old cells should be factored into the model if the service provider has not assumed responsibility. Lenders may also want to build a reserve account into the financing documents to cover above-warranty cell replacement costs. The creditworthiness of the performance guarantor and warranty provider is critical. Insurance products may be available to bolster weak financials.

The owner takes on more risk if the project lacks a full-wrap EPC contract

Split EPC contracts are more common in solar-plus-storage projects than pure solar projects. Project lenders and tax equity investors have historically preferred a fixed-price, turnkey EPC contract that shifts as much risk as possible from the owner to a single EPC contractor. In contrast, a split structure may have multiple equipment supply, construction and installation contracts.

There is more risk for the project owner (and its financing parties) under a split arrangement than a full-wrap structure. Splitting these contracts creates interface risk (both logistical and technological) as well as results in lost time and finger-pointing when trying to sort out responsibility for any defects or issues. Construction lenders and tax equity investors will assess the “bankability” of split EPC contracts by assessing whether the additional risk exposure is sufficiently mitigated. Thorough technical and legal review will be at the heart of this analysis.

Contracts should adhere to ITC rules if the project relies on tax equity financing

Batteries that are combined with solar projects on which investment tax credits (ITCs) are claimed potentially qualify for such a tax credit.

To be eligible for the ITC, at least 75 percent of the energy stored by the battery should come from the solar project to which it is coupled. Lenders and tax equity investors will want a covenant in the loan agreement and tax equity documents requiring the sponsor to obtain exclusive charging from the linked solar facility during the first five years of operation, during which any tax credit claimed remains exposed to recapture. To the extent the offtaker has a right to control charging, the owner may want to build in a right to recover any ITC-related recaptures or losses in the PPA.