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Banks & Solar: It’s All About Established Players

Banks are increasingly willing to invest in solar projects, but not surprisingly, are only willing to back established players. Here’s the latest example of that: Rabobank will provide a $50 million construction loan to SunEdison for solar power generation projects in the U.S., the companies announced Tuesday.

SunEdison, which was bought by silicon wafer maker MEMC Electronic Materials in 2009, has built a business of selling power purchase agreements where its customers only pay for the solar electricity rather than owning the solar electric equipment. SunEdison uses loans to build solar projects for customers, like small businesses and utilities, then delivers a return to the lender from the savings.

The revolving loan will last three years, meaning SunEdison can repay, then redraw from the fund during that time. The size of the fund is likely to expand during the three years, Rabobank said.

“Over the past couple of years, financial institutions have become more comfortable with solar photovoltaic construction risk so we expect a number of parties to be interested in joining the facility,” said Thomas Emmons, who leads Rabobank’s Renewable Energy Group in New York, in a statement. Rabobank’s announcement came after JPMorgan said in October it would put up $60 million to fund SunEdison’s projects for business and government customers.

The U.S. solar market is still young, but it’s getting difficult to penetrate for new, small project developers. There certainly has been no shortage of these new comers. Some of them have managed to build up impressive pipelines of projects, including signed contracts with utilities, by taking advantage of policies in states that require their utilities to offer renewable electricity.

Singing contracts is one thing; delivering on them is another thing entirely. As GTM Research pointed out in its recent report on the U.S. utility market, many developers submit lower bids to win contracts than they can’t deliver on.

Sometimes, the bids are so low because project developers underestimate how much they’ll have to pay for solar panels and other equipment in the future, when construction will start. Sometimes, they underestimate the returns expected by their lenders. And, of course, collapse of the financial market has only made money more scarce. In fact, knowing that project financing is hard to come by, some investors are demanding double-digit returns on their investments in the U.S. even though some of their counterparts in Europe are willing to accept single-digit returns, according to GTM. These investors generally put up money in exchange for a chance to use a 30 percent federal investment tax credit.

The fortunate few have found buyers for their project pipelines even if they have only completed a few projects, if any. Recurrent Energy, for example, hadn’t completed any project when it was bought by Sharp for $305 million this year, GTM said. NextLight sold its project pipelines to First Solar (s FSLR) for about $297 million this year. First Solar also spent $400 million for the projects under development by OptiSolar, which admitted to having trouble lining up money to be both a solar panel manufacturer and project developer.

SunEdison, based in Maryland, is one of the older project developers in the U.S., and it said it has installed “close to 250 megawatts” worldwide. Even it wasn’t immune to the recession and resulting credit crunch and resorted to layoffs. Then SunEdison sold itself to silicon wafer maker MEMC Electronic Materials for $200 million and then some in 2009. Around the time of the sale, SunEdison had completed about 80 MW of projects.

SunEdison declined to divulge how many megawatts can be installed with the $50 million fund. The costs of equipment and labor reached $5.89 per watt in the U.S. in 2010, according to Greg Sheppard, chief research officer at market research firm iSuppli, so $50 million could fetch around 8.5 MW. The actual size will vary, of course, and will depend on the mix of commercial and utility-scale projects and the installation costs over the next three years, which analysts say should fall.

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Photo courtesy of Andreas Demmelbauer

One Response to “Banks & Solar: It’s All About Established Players”

  1. There’s a common misconception in this piece: banks don’t invest in anything. They lend money, based on their appraisal of the borrower’s abilty to pay it back. Of course they back established players. Start ups have to go to VCs and other sources willing to shoulder greater risk for greater return. Hope the strength in the commercial solar market trickle down to the residential market, where prices are dropping.