Some Solar Developers are in Financial Trouble
Here's how to mitigate your risks.
Recent market events surrounding a few of the largest residential and commercial solar developers have sent shockwaves through the renewable energy industry. The root causes of these events will become known in time, but it seems that excessive leverage, aggressive expansion plans, falling energy prices and murky accounting practices may have played a role in diminishing some firms’ reputation with investors and creditors, leading to a precipitous decline in market value. We feel that the probability of some of the larger solar developers failing has increased to the point where clients need to be aware of the potential risks involved.
If you have a project planned or on-going with a solar developer, the risk to the project is highest during the construction phase. Except in the case of prepaid PPA agreements (see below), if a developer defaults after the project is operational and interconnected, the cash flow from the project is valuable and should be able to be transferred to another owner with little risk to you.
If a developer defaults during construction, a partially constructed project is not an attractive opportunity for a competing firm to take over, which will likely increase the cost and reduce the return on investment. In the worst case scenario, you may end up with a partially built project that is subject to litigation and creditor claims, thereby leaving it at a standstill until all creditor claims are resolved.
Furthermore, project subcontractors may look to you to settle their outstanding payments, and could put a lien on the assets in place - leaving you with a partially constructed project that can’t be completed without a legal resolution and settlement.
At this juncture the financial markets are not accommodating to solar developers, so there is also a risk that developers may back out of Purchase Power Agreements for projects that have not broken ground yet. This could cause you to miss the construction window for 2016, and the process for implementing solar may have to start over, increasing the overall cost and burden.
Depending on where you are in the process of implementing solar, here are some proactive steps that can be taken to mitigate the risk of a solar developer backing out of a project or going out of business.
RFP / Contracting Phase
- Require that the developer carry project payment and performance bonding to cover the full project installed cost. This is unusual for PPA financed projects, but it will help shield you from subcontractor payment claims and should allow the project to resume more quickly in the case of a default.
- Conduct a thorough review of contract documents and discuss making amendments with your solar developer to allow for a seamless transition to alternative vendors and financing if necessary. Any ownership transitions should be with your approval, not to be unduly withheld.
- Ensure that there is a milestone schedule with liquidated damages (LDs) or some other form of incentive (such as, eventually, default) for keeping the project moving forward. This will be important if a vendor gets in financial difficulty, which will slow the project.
- If you are considering prepaying a portion of the PPA energy payments up front (for instance using Proposition 39 funds), you should be aware that you are taking on more risk, perhaps significantly more risk, as the window of potential loss can extend many years into the future. Prepayment of PPA contracts generally results in lower PPA energy payments over the term of the contract. Since ongoing energy payments are lower, the cash stream from a prepaid project is less attractive to potential buyers should the developer default. From a credit perspective, PPA prepayment is equivalent to any other trade creditor, and the funds would be very difficult to recover in the case of a bankruptcy. Because of this heightened risk, we recommend only contracting for prepaid PPAs with very solid, diversified solar PV firms.
Contracted / Construction Phase
- For contracted PPA projects, do an assessment of alternative financing mechanism(s) to complete the project in the case of a vendor default, and ensure that a contingent financial plan is in place to move quickly to obtain funding for completion.
- During construction, keep a close eye on progress towards completion and the state of financing. If a project stalls, use your milestone schedule and LDs or the prospect of default to move the project forward. If you don’t have the resources or expertise to do this yourself, consider bringing on independent advisors to closely track the project.
In all cases, we think that it is prudent to engage with your legal counsel to assess the impact of transitioning your solar to an alternate party. If the project does need to be rebid, you may want to consider engaging an independent energy consultant to handle the process of transitioning so that there are limited disruptions to your on-going operations and to the project site.
If you have any questions about a solar project, contact Sage Renewables at 415-663-9914.