Financing Large-Scale Solar Projects: Understand the Basics

Financing Large-Scale Solar Projects: Understand the Basics

This is part of a series of articles about “lessons learned” as a CFO/COO of a national solar developer. 

The “lessons learned” are built into  the Industry Specific software my company recently launched.

This article is a primer (mostly in layman's terms) on the “go to” method of financing Large-Scale Solar projects.

As I spread the word about the software, I have engaged with a disproportionate amount of startups in the industry.

They all know how to acquire land and the basics of developing the sites but are confused about the financing. 

Let's bring some clarity to the topic.

We will be using a typical example of five individual financing vehicles. Development Loan, Tax Equity Bridge Loan (TEBL), Construction Loan (CL), Tax Equity Financing and Back Leverage Financing.

Phase I - The Development Phase. When a project first begins, there is usually nothing more than the idea of a plot of land turning into a commercially viable electricity generator. 

The financing for Phase I is provided by a combination of Sponsor Equity and a Development Loan. The Development Loan is very risky, with a “high” interest rate, and a Loan to Value (LTV) of 15% to 40% of the project expenditures. 

The incentive is to work very quickly to get to Phase II.

Phase II - The Construction Phase. This is the most expensive phase of the project because a typical project will cost around $10MM to build. 

The financing is typically a Tax Equity Bridge Loan (TEBL)  and a Construction Loan (CL) both having a “middle of the road” interest rate and an LTV of 90% of the cost of the project. The Sponsor Equity of 10% will complete the financing. 

A solar project can be “Stepped-Up” to Fair Market Value (FMV) for the calculation of the Investment Tax Credit (ITC). The ITC is always a % of the FMV of the project so having a higher FMV will add to the value of the project.

The typical “Stepped-Up” FMV is around 15% higher than the actual cost of the project. 

The Tax Equity Bridge Loan is between 25% and 30% of the FMV with an LTV of 90% of the “Stepped-Up” value of the project. (Read it again, it’s not that confusing) 

Using a 30% example on our $10MM project, the TEBL is $10,000,000 x (Step up) 1.15% x 30% x 90% = $3,105,000.

The banks supplying the Construction Loan (CL) require the TEBL to fully fund before loaning any money to the project. 

The CL will fund based on an LTV of 90% less the amount of the TEBL. 

For the same project, the CL is $10,000,000 x 90% less $3,105,000 = $5,895,000.

The total is $3,105,000 + $5,895,000 = $9,000,000

The final $1,000,000 is provided thru Sponsor Equity

Phase III - Commercial Operations Date (COD). When the project  begins generating electricity, the Tax Equity Investment and the Back Leverage Term Loan will fund 95% of the project and replace the TEBL  and the CL both having an LTV of 90%. 

This results in a refund to the Sponsor Equity of 5% of the project. 

The final Long Term financing is as follows:

Tax Equity is $10,000,000 x 1.15% (Step-up) x 30% x 95% = $3,277,500.

Back Leverage Term Loan is $10,000,000 x 95% less $3,277,500 = $6,222,500.

The remaining $500,000 is provided by Sponsor Equity.

Hopefully you have a better understanding of the complex financing structures used in Large-Scale Solar projects. I also hope the terminology did not confuse you too much, but this is the terminology the industry financiers you talk to will use.

This article is intended to give you a high-level framework on how Large-Scale Solar projects are financed.  If you need help finding an expert or just want to discuss the concepts, we are here to help.



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