Financing PV - the fundamentals II

In the second part of a two-part column, Stefan Shmitz looks at how the issue of construction affects finance planning for PV projects. And how could the next generation of PV technology impact on project costs? John-Marc Bunce takes up the story.

By Stefan Schmitz and John-Marc Bunce

One important feature of the PV project market is that the suppliers of the actual power (and thus cash) generating technology – the module manufacturers – are not really in the business of providing Engineering, Procurement and Construction (EPC) construction services on a turn-key basis. This is in contrast to the windpower markets, where developers and investors regularly turn to turbine manufacturers like Vestas, Enercon, Suzlon and others to build the project, using their turbine technology on a turn-key basis.

In doing so, the construction services can be combined and aligned with warranties, extended warranties, and often maintenance services, which in many cases are also supplied by the turbine manufacturers.

Investors and banks like this approach because it frequently brings a company with a large balance sheet – and a thorough understanding of the technology – into the project.

For PV projects, the picture looks somewhat different. Sharp, QCells, First Solar and other module manufacturers do not offer this kind of service, and confine themselves to supplying the modules. This paves the way, or rather makes it necessary, for other EPC providers to be introduced into a project. From a bank or investors perspective, these EPC providers need to have the experience to undertake such projects and, more importantly, have the financial muscle to back up any warranties.

The EPC agreements for PV projects themselves provide for many of the customary provisions in construction agreements but, in addition, contain a number of clauses which relate to the supply and function of the PV modules, and thus look to address the cash flow coming into the project. In most cases, the EPC contractor would buy the modules from the manufacturer, build them into the project and then sell the project turn-key. This means that the EPC provider assumes the risk for – and of – the modules, usually for a limited period of one to two years. After that period (and sometimes right from the beginning) the principal has any warranty under the module supply agreement assigned to him, so that any claim is then taken up with the module manufacturer directly, rather than the EPC provider.

Sometimes, the EPC contractor does not buy the modules, rather this is done by the principal, who then hands the modules to the EPC provider – who in turn builds them into the project. Such an approach greatly favours the EPC contractor as it takes a large portion of risk away. It also makes the structure of the project difficult from a bankability point of view, and would normally necessitate some kind of interface agreement; this would regulate the responsibilities and liabilities of the various parties involved in a project; and would prevent the principal having to go from one service or equipment provider to another in search of the right counterparty (and possibly prevent a situation arising where the prinicpal ends up being sent from one to the other, unable to identify the right party).

A recent development, mostly seen in Southern Europe, has put additional pressure on EPC contractors and is probably – at least in part – due to a number of banks feeling uncomfortable about the risks associated with PV projects. Under this new development, banks have asked to see a long term output or performance guarantee included in the EPC agreement – before they accept an agreement as bankable. Some of these guarantees are supposed to run for up to 20 years.

This could impose a very heavy burden on the EPC provider, and one which they would almost be incapable of offering. They may also have put this kind of liability on their balance sheet – with all the negative consequences that this can result in.

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