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Ontario Post Election: Is the Financing Market Ready?

On October 6, 2011 the Ontario Liberals were re-elected paving the way for a continuation of the Green Energy Act. Shortly after that several announcements were made indicating that banks would be financing Feed-in Tariff (FIT) projects in Ontario.

On the solar side, Toronto-based SkyPower announced a $67 million credit facility with Deutsche Bank, while SunEdison announced a similar facility for $300 million with Deutsche Bank and Rabobank for opportunities in both Canada and the US.  In November 2011, SunEdison proudly declared that it had begun construction on the first FIT ground-mount project in Ingleside, Ontario, near Cornwall.

In December, Recurrent announced that the Japanese bank Mizuho would be providing a credit facility for Recurrent’s Ontario portfolio to the tune of $250 million.

On the wind side, a number of FIT projects are continuing to move forward to financial closing.  The key stumbling block for wind remains the slow pace of permitting approvals and connection agreements.  Notwithstanding the slower than expected pace of development, 2012 should be a busy year for lenders with a variety of projects looking for funding. The question is: Are lenders ready?

Below we examine some issues that lenders consider as they evaluate Ontario FIT deals:

Equipment Supply – Key equipment for solar developments includes modules, inverters and racking.  Because many of the manufacturing facilities in Ontario were constructed in order to satisfy domestic content requirements set for by the feed-in tariff, many of them are new. Therefore, their track records are limited. 

In 2011, many solar and wind manufacturers were negatively impacted by equipment oversupply and some of them are therefore vulnerable to failure.  Because of this, deep-pocketed wind and solar manufacturers have taken a greater share in the market, forcing out smaller players.  Developers and lenders require that their equipment suppliers remain creditworthy during the 20-year lifetime of the project and since some manufacturers are on shaky ground, lenders have voiced concerns about Ontario-manufactured equipment.  Competent developers will need to heed these concerns and provide the contractual protection and due diligence on their suppliers needed to reach financial closing.

Energy Production Forecasts – Since Ontario is a relatively new market for solar, there is a limited track record in terms of energy production forecasts as well as actual operating experience.  Typically, baseline forecasts are conducted using the modeling software PVSyst, developed by a company in Switzerland.  It is an input-output model in which the system design is loaded into the software along with historical weather data and certain assumptions around losses associated with soiling and snow, and others.  A typical baseline (P50) output for a ground-mount plant in Year 1 is approximately 1,200 kilowatt-hours / kilowatt-year, but the output can vary based on location, system design (including whether or not trackers are used, panel tilt, and elevation), operations and maintenance approach (including whether the panels are washed and/or cleared of snow or not), weather data used and assumptions around availability (system uptime) and curtailment. 

Wind energy forecasts have more of a track record in Ontario though it is interesting to note that wind forecasts have tended to be overly optimistic.  Recent studies found that the wind regimes were not as good as originally thought and that system availability was lower than predicted.  Models have since been calibrated to adjust for these lessons learned. 

General consensus is that solar forecasts are more accurate and predictable so overly rosy forecasts are not expected.  However, another issue for both solar and wind in Ontario is the possibility of economic curtailment due to surplus baseload generation.  The Feed-in-Tariff contract contains a mechanism for compensation to wind and solar power developers should economic curtailment of their generating assets occur but the effectiveness of this compensation is still somewhat uncertain.

Lenders and developers should use a reputable independent party with experience in forecasting energy production in Ontario.

O&M Agreements – Operations and maintenance (O&M) agreements take different forms.  In solar, many large developers have focused on providing their own O&M services.  O&M typically involves warranty compliant maintenance, site maintenance (including clearing access roads), security, and spare parts reserves.  The experience in Ontario has been that the project construction contractors and equipment suppliers provide O&M services during the initial warranty period and that the owners take over after project performance has been proven.  This approach has been accepted by the lending community.

Financing Challenges – It is believed that over the next three years around $3 billion of new project financing will be required to meet the funding requirements to build out the back-log of feed-in tariff projects in Ontario.  In the current uncertain financial climate, it is not clear if there will be sufficient lending capacity to meet this demand for capital. 

It is expected that projects that have the best equipment supply agreements, energy production forecasts and O&M agreements in place and those with the most experienced developers will be able to reach financial close.  Others will be forced to find alternative, and increasingly creative, ways to finance their projects or to sell them to those who can obtain financing.

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