Page 173 - Alternative Energy Systems in Building Design

ECONOMICS OF SOLAR POWER SYSTEMS 149

An optional (and relatively inexpensive) computerized system-monitoring console
can provide real-time performance status of the entire solar power cogeneration system.
A software-based supervisory program featured in the monitoring system also can
provide instantaneous indication of solar array performance and malfunction.

PROJECT FINANCING

The following financing discussion is specific to large alternative- and renewable-energy
projects, such as solar, wind, and geothermal projects, that require extensive amounts of
investment capital. Project financing of such large projects, similar to large industrial proj-
ects, involves long-term financing of capital-intensive material and equipment.
Since most alternative-energy projects in the United States are subject to state and
federal tax incentives and rebates, project financing involves highly complex financial
structures in which project debt and equity, rebate, federal and state tax incentives, and
cash flow generated by grid-energy power are used to finance the project. In general,
project lenders are given a lien on all the project assets, including property, which enables
them to assume control of a project over the terms of the contract.
Since renewable-energy and large industrial projects involve different levels of
transactions, such as equipment and material purchase, site installation, maintenance,
and financing, a special-purpose entity is created for each project, thereby shielding
other assets owned by a project sponsor from the detrimental effects of project failure.
As a special-purpose joint venture, these types of entities have no assets other than the
project. In some instances, capital contribution commitments by the owners of the
project company sometimes are necessary to ensure that the project is financially sound.
In particular, alternative-energy technology project financing is often more compli-
cated than alternative financing methods commonly used in capital-intensive projects
such as transportation, telecommunications, and public utility industries. Renewable-
energy-type projects in particular are frequently subject to a number of technical, envi-
ronmental, economic, and political risks. Therefore, financial institutions and project
sponsors evaluate inherent risks associated with a particular project development and
operation and determine whether projects are financeable.
To minimize risk, project sponsors create special entities, which consist of a number
of specialist companies operating in a contractual network with each other and which
allocate risk in a way that allows financing to take place. In general, a project financing
scheme involves a number of equity investors known as sponsors, which include
hedge funds as well as a syndicate of banks that provide loans for the project. The
loans are most commonly nonrecourse loans, which are secured by the project itself
and paid entirely from its cash flow, rebates, and tax incentives. Projects that involve
large risks require limited-recourse financing secured by a surety from sponsors.
A complex project finance scheme also may incorporate corporate finance, securitiza-
tion, options, insurance provisions, and/or other measures to mitigate risk.

Power purchase agreements Power purchase agreements (PPAs) for renewable-
energy projects are a class of lease-option-to-buy financing plans that are specifically
tailored to underwrite the heavy cost burden of the project. PPAs, which are also