A carefully selected financial framework for the solar power plant serves as the cornerstone for the energy project’s success, providing necessary funding on favorable terms.

The renewable energy sector worldwide has demonstrated consistent growth over the last few decades.

As per the Energy Outlook 2021, the total market for wind and solar photovoltaic technologies in Europe is projected to increase by 35 GW in 2021, requiring an investment of 60 billion euros. The International Energy Agency forecasts an 8% growth in wind energy and a 13% increase in solar energy.

Once established, solar power plants are the most economical option for power generation, as solar energy is freely available and modern technology incurs low operational costs. Therefore, renewable energy sources can easily replace fossil fuels as they enter the market, and this trend is expected to expand further in 2021.

Positive market conditions, along with favorable policies in many nations, will stimulate growth in the sector. This is further enhanced by technological advancements that have made new solar power plants cheaper on average than coal or nuclear power plants.

A crucial aspect of enhancing the competitiveness of solar energy is selecting the appropriate financial model for a solar power plant initiative. Currently, businesses have access to various financial instruments for executing these capital-intensive projects, including long-term investment loans and sophisticated project finance options.

Our experts are prepared to deliver tailored solutions for every project, encompassing long-term financing, technical documentation development, and the construction of solar power plants under EPC contracts.

We assist a wide range of clients in advancing solar projects across Europe, the Middle East, the USA, Latin America, Southeast Asia, and Africa. Reach out to our representatives for a complimentary consultation.

A bank loan is a traditional and widely used method of financing for businesses, particularly in the solar energy sector. A considerable portion of the $2.9 trillion invested in renewable energy globally over the last ten years has been sourced from long-term loans.

– Long-term financing for solar power plant construction typically spans 6 to 10 years or longer, contingent on the specific project type.

– Interest rates may be either fixed or variable, with the latter being more prevalent. Recently, lenders have begun to offer loans featuring more intricate variable interest rates.

Given the fluctuations in interest rates, it is essential to develop innovative financial solutions that align with the evolving market landscape.

In this context, the variable interest rate enhances the financial model of the solar power plant project by allowing it to adjust to the prevailing financial conditions. Consequently, traditional banking operations that relied on fixed interest rates are increasingly being substituted with indexed loans, which are tied to market indices and whose terms fluctuate with market changes.

Every lending transaction carries inherent risks for the lender, and as the loan term extends, the level of uncertainty rises, leading to a greater demand for guarantees that safeguard the lender’s interests.

A loan for financing a solar project can be secured through tangible guarantees such as securities, real estate, movable assets, and other valuable properties.

In cases where collateral is insufficient, the lending institution may require one or more guarantors to ensure debt repayment if the borrower defaults.

Given that the establishment of a large solar power facility with a capacity of 100 MW could necessitate an investment of approximately $70-100 million or more, many projects are funded by bank syndicates instead of single banks.

A single credit operation provides syndicated loans to support the realization of major projects.

This form of financing assists energy firms in balancing the need for substantial funding with their aim to minimize the risk concentration from financial institutions.

Investment bank loans have become extremely popular in solar energy, and the ease of obtaining funds is far from the only reason for the demand for this versatile financial instrument.

Table of Contents: Advantages of a Bank Loan for the Construction of a Solar Power Plant. 

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While long-term bank loans are frequently utilized for solar projects, they may not represent the most suitable financing option. When developing the financial model for a solar power plant, it is essential for a company to evaluate the pros and cons of each financing method in relation to the specific business context.

Limitations associated with bank loans

No financial instrument is perfect. Each company faces its own distinct economic and financial circumstances, meaning that a solution suitable for one may not be effective for another.

Business leaders and those in charge of corporate finance should remain aware of the alternative financing options that are becoming available in the market, as these can frequently offer more appealing terms than traditional investment loans.

Limitations associated with bank loans for building a solar power facility.

It is essential for borrowers to be aware of the current financial market options and to thoroughly evaluate each individual offer. The financial experts at Advanced Financial Agency are prepared to offer you and your team detailed guidance on executing investment projects.

The project finance (PF) approach is among the most sophisticated techniques for securing funding for the development of large-scale solar power plants and other capital-intensive energy projects. This method enables businesses to access substantially greater financial resources than conventional bank loans.

Large corporations investing for the long term today must seek external capital, as they seldom possess substantial internal funds. Various financial tools, such as loans, leasing, and project financing, provide assistance.

Energy firms managing multiple costly projects simultaneously or dealing with debts from previously consumed energy require funding for ongoing development and the execution of major initiatives.

Project financing presents new avenues for business growth, focusing on the potential of specific projects rather than the assets of the borrowing entity. As project financing gains traction and more efficient variations of this approach emerge, it is increasingly applicable to smaller projects.

In financial literature, the term ‘project finance’ is defined in various ways, leading to ongoing discussions among researchers about whether it should be classified as a method, formula, concept, or type of financing.

Historically, project finance has roots in ancient practices, such as when Greek merchants funded trade ventures by borrowing against anticipated profits.

Typically, those advocating for a project will form a new entity to carry it out, which allows them to limit their liability for any debts incurred, distinguishing it from traditional loans.

The establishment of project finance necessitates the creation of a Special Purpose Vehicle (SPV), which oversees the solar project and secures the necessary funding. In the realm of financial literature, various definitions of ‘project finance’ exist. Scholars are still engaged in discussions regarding whether project finance should be classified as a method, formula, concept, or type of financing.

Regardless, the concept of project finance has historical roots, tracing back to ancient times when Greek merchants financed their trade ventures by borrowing against anticipated profits. Typically, the advocates of a project will establish a new entity to carry it out, which, in contrast to traditional loans, limits their liability for any obligations incurred.

The structuring of project finance necessitates the creation of a Special Purpose Vehicle (SPV) that oversees the solar project and secures funding.

Upon finishing the construction and commissioning of the facility, the debt is settled through the revenue generated from electricity sales.

The shareholders and stakeholders in these companies primarily consist of entities engaged in executing a particular project, such as contractors or subcontractors.

Additionally, potential end users of the power plant requiring an energy supply may also be included. Participants in project finance establish a sophisticated network of agreements designed to optimize risk distribution, thereby enhancing project management efficiency.

In adverse circumstances, the involved parties strive to alleviate the impact and take necessary actions to rectify the situation. This approach’s primary benefit lies in its ability to distribute risks among all participants in the project.

Project finance (PF) is defined as a financing approach for investment initiatives that is independent of the project initiators.

In this model, the primary source for repaying debt is the cash flow produced by the project itself, with the debt being backed by the project’s assets rather than the company that initiated it.

The effectiveness of project finance in solar power plants relies heavily on the dependability of financial institutions and a thorough evaluation of the investment project’s profitability and anticipated cash flows.

• Relief of the public sector from high capital expenditures.

• Attraction of significant borrowed funds that cannot be obtained using traditional financial mechanisms, such as a bank loan.

• Off-balance sheet nature of financing, which contributes to maintaining a high creditworthiness of the initiator of the solar project.

• Rational distribution and effective control of project risks as a result of their diversification.

• Ability to involve government agencies and national and international institutions in order to monitor the implementation of projects.

If we talk about the disadvantages of PF, it is worth mentioning the high cost of raising funds.

The project finance method came to renewable energy in the 1990s, but initially PF instruments were used in the oil and gas sector and infrastructure. As before, this source of project financing is applicable to capital-intensive projects, since the organization of the PF scheme requires significant costs and, accordingly, may be ineffective for small projects.

Potential investors should consider possible hidden costs. In particular, there may be additional costs associated with loans and financial derivatives.

Often there are costs associated with a complex procedure, including diversification of risks and distribution of responsibilities of the parties involved in the project. The last danger associated with the implementation of a solar project using project finance is the risk of conflicts between individual participants involved in the project. 

• Technical barriers. Power generation is difficult to accurately predict due to changing environmental conditions and fluctuations in solar radiation. It is also important to consider that technological progress brings more and more new technologies that can compete with the current project.

• Economic barriers. The danger lies in a decrease in demand and a drop in the cost of generated energy after the guaranteed period. Abrupt changes in the structure of the economy can change the market environment. The lack of capital in some markets also creates certain problems for attracting financing for solar projects.

• Political obstacles. Political risks affect not only developing nations with their unpredictable laws and significant corruption levels. Currently, certain countries are retracting incentives for solar energy, leaving ongoing projects to navigate the market independently. In conclusion, project finance is an excellent option for building multi-megawatt solar power plants and other substantial facilities.

Project finance facilitates the acquisition of sufficient resources and the diversification of risks.

Successful companies in auctions typically face constraints on the time available to increase their photovoltaic capacity.

What is the most effective financial model for a solar power plant project in the current market?

There are two principal options.

The first business model is to finance the construction of a solar power plant through a long-term bank loan. In many countries, such a loan is not difficult to obtain by holding a successful auction and submitting a serious business plan.

The second business model involves the organization of project finance (PF) with the involvement of an investor who, at a price determined depending on the capacity of a given facility, finances its construction and acquires ownership of this asset.

Sometimes the company, in addition to cash injections associated with the completion of the solar power plant, receives a long-term contract for its maintenance. 

The transaction is usually carried out as the purchase of shares in a limited liability company whose assets are a photovoltaic installation. Typically, a long-term contract for the operation and maintenance of the facility is signed between the same parties.

The company that is the subject of the transaction receives a guaranteed sales price for the energy produced for 10-15 years and guarantees the estimated costs necessary to keep the installation at the highest level of efficiency.

This situation allows investors not only to gain know-how related to the engineering design and construction of power plants but also to secure a long-term source of income.

Equally important in this case is the availability of free funds that can be spent on the development of new projects. 

What is the cost of a 1 MW solar power plant?

The expenses associated with constructing a solar power plant are not disclosed until the project initiator conducts thorough design assessments and engages in discussions with prospective contractors and equipment vendors.

The estimated cost per megawatt of installed capacity can only be provided roughly, taking into account the unique aspects of the project and the local market conditions.

How much would an investor need to spend on a 1 MW solar power plant?

Current global estimates vary between $735,000 and $1,256,000.

This range is influenced by factors such as the selected technology, facility size (economies of scale), labor expenses, proximity to infrastructure, and more.

Additionally, it is important to consider the primary operating costs that the investor will encounter.

– Ongoing maintenance expenses incurred by the operations and maintenance contractor.

– Costs associated with leasing the land for the solar power plant.

– Property tax: the tax rate varies by host country, and skilled consultants can help mitigate this risk and optimize tax liabilities.

– The expenses are related to the periodic replacement of inverters and other components. Costs for insurance and financial services.

– For further information on the costs of constructing and operating a solar power plant, please reach out to the Advanced Financial Agency.

What factors should an investor take into account when developing a solar project?

The application of sophisticated financial models in the development of solar power plants, such as project financing, has revolutionized the renewable energy sector over the past few decades, making it a viable business with a low entry barrier.

As the market continues to mature and expand globally, solar energy is increasingly viewed as a promising investment opportunity.

However, the photovoltaic industry presents significant complexities, with the primary risk stemming from the investment time frame, which typically spans 10 to 15 years from the initial energy sale.

Throughout this duration, the cash flow generated from electricity sales is generally secured at the auction price and adjusted for inflation. Following this period, it is essential to project the price for the entire remaining lifespan of the installation.

The world’s leading equipment manufacturers guarantee that the performance degradation of solar panels will not exceed 20% within 25 years of operation. If the cost base is low enough, that is, provides a positive cash flow after the guaranteed tariff period, the investment time horizon can be up to 30 years (depending on equipment and quality of service).

The truth is that it is almost impossible for project proponents to predict prices for renewable energy in 10-15 years, that is, beyond the typical guaranteed period.

What factors should guide a business in its investment decision-making process?

At this stage, it is important to understand that investments in a solar project must necessarily pay off in a much shorter time than provided by the terms of the contract for the supply of electricity. The future is uncertain, so you cannot rely on it. Investors looking to make the right investment for large funds should receive the expected return during the guaranteed price period.

Otherwise, it becomes a gamble worth tens or hundreds of millions of dollars. However, the price of electricity is not the only factor influencing the revenues of a solar project. Much depends on the amount of electricity produced and sold to consumers throughout the year.

It depends on the amount of sunlight in the area, the quality of the installed equipment, periodic inverter replacement, and professional maintenance. The listed aspects can only be calculated by an experienced specialist. 

Furthermore, it is largely feasible to evaluate it only upon the conclusion of the installation process. The final agreement should be executed only after all construction and installation activities are finalized, along with the technological commissioning of the entire system, ensuring confirmation of the anticipated electricity production levels.

The profitability of investing in a solar power plant is influenced by several key factors:

• The cost of building or purchasing an object.
• Time frame of the investment project (period of return of funds).
• Expected prices for generated electricity in the coming years.
• The amount of electricity sold during the specified period.
• The amount of operating expenses for the year.
• Choice of source of funds. 

When creating a financial model for a solar power plant, it is crucial to consider the complexities involved in constructing such facilities, which can sometimes entail certain risks and uncertainties.

This encompasses not only the duration of construction and equipment installation, which may range from 3 to 12 months or longer, depending on the project’s scale and the technical challenges that may arise on-site.

The success of the project hinges on effective planning, the engineering design of the solar farm, identifying and preparing an appropriate construction site, securing necessary permits, sourcing electrical components and metal structures, and the installation process, among other factors.

If you intend to develop a large-scale solar power facility, reach out to our consultants.

Our financial and technical experts will assist you in obtaining an accurate construction cost estimate, choosing appropriate engineering solutions, and identifying the best financial model tailored to your project.