Lenders are increasingly backing solar-storage projects with long-term contracted revenues, such as PPAs, a key factor, meanwhile Inflation Reduction Act provisions in the US have seen greater use made of tax credit transfer bridge loans – the Texas market, where there is high demand for alternative forms of energy, is proving particularly popular
Recent weeks have seen a flurry of announcements concerning financing facilities for major solar and storage projects. Such schemes are extremely fashionable, particularly in the US. Lenders and investors find the long-term contracted revenue – in the form of PPAs [power purchase agreements] or VPPAs [virtual power purchase agreements], for example – associated with such projects, coupled with battery storage merchant risk, particularly appealing. The Texas renewable energy sector has been especially attractive to investors – demand for alternative sources of energy in the state is particularly high, especially given the sometimes astronomical energy bills consumers have had to content with in recent years.
The introduction of the Inflation Reduction Act has had the effect of dramatically changing the way clean energy project financings are being structured. This was made evident recently when it was announced that Sunraycer Renewables had closed a $475 million project financing facility – earmarked for solar and energy storage projects – with MUFG Bank, Nomura Securities International and NORD/LB. A statement said the Sunraycer facility was divided between a construction-to-term loan and a tax credit bridge loan, a “structure that has recently become available as a result of the ITC transferability provisions in the Inflation Reduction Act”.
Rise of tax credit transfer bridge loan facilities
The introduction of the IRA meant that project developers were given the opportunity to monetise tax credits by selling them to unrelated third parties as well as the established tax equity market. However, monetising tax credits through tax credit sales creates “timing mismatches” due to the fact project developers require a large amount of capital for the construction of a project before tax credit buyers are permitted to pay for the credits. Consequently, the market is now seeing tax credit transfer bridge loan facilities, sized in accordance with the projected sale price of the tax credits, being used to bridge this gap.
In the case of Sunraycer, the tax credit bridge loan – in conjunction with the construction-to-term loan – will be used to support the construction of two projects in Texas, totalling 241MWac of solar and 125MWac of paired battery energy storage systems. The first project, Gaia, is a 143 MWac solar + 75 MWac battery storage project located in Navarro County. The second, Midpoint, a 97.5 MWac solar + 50 MWac battery storage project located in Hill County, began construction late last year. Both projects are expected to reach commercial operations later in 2025. Louise Pesce, managing director at MUFG, which part-financed the projects, referenced the benefits they would provide for Texas energy consumers: “The Midpoint and Gaia assets will help meet growing demand in ERCOT and have material positive impacts on Texas ratepayers and the environment.”
Compelling investment: Long-term contracted solar revenue & merchant battery storage exposure
The Texas market is also proving attractive to overseas-based investment managers. Earlier this month, Denmark-headquartered investor AIP Management entered into an agreement to acquire a 49.99 per cent equity stake in Pine Forest – a co-located 300 MWac solar photovoltaic (PV) and 200 MW / 400 MWh battery energy storage system project in Texas – from Clearway Energy Group, with the total investment standing at approximately $200 million. The fact the project’s solar PV capacity will be fully contracted through long-term virtual power purchase agreements with “investment-grade corporate off-takers” made it a particularly appealing proposition. Domenico Tripodi, partner and co-head of investments of AIP, said that Pine Forest was a “compelling investment, combining long-term contracted solar revenue with merchant battery storage exposure”.
Solar and storage is seen as a winning combination by many lenders. Earlier this month, a group of lenders including BNP Paribas, Canadian Imperial Bank of Commerce (CIBC), Crédit Agricole CIB, KeyBanc Capital Markets and Natixis CIB – as well as Wells Fargo, acting as coordinating lead arrangers – provided a $1.71 billion debt facility to fund the construction of Copia Power’s Maricopa Energy Center project, which includes solar and energy storage. Located in Maricopa County, Arizona, the project consists of 550MW of solar generating capacity and 2,200MWh of battery energy storage capacity. The Maricopa Energy Center project’s long-term contracted revenue has been a key factor in winning the substantial backing of lenders. The project is being constructed in two phases, both of which have executed PPAs with Arizona Public Service – the projects are scheduled to reach commercial operation in 2026-2027.
Enlight California project backed by busbar PPAs
Enlight Renewable Energy’s PPA-backed Country Acres project – a 403MW solar and 688MWh energy storage scheme located near Sacramento, California in the US – secured $773 million of debt financing earlier this month. The project has a 30-year solar generation busbar PPA and 20-year energy storage busbar purchase agreement with the Sacramento Municipal Utility District (SMUD). Under a busbar PPA, the buyer takes delivery of the power at the point where the facility interconnects to the grid. In contrast, with a non-busbar PPA the facility delivers electricity to one point on the grid, the buyer withdraws electricity from another point on the grid, and the contract is settled financially on the basis of the price difference between the two points.
Under a busbar PPA, the generator’s responsibility ends once power is injected into the grid at the busbar (the interconnection point that connects a generation facility directly to the grid). Such a deal facilitates risk transfer in the sense that, at the busbar, the buyer assumes both the transmission risk (that is, any losses or extra costs incurred as the electricity is conveyed across the grid) and basis risk (that is the difference in price between the busbar and the final market price). The benefits of a busbar PPA for the generator are that such a structure simplifies operations by removing the complexities associated with grid-related price volatility. From the buyers’ perspective, though the buyer assumes extra risk, they commonly secure pricing terms that are more favourable. That said, the basis risk isn’t eliminated altogether, rather it is reallocated from one party to another. Enlight has also said it expects to conclude a tax equity transaction during the construction period, noting that the project has met the terms required to achieve safe harbour status for beginning of construction.
Excelsior fund beats capital commitment target by 33 per cent
The Development Bank of Japan is another lender that has spotted a major opportunity in projects combining solar and storage. It was announced earlier this month that the bank is the anchor investor in Excelsior Energy Capital’s Excelsior Renewable Energy Investment Fund II (Fund II), which has total capital commitments of just over $1 billion. The strength of investors belief in the potential of solar-storage projects was highlighted by the fact that Fund II’s total capital commitments exceeded its original target ($750 million) by 33 per cent. Excelsior said Fund II had attracted investors from the United States, Japan, Europe, Australia, and the Middle East.
And the drive for new solar-storage installations shows no sign of letting up. For example, data from the US-headquartered Lawrence Berkeley National Laboratory (Berkeley Lab) shows that there is “strong developer interest in hybridisation”. At the close of 2023, there were 18 per cent more hybrid plants—representing 33 per cent more generating capacity—in interconnection queues across the United States than there were at the end of 2022. Solar dominates the proposed hybrid plants – at the close of 2023, there were 599GW of solar capacity proposed as a hybrid (representing approximately 55 per cent of all solar capacity in the queues), most commonly pairing PV with battery storage. Now with an increasing number of lenders looking to finance proposed plants, expect solar-storage deployment to soar in the coming years.
Strategic communications, insight and events for the global energy transition.