One of the biggest obstacles to connecting solar project developers with the investors that could provide them with financing comes down to communication, according to Haresh Patel, Chief Executive of Mercatus, which provides origination and syndication services for energy investors. The company has scored some big clients offering software that gives banks and other funding sources a simple roadmap to figuring out which projects have promise.
Financing solar projects is not new, and mechanisms have evolved to ease the process. But information available to both project developers and potential investors is neither standardized nor streamlined, and there is little transparency in what information banks and other lenders need to assess a project’s viability, Patel told Breaking Energy.
A lot gets lost in translation between solar project developers, who are more focused on project costs, and lenders, for whom creditworthiness is just as important. And the relative youth of the industry means that a lot of the rules, or standards, of obtaining financing are not yet in place. “There are a lot of first-timers on the developer side,” and banks have done a “horrible job” of telling developers what they need to do to secure financing, Patel said.
Part of the banks’ failure to communicate comes down to an inefficient system of project evaluation. “You’re dealing with roughly 1,000 pages of different documents, about 60 people who are touching this at any given time when they’re analyzing the project from a banking perspective, and disparate e-mails, dropboxes – it’s not automated,” Patel said. “The costs easily amount to $1 million in diligence fees.”
“The problem is lack of communication, lack of rules, and a blizzard of paperwork,” said Patel.
“The net result is extremely slow decision funding, very low harvest ratio in terms of what projects actually get financed, and then diligence costs that are just killing the deal, so the market isn’t taking off.”
The Big Data Solution
Mercatus has developed software to streamline the process, with benefits for both investors and developers.
It starts with an interface that tells an applicant exactly what sort of information the lender requires to evaluate the project. “It gives you transparency into what you need,” said Patel. “Everybody thinks they’ve got the perfect project, they don’t know why they don’t get any answer, and they finally realize ‘oh, I’ve only got 35% of what the banks actually require’.”
The software also gives the project developer an idea of how the information provided stacks up against requirements. “It gives you a score of how well you’re doing against what’s needed,” Patel said. It factors in government incentives, timelines, financial modeling, and other categories that, when evaluated in total, “provide meaningful feedback on the creditworthiness, or financeability, of the project”, he said. “These modules generate what we call the industry’s first FICO score.”
Securitization
In addition to providing efficiency and transparency for developers seeking funding, their completed applications, which use a single system of metrics, can be easily compared and bundled into groups sharing certain characteristics. Ease of comparison facilitates securitization – or pooling of debt for resale as a single package – which could be a real boon to both lenders and developers.
“Banks are wholesalers,” said Patel. “They want big deals, and up to now, they’ve been happy because there have been a lot of big deals around – $300 million, $1 billion.”
But the number of these projects is shrinking, in part because there are limits to the number of large projects that can be easily integrated into the grid. “There’s not a lot more you can put out there in the desert, because we still don’t have transmission capacity. We still don’t have the fortitude to add to the grid, fight the environmental issues, etc,” Patel said. Investing in a securitized pool of smaller solar projects can be an attractive alternative.
Customers
Mercatus does not yet count any banks among its clients, though the company has sold its software to utilities, independent power producers, corporate tax equity providers, and new funds, such as Real Estate Investment Trusts (REITs) and master limited partnerships (MLPs).
And there may be prospects for expanding Mercatus’ services beyond solar. Patel said that several of Mercatus’ large customers see possibilities for using the software in their traditional energy businesses, where the flood of cheap natural gas on the market and other factors are beginning to result in substantial changes to the way utilities have traditionally functioned.
“Once you have everything in one big database, that’s the power of big data,” said Patel. “That’s going to be a relatively easy dashboard for our platform to support, given its architecture.”
