Clean Energy Finance: From Start Up to Success


By Corey Cantor and William Graves The “Intro to Finance” session, presented

Sol Systems' Director of Investments, Andrew Gilligan, walked CELI fellows through what it means to finance an energy project

by Andrew Gilligan, covered three main topics: a basic finance overview, corporate finance, and project finance.  By providing insight into each of these, the presenter provided the class with its first taste of how energy projects move from conception to completion.

Beginning at a high level, Andrew explained that finance is how an entity raises and/or spends money. Investors look to invest money into a given project or company and earn a return, while those on the other side of the equation work to raise capital for specific ventures. Capital consists of debt and equity. Debt is the most senior in the capital stack, and provides the least upside for the investor. By providing debt to a project or company, an investor is able to earn a fixed return on the investment until the debt is repaid. Equity is less senior, but allows for significantly more upside. Using the risk/return paradigm, the class learned that riskier investments demand a higher return, while lower returns correlate to less risky investments.

After turning to corporate finance, the class learned how a company grows from a small startup to a publicly traded giant. Beginning with seed funding, a company can gain financing from “friends, family, and fools”, angel investors, and/or government support. As the company is early-stage and the investment is risky, angel investors and debt providers will require high returns. Private equity and venture capital more specifically, usually take an interest in a company after it shows some growth potential. These investors expect most investments to fail, but their losses are balanced by the very high returns they make on the few that succeed. More mature companies raise capital through the public markets. After an IPO (initial public offering), a company is able to sell shares of equity to raise funds. On the debt side, a company can issue bonds if it is in need of capital. As the company is now “public” investors can assess the strength of the company by analyzing its balance sheet, income statement, and statement of cash flows. These three documents are updated and issued quarterly, allowing investors the ability to keep a close eye on growth and key financial strength ratios.

Andrew then turned to the specific issues around Project Finance in Renewable Energy. Project finance is the use of non-recourse debt to finance energy projects. To utilize project finance a firm must first place an energy project into a holding company, or special purpose vehicle. This is done to protect the company from a potential project failure and its associated financial losses. The project is then financed through a combination of debt and equity. As the special purpose vehicle does not contain any assets before the project is built, the owner of the project must demonstrate that the project will have contracted revenue once it is placed in service. The lenders diligence key contracts such as power purchase agreements, site lease agreements, and interconnection agreements in order to make a determination as to whether or not they want to invest in the project.

Next, Andrew discussed two innovative ways to finance solar projects: Yield-Co’s and Securitization. Yield Co’s focus on raising capital by selling shares of a publicly traded company. Securitization allows companies to bundle together homogeneous projects and issue bonds (a form of debt) to finance projects. SolarCity is one of the only companies currently financing projects through securitization. The discussion turned to the impact of tax credits (both Investment Tax Credits and Solar Renewable Energy Credits); where Andrew explained how they helped solar grow over the past five years. He forecast the potential impact on the upcoming expiration of the solar tax credits by sector (residential, commercial, and industrial).

The session ended with a return to the fundamentals: Andrew noted that the economics of the market are key. Investors want a sound return on investment and will not make decisions that are not financially beneficial to the firm. Nevertheless, the group noted that policymakers can make an impact through tax credits, and there are state incentives that can be offered regardless of the result of tax credits on the federal level. With battery development moving into a new phase, there is even greater potential moving forward. Overall, the Introduction to Finance session covered a lot of ground, but gave our class a good insight into how investors make decisions on which projects to finance.