In a recent report, Standard & Poor's (S&P) Ratings Services says the convergence of less costly renewable energy technologies and a global consensus on the desirability of clean energy is attracting interest from a growing number of investors. This interest is increasing demand for independent evaluations of the suitability of individual projects as investments.
The New York City-based financial services firm currently rates the project finance issues of 19 renewable project development companies, including Solar Star, Topaz and CSolar. This number is expected to climb steadily along with the market.
In the not-too-distant past, project developers would raise the funds to build renewable energy facilities from private equity. Now, large institutional investors are entering the mix. It's worth noting that Solar Star is owned by Berkshire Hathaway and CSolar, developer of the Imperial Solar projects, is owned by Tanaska.
Michael Wilkins, an analyst in S&P's London office, says his firm generally performs its analysis of projects and issues ratings on behalf of a client that is a sponsor of a particular project. Usually, those clients ask S&P to evaluate the credit risk of their project proposal prior to completion, but sometimes it relates to a project that is already operational.
‘The way we operate is that we receive mandates from project sponsors – mainly developers, but also financial backers, such as infrastructure funds,’ Wilkins says. ‘We then perform our credit analysis on that project on behalf of the sponsor that has engaged us. They will then take that analysis and the rating that comes out of it and use it for a bond issue, which they sell in the market.’
Wilkins says the process is not the same as due diligence – which fulfills a legal requirement – although it involves a very thorough examination of the technical, engineering and commercial aspects of the project. It is more of an independent evaluation of the creditworthiness of the project.
One of the reasons S&P is moving more aggressively into the renewable projects ratings arena is that more investors of a greater variety are looking to enter the market. As a rule, ratings are used to widen the investor base and also to provide a benchmark for pricing purposes.
‘In general, the type of sponsor has evolved,’ Wilkins says. ‘In the early days, back in the 1990s and early 2000s, most of the sponsors were developers or utility companies. Now, we're seeing more infrastructure funds and financial sponsors.’
S&P's first solar rating was of the Harper Lake parabolic trough concentrating solar power station in California. In 1998, the company gave the project a BBB- rating. Harper Lake still has three years left on its debt maturity and currently carries a BBB rating from S&P. In the 2000s, the firm began rating more renewables projects in Europe – mainly wind.
Starting in 2007 and onward, S&P began looking at solar projects that were receiving loan guarantees from the U.S. Department of Energy. Trevor D'Olier-Lees, an analyst in S&P's Manhattan office, says the firm probably examined 80 to 90 different transactions under the program, which gave the ratings group a lot of insights into the solar sector. At the same time, the relative newness of solar power plants as an asset class and their thinness on the ground relative to other types of infrastructure removes some of the historical verification of its analysis methods.
One source of S&P's confidence for the way it evaluates solar energy projects is, in fact, the methodology it has developed for analyzing finance in other sectors, where historical data is deeper.
‘In addition to our own experience and expertise, we have used – as an input to the analysis – the knowledge gained from technical reports provided by independent engineers to opine on the risks of construction, whether it be a renewable project or a more traditional infrastructure project, such as building a bridge,’ D'Olier-Lees says. ‘We also look at market studies and production studies when compiling our assessment. To do this, we use our own methodologies and expertise in these areas. Our rating process for project finance is not specific to solar projects but is applicable across the board. We then tailor the risk assessment and assumptions to solar projects.’
According to D'Olier-Lees, where the amount of data is limited, S&P will factor in some conservatism based on its experience with projects in other industries. One result of this cautious approach is that ratings for solar projects tend to be a notch behind those in sectors with longer track records.
For example, D'Olier-Lees says the ratings group is comfortable in assigning BBB category ratings for the Solar Star project – BBB for the construction phase and BBB+ for the operations phase – but it is uncomfortable moving this asset class in general into the A category because there is not a lot of data on large projects.
That's just for today, however. As solar assets continue to perform and historical data continues to pile up, the comfort level for them is likely to increase across the board.
‘What's interesting in the [Solar Star] report is that we're using a methodology that's quite transparent,’ D'Olier-Lees says. ‘You can see how we rate it and the assumptions we make.’