Lifecycle Quality Best Practice Guidelines

5.1. Introduction: discontinuity points across the lifecycle of solar assets

In the lifecycle of a PV plant, there are specific events that represent discontinuity points. They should be handled carefully to keep risks under control, ensure that the appropriate stakeholders and skillsets are involved, and avoid “gaps” in the transition phase.

In particular, the most relevant discontinuity events can be summarised as follows:

→ Change of phase of a project:

• Development, engineering, procurement

• Construction

• Operation under EPC warranty

• Operation under ownership

• Decommissioning & disposal

→ Change of ownership between Asset Owners

→ Change of financing structure, such as closing new financing or refinancing

The fundamentals of LPM are described under chapter 4 of these guidelines. The present chapter focuses on the relevance of due diligence to ensuring continuity as a project transitions through the phases of its lifecycle.

5.2. Change of phase

When transitioning between project phases, it is crucial to conduct appropriate assessments to ensure the quality of a project, identify potential issues that could impact a project in the medium- and long-term, and ensure that the forecasted financial returns can be achieved.

A thorough assessment of solar assets typically requires a multi-disciplinary and holistic approach, as shown in Table 1 in chapter 4. The relevant assessments can be conducted by in-house teams if the right expertise is available. However, using an external advisor is recommended (especially for technical and legal due diligence assessments) to ensure a fully impartial view. In addition, an external advisor can provide a wealth of benchmarking experience from other projects or assets they have analysed. Information obtained via objective and independent due diligence is a critical component of the investment and lending process, and such efforts directly affect the confidence that key parties, in particular service providers, lenders, and investors, have in the solar markets.

Depending on the size of the PV portfolio involved, the standardisation level of some contracts (e.g., insurance policies) and the geographical focus, some due diligence tasks can be skipped.

The results of the various assessments provide the rate and reliability in terms of performances for the lifetime of a PV plant.

5.2.1. Development, engineering, procurement

This phase covers all the tasks undertaken to get the project ‘shovel-ready’ or ‘ready to build’. Usually, this is focused on the technical and financial development of the project, with a series of transactional milestones, such as investment committee approval, execution of EPC contracts and financial close.

It is important to assess the quality of the developed project to reach  a final decision to build the project and sign the relevant contracts. In particular, the following aspects need to be analysed and it is recommended that they are properly investigated with legal and technical due diligence:

Yield estimates

To estimate the energy yield potential of a PV plant, technical advisers typically use simulation software based on models that use the best available data and methods. The result of the modelling is the P50 estimate, or in other words, the “best estimate”. P50 is essentially a statistical level of confidence suggesting that the predicted solar resource/energy yield may be exceeded with 50% probability. P50 level of confidence may represent too high a risk for some investors. Therefore, other probabilities such as P90 (estimate exceeded with 90% probability) or P75 (estimate exceeded 75% of the time) might be considered. Lenders and investors might use P90 estimates in uncertain, or high-risk profile projects to be confident that sufficient energy is generated to comfortably repay the debt.

Land rights

Ideally, the site on which the project is located should be free of obstacles. If these do exist, they must be considered during the design phase and the relevant consents or permits for the works must be obtained then (if required). If the site is affected by restrictive covenants which preclude solar PV (limitation to solely agricultural use can sometimes affect rural properties), then a release needs to be negotiated with the beneficiary of the covenant. Alternatively, defective title insurance can be put in place. This must be at a level which would fully compensate the project company for wasted capital costs, and loss of future income, arising from the project being decommissioned earlier than anticipated. Lenders will also want to see that insurance is in place where a site is affected by rights to run service media in unidentified locations, or where mineral rights are excepted from the title.

Consistency of the authorisation process:

• Planning permission in respect of the PV plant which is clear from the risk of judicial review

• Planning permission for cable route works which is clear from the risk of judicial review

• All relevant conditions imposed on the permissions (in particular those required to be discharged prior to commencing works on site) to have been discharged

Quality of the layout

A review of conceptual design is required in relation to the selected components, as well as infrastructures to ensure the plant design is in line with market standard and respect relevant constraints / prescription of the relevant permits

• Verification of the key terms of the PPAs: including, when applicable, the creditworthiness of the counterparty

• Connection to the grid: In most cases, solar PV projects require the right to connect to the grid. Therefore, a key part of the property due diligence is to check that both the site and project company have the rights to lay a cable to the point of connection to the grid 

5.2.2. Construction and operation under EPC warranty

If technical problems are not detected early during the construction of the plant, or at least within the two-year acceptance period, they can affect future performance and long-term operation. An Asset Owner/project developer will need the professional view of a technical advisor to check the overall quality of the plant. This will include a detailed review of components used on site, future yield estimations and site visits during and after construction. From the Owner’s perspective, it is crucial for the technical advisor to identify any major issues prior to the acceptance period commencing, or at the latest, before the acceptance period is complete. Some crucial steps in the operation of the plants are the acceptance. The role of technical advisor becomes crucial during the PAC and FAC tests (whose recommended protocol has been described under Chapter 9 of the EPC guidelines).

5.2.3. Operation under ownership

In addition to periodic technical verifications, other important areas of evaluation for plants in operation are accounting and tax matters. It is the responsibility of SPV directors to verify all relevant documentation, especially when dedicated tax benefits have been obtained, to ensure legal compliance and avoid significant penalties. It is best practice to include a third-party auditor in this process to ensure transparency.

Effective tax and accounting due diligence may also reveal key indicators of potentially fraudulent activity. These can range from unusual transactions, discrepancies in accounting records, activities/transactions outside the normal course of business, and changes in important credit and underwriting policies and procedures.

5.2.4. Decommissioning

During the decommissioning phase, the role of technical advisor is to confirm that the components of the plant have been dismissed/recycled according to the relevant regulatory framework and that the land/roof has been restored to its original conditions. This work is particularly relevant for local authorities, landlords, and building owners.

5.2.5. Change of ownership

If ownership a PV plant or portfolio changes hands, it is very important for the potential buyer to collect the relevant information and to learn as much as possible about the “history” of a plant and the SPV. In addition, due diligence may also benefit the seller as a rigorous assessment and examination may reveal market value that is higher than expected. Hence why it is not uncommon to also have a “vendor due diligence”, commissioned by the Seller prior to starting a selling process.

5.2.6. Financing or refinancing

The introduction of debt financing within a project’s capital structure or refinancing at any phase of the lifecycle of a PV plant, typically requires detailed verification. To satisfy lenders’ requirements for approving initial or further financing, all aspects of the project must be aligned and quality assured. Ensuring sufficient protection of an investor’s capital requires a fully functioning, and revenue-generating project, with all the required  permits.

Accordingly, a solar project finance transaction is not a mere negotiation of financial structuring but also involves an analysis of real property rights, construction and development contracts, equipment warranties, power purchase and interconnection agreements, PV power plant performance, cash management, environmental permitting, energy regulatory matters, and, of course, tax analysis.

The key rule for project finance is risk mitigation: the transaction structure must allocate risks that could affect the project’s cash flow to a creditworthy party, with the ability to mitigate them . Much of the tension in negotiating solar project financing derives from each participant’s efforts to properly identify risks and shift them to others while retaining the benefits from the transaction. For example, the project sponsor usually seeks to shift technology risks to the equipment manufacturer and EPC service provider, while preserving as much of the cash flow and appreciation in project value as possible for itself. The lender will usually seek to shift risk to the Owner by taking paramount positions in the project revenues and assets. They will also seek to guarantee the loan repayment schedule by placing contractual obligations and risks related to warranties onto third parties, such as equipment manufacturers and EPC service providers.

Risk shifting can be done through various legal procedures, including (i) grants of liens on the project assets, revenues, and key project agreements; (ii) warranties and contractual requirements for the equipment and for the maintenance services performed; (iii) requirements for various types of insurance products to cover certain adverse events; (iv) and guaranties of each participant’s obligations from creditworthy entities. During a project financing transaction, the relevant advisor focuses on the calculation of risk magnitude, and the negotiation of risk-shifting devices. This normally results in substantial and complex documentation that must be effectively stored and closely evaluated.