Solar Market and Cost Analysis
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Cost of Capital, Bank Debt
(Norton, Rose, Fulbright)
Unlike the tax equity market, project finance bank debt in the energy sector reached a record level
in 2022, with $96 billion in deals, up 43%.
Though there were fewer deals in 2022 (211) than in 2021 (224), there were many large-scale deals
outside the environmental, social, and governance sector, For example, $20 billion of deals were
done for liquefied natural gas, in large part due to the war in Ukraine. There were also others deals
for airports and semiconductors.
Debt service coverage ratios for solar project finance loans were 1.20-1.25 for utility-scale projects
and 1.3-1.5 for community solar projects (they were 1.30–1.35 for wind).
Banks are no longer basing the price of deals on LIBOR, but now instead use SOFR. In January 2023,
the daily SOFR was trading at 4.3%. Total fees on top of that rate generally range between 2.25% and
3.00%, putting the total coupon between 6.5% and 7.5%.
Banks are now also willing to offer loans with some merchant risk (i.e., a portion of future electricity
sales do not have a predetermined price).
Sources: Norton Rose Fulbright Cost of Capital: 2023 Outlook.
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