Developers, bankers and other market participants are talking increasingly seriously about the prospect of solar projects in Texas obtaining debt financing on the basis of power hedges, even with a potentially detrimental trade case decision looming in Washington.

Developers have been asking commodities traders for quotes on power hedges for solar projects in Texas for at least six months, though deal watchers speaking with PFR recently were not aware of any such deals reaching financial close yet.

“Until this year, on a cost basis, they couldn’t get done,” says a renewables developer in California with several years of experience in power marketing. “To me, it’s a really interesting development. In my mind, by definition, if you can get a hedge in ERCOT, you are at market parity, because a hedge is the price for power.”

As much as two thirds of the solar projects in the queue in Texas, representing some 5.3 GW of capacity, could be done on the basis of hedges, he adds, noting that solar has an advantage over wind in that it is less geographically constrained and is an on-peak source of power.

Banks have also increasingly been looking at such deals, as well as solar projects that require lenders to attribute some value to a merchant tail after the expiration of the contract in order to be economically viable. 

This is partly because competition to acquire contracted, development-stage assets has been so fierce that acquisitive sponsors have had to assign value to the merchant tail in order to be successful in auctions, says a project finance banker in New York. In order for them to hit their return targets, they will need to size the debt accordingly—meaning longer amortization schedules.

Market participants weighing the risks of financing merchant solar risk in the U.S. need not look far for a cautionary tale. Several projects financed on the basis of merchant cash flows in Chile ended up in distress in 2016, amid tumbling power prices, a mining slump and the travails of sponsors such as SunEdison and Abengoa (PFR, 3/22/16).

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