As project finance has become available for solar assets with financial hedges in Texas, sponsors that are bullish on the market have begun to explore innovative contract structures that preserve more potential upside for them while still providing comfort to lenders and tax equity investors.

Copenhagen Infrastructure Partners is one such sponsor, having financed its 240 MW Misae project in Childress County on the basis of a swap that effectively guarantees a fixed price for seven years followed by an arrangement known as a "collar" for a further three years.

The 10 years of revenue certainty provided by the contracts allowed CIP to bring in tax equity financing, in this case underwritten by U.S. Bank and syndicated out to Springfield, Mo.-based automotive parts retailer O’Reilly Auto Parts.

collar cartoon
"Shall I leave a little room for upside, Sir?"
But the three-year collar also means the sponsor will benefit if the price of power is higher during that period, rather than being locked in to a completely fixed price, as it would be with a more straightforward swap.

Goldman Sachs provided the swap and collar through its commodities trading division, J. Aron & Co.

Swapper's remorse

“Every developer should be bullish about the market," says a senior energy commodities trader in New York. "If you don’t believe the market is going up, you should not be building a power plant."

An investment banker who specializes in renewable energy agrees: “Sponsors, left to their own devices, would prefer to go merchant," he says. "Also because they don’t have to worry about basis risk.”

In the past, sponsors that have signed up for a long-term swap, especially on wind projects, have sometimes ended up offering to buy their hedge providers out of the back end of their contract or restructuring the deal to reduce the volume covered by the swap, especially in the summer months. In either case, the permission of any tax equity investors must be obtained.

The collar structure preempts this situation by granting the sponsor some merchant exposure earlier in the life of the project.

Should prices fall, on the other hand, a three-year collar provides a price floor to protect the project—and any tax equity or debt providers—against adverse power market conditions.

Time tested

The collar option strategy has been around for many years, and has been applied not only to commodities like power and gas but also to equities, where it is sometimes known as a "hedge wrapper." It involves simultaneously buying a put option and writing an out-of-the-money call option.

"The call they sell reduces the put a little bit," the commodities trader explains. "You get a higher swap, because you shorten the tenor, and you get a range of merchant upside in the back because you have downside protection and participation all the way to the call side."

[For a thorough explanation of various types of synthetic power contracts, including collars, see this article by project finance attorneys John Marciano and John Frenkil from 2013.]

CCA Group advised CIP on the tax equity raise for Misae. Norton Rose Fulbright served as the sponsor's legal counsel and Foley & Lardner represented the tax equity investors.

Engineering, procurement and construction contractor M.A. Mortenson began construction on the project a year ago. It is located in the Panhandle zone of Ercot. Commercial operations are expected to begin by year-end.

Misae part two

The Misae project is the first phase of a solar cluster that was originally developed by Latinoamericana de Energía. The developer hired Rubicon infrastructure Partners to find a buyer for the second phase earlier this year.

At 517 MW, Misae II will be twice the size of phase one. Nacho Ruiz, managing director at Rubicon, is leading the equity raise and is understood to have identified a buyer. Ruiz declined to comment.

Latinoamericana de Energía expects to reach notice to proceed this month and begin operations in March 2021.

“The project admittedly will face the challenge of energy curtailment due to the high production from numerous wind farms in west Texas,” reads paperwork filed with the Texas Comptroller of Public Accounts in August 2018. “Misae Solar Park II … will face roughly 12.8% curtailment, which further constrains project economics.”

Taryana Odayar contributed additional reporting.

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