In the first of a 2-part column, renewable energy focus looks at the murky waters that need to be navigated when structuring and financing a PV project.

By Stefan Schmitz

Photovoltaics (PV) offers a relatively simple and low risk technology. While the financing of PV projects should generally be carried out along the lines of conventional project finance structures, particular features of the technology and the market will necessitate a number of important adjustments. They will require banks and sponsors to look at – and take into account – issues that may be unfamiliar to them from other energy (or even renewable energy) projects.

PV projects also offer a great opportunity for investment. In 2006, global industry revenues were US$10.6 billion, while capital investment through the PV business chain totalled US$2.8bn. The industry raised over US$4bn in equity and debt financing, up from US$1.8bn the previous year (source: Solarbuzz.com, Marketbuzz 2007, Annual World Solar PV Market Report).

THE PV market

The PV market has been undergoing rapid development and growth in recent years. While the PV market still suffers from a lack of sufficient supplies of crystalline modules, which in turn is the consequence of a shortage of silicon (silicon contributes about 45% of the cost of a crystalline module, which is driven by the costs of the silicon wafer) the situation has improved and is expected to improve even further.

This is because of the growing share of thin-film modules which do not require silicon and which have now – by and large – become accepted, bankable technology. It also appears that the shortage of silicon is about to come to an end fairly soon. More than 70 silicon generation facilities are currently being planned and constructed, and if even half of those were to see completion, the silicon shortage should be overcome before long.

Just as with wind, Germany has shown the strongest growth rate in PV. This is almost entirely the result of the favourable and very high feed-in tariff regime (in excess of US$ 0.6/kWh). Germany has comparatively little irradiance form sunlight so, in normal and market driven circumstances, PV projects in Germany would make little sense and would be wholly unprofitable.

Japan – the other major host to PV projects – and Germany together accounted for 72% of the world’s PV installations in 2006. Germany alone accounted for 55%, a figure which, together with about one third of the world’s wind capacity installed, underlines the country’s leading position in renewable energy.

The consolidated world production of PV cells increased to 2.204mW in 2006, up from 1,656mW the year before and thus a third higher (source: Solarbuzz.com, Marketbuzz 2007, March 19, 2007). It is estimated that the worldwide annual PV installation rate will reach 3.2gW by 2010; a threefold increase over 2004 market installations. World PV annual turnover is set to grow from US$6.5 billion in 2004 to US$18.5 billion by 2010 (source: Solarbuzz Inc).

Today the hottest and fastest growing PV markets are Spain, but also the US, Italy and Portugal. Spain, in particular, has enacted very generous tariff legislation which pays almost as much as Germany did in the heydays of its own PV boom. The Spanish market was up 200% in 2006, the US 33% (Ibid). Expectations for return on investment in Spain are often in excess of 20%. Given the certainty of the off-take regime, and the reliability of the technology this is a very good market for investment (NB – the Spanish government has recognised the dangers of an overheating market – and the costs for the consumers associated with it – and is considering some kind of a cap for further installations. Some of these rumours have strongly affected the Spanish market in the last few weeks but no decision can be expected before the end of the summer break).

While it is correct to say that the financing of PV products works along the lines of conventional project finance structures, there are a number of particular factors unique to PV projects which banks and sponsors will need to pay attention to.

Technology of PV modules