On August first, Acciona Energy closed financing on Nevada Solar One, in the first leveraged lease structured financing in the United States.
This begs two questions:
- What in the world is a leveraged lease structured financing?
- Why do we care?
What in the World?
An in-depth analysis of the economics of leverage leasing for all three parties involved is available here. Structured financing is a generic term for any form of financing more complex than a loan or a rental. For those of you who need to remain awake, here’s the short version: a leveraged lease is a way of obtaining financing that allows the three parties (lenders, equity investors, and lessee) involved to parcel out the risks, tax benefits, and income streams in a way that suits each of their needs.
Why We Care
While using structured finance can lead to substantial financial benefits for the parties involved, the deal can only be done if the lenders believe that the cash flows from the underlying asset, in this case Nevada Solar One, a Concentrating Solar Power (CSP) plant, are sufficiently reliable that they are willing to loan money in exchange for a share of those cash flows.
In other words, the lenders believe that Acciona (ACXIF.PK) will be able to operate the CSP plant with sufficient reliability to earn enough money to eventually pay off the $266 million they put up for the deal. The equity investors believe that the CSP plant will retain some value at the end of the lease, so they will not be left holding the bag.
The completing of a leveraged lease is implicit proof that all the financial institutions involved have a degree of confidence in CSP technology, which they would not have in a development stage technology. By their actions, lenders Spain-based Banco Santander and BBVA, and Portugal-based CAIXA Geral de Depositos and equity investors JPMorgan Capital Corp., Northern Trust (NTRS) and Wells Fargo (WFC), are all saying, "Concentrating Solar Power is a main-stream technology, and we are confident of its predictable operation for the lifetime of the lease." Just as important, they’re putting their money where their mouths are.
When lenders believe in predictable cash flows, they reduce the interest rate they charge to finance a project, just as a mortgage company will charge a lower rate of interest to a married couple with steady jobs than they would to a single man who has never worked in his life (if he could obtain a loan at all.) A lower interest rate translates into a lower discount rate when calculating the Levelized Cost of Energy which a technology can produce.
With financial innovation, a group of Iberian and American financial institutions have reduced the cost of energy which will have to be paid by this plants and future CSP plants in the United States just as surely as any technical innovation would. Everyone who wants clean energy at affordable prices should care.
UPDATE: 9/13: In this article on CSP by Fortune/CNN columnist Marc Gunther, he quotes an executive at CSP developer Ausra, saying "As soon as we can build solar power projects with the same cost of capital as building conventional coal or natural gas plants, we’ll deliver electricity at the same cost as coal." (emphasis mine.)
DISCLOSURE: Tom Konrad and/or his clients do not have positions in any of the companies mentioned here.
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