Portfolio Construction
Developers and EPCs are almost always working on more than one project. But their projects vary by timelines, offtakers, locations, and pricing. This works fine for one-off cash deals and customer-owned C&I projects. But it creates a puzzle for third party ownership, particularly with portfolios.
In project finance, the portfolio effect is well known. If you can group a set of projects together into a portfolio, you’ll get better pricing from buyers. Economies of scale allow buyers to deploy more capital at lower cost per project, improving overall pricing for the portfolio.
The tricky part is deciding which projects to group together to make this work. If it were as simple as throwing any project into the mix, developers and EPCs could include their whole project pipeline from speculative origination through mechanical completion across C&I and community solar projects in seven different states. But investors don’t work that way.
Our investors are IPPs who manage funds that align with specific project profiles and specific time periods. This makes them interested in some projects and not others, and some projects more than others. And their priorities are constantly shifting in subtle and not-so-subtle ways.
For developers and EPCs, these dynamics make project financing feel like a moving target. One of the reasons they use our marketplace is to find the right investor at any given time. But these challenges are compounded in portfolios, where some investors will bid on more projects than others and different projects than others, creating a multi-dimensional matrix of potential bid configurations.
What makes a portfolio?
We’re frequently asked about the right portfolio construction, which projects to market together, and even what a “portfolio” means in the middle market. The right answer is the combination of projects that maximizes value for the seller. But the specifics of how to get there vary considerably.
Our software is very flexible for portfolio construction. We don’t have hard and fast rules for projects that can and can’t be combined. And we’ve found success in the market with a wide variety of portfolio configurations. But this experience has given us a perspective on the most important factors to consider when aligning projects for a portfolio acquisition. Here are our top five:
Counterparty consistency
Development status
Offtake type
Geography
Target COD year
Counterparties: Having as many similar counterparties across the portfolio is fundamental, as it creates economies of scale for the transaction. At a foundational level, this starts with the same seller, which is who ultimately controls all of the projects. For C&I projects, having customer consistency is the next most important (e.g. many different sites with the same PPA counterparty). Lastly, to the extent that EPCs are included in the portfolio, it is much more attractive to have a consistent EPC across the projects. The EPC is a substantive counterparty for the Investor to approve, with a heavier document for them to negotiate.
Development Status: Economies of scale also come from projects transacting at the same time in their development cycle (e.g. in development, NTP, mechanical completion). This allows buyer and seller to use the same contract documents and manage project execution similarly across the portfolio. It also creates more consistency in pricing. Financing sources change from year to year, or sometimes even within the same year, leading to potentially undesired changes for projects at different stages of development.
Offtake Type: Most investors specialize in projects with a particular type of offtake (e.g. C&I, community solar, or small utility). Some may be interested in both C&I and community solar, or both community solar and small utility projects. But we rarely see investors excelling with competitive pricing and execution efficiency across multiple offtake types. Even similarly sized projects within the same state may benefit from having different investors who specialize in the projects’ associated offtake.
Geography: The nuances of mid market solar projects at the local level are too many to list here. These include utility programs and interconnection, state subscription and incentive programs, permitting processes and policy structures. Investors are much more likely to lean into projects in places where they have experience or where their teams have done significant research. This allows them to move faster and with more confidence.
Target COD Year: It might be counterintuitive to see COD timing at the bottom of our list here, given tax credit financing’s outsized role in the solar industry. But investors buying projects in our marketplace manage multiple funds across calendar years, giving them flexibility. We do see price adjustments in LOIs tied to COD timing, so this is still a factor in pricing. But that doesn’t preclude projects in different calendar years being included in a portfolio and priced together, it just may have a slight impact on value for each.
Risk of imbalance
The two biggest questions on sellers’ minds are how much value they’ll receive from a sale and how likely their counterparty is to execute the agreement on the terms specified. Portfolios add complexity here because any projects that do not move forward will remove a portion of the portfolio’s aggregate effect on pricing.
If a portfolio includes several similarly sized projects and one falls off, the effect may be marginal. A buyer may even choose not to adjust pricing in this scenario. But if the portfolio includes a project that is much larger than the others, the impact of that project falling off can be dramatic. For a handful of different PPAs across a 2MW, 500kW, and 200kW project portfolio, losing the 2MW project can wreck the whole portfolio. By contrast, the impact of one project falling out of a large community solar portfolio is likely minimal.
This is a key reason why we ask buyers to price each project in a portfolio separately, as it provides clear evidence that some projects are worth more than others.
Market insight
With these multiple factors to consider, insight into buyers is extremely helpful. A portfolio configuration that works for one buyer may not work for another. Optimizing this to maximize value requires the right set of projects and the right set of buyers.
While a developer or EPC may take a few projects or a couple of portfolios to market every year, we take hundreds. We glean insight from 50+ IPPs actively bidding in our marketplace to inform our guidance on portfolio construction. This market insight doesn’t simplify the task, but it does help us construct a portfolio that maximizes value for sellers and works for buyers who can execute.
In some cases, we even have portfolios that receive bids on different projects from different investors. This flexibility in our marketplace allows us to see how the market responds to these configurations, and adjust accordingly. And it allows sellers to evaluate the costs and benefits of working with one party on the whole portfolio vs. splitting up the portfolio to align the projects with the focus areas of multiple investors.
How we can help
Our team will advise sellers on portfolio construction prior to bringing portfolios to market. We have deep transaction experience, current market insight, and an appreciation for the nuances of solar and battery storage projects across C&I, community solar, and small utility segments. We’ve aligned our own incentives with getting deals done and getting projects built, and our process supports these objectives for both sides of the marketplace.
