New Microgrid Financing Options Can Help Manage Your Risk

Clark Wiedetz, director of microgrids and renewable integration for Siemens Digital Grid.

Imagine you made the decision to move forward with a microgrid and now it is time for the dreaded question of how to pay for it. One simple preferred business structure makes for a nice storybook ending, but alas customers prefer a variety of options. Not all customers are alike nor are they in the same business situation at a moment in time. Luckily, customers do not have to worry about making the decision on their own as Siemens offers guidance for this important decision and there are affordable options for all customers depending upon their preferred style, available capital, and penchant for risk.

We are seeing numerous frameworks used to finance microgrid projects, but broadly, they fall into four categories: debt, leasing, shared benefit, and let’s call the fourth, managed service agreements. Within these microgrid financing options, there are generally four main participants: developer, contractor, investor, and end-user. How do you know which option is best for you while considering the participants? Below are some options we recommend considering for customers looking to finance their microgrid projects.

The first option is debt financing, which is the direct sale of a system, financed by debt, with end-users responsible for operation of the distributed energy resources (DERs). Working with financial experts can help assess some of the project risks with debt financing, which can include:

• Credit Risk: Financier – Assesses the creditworthiness of the end-user, considering the length of the debt repayments and financial performance
• Construction Risk: Developer + Contractor – Both share the risk of delays and cost overruns
• Performance Risk: Developer – Performance guarantees underpin the project and transfer the performance risk to the developer
• Revenue Risk: End-user

Decisions about financing are frequently amongst the most complex customers must make in the microgrid development process, and making the right decision is critical to the success of any project.

The second option is leasing when the developer provides the capital and owns the assets. The end-user has exclusive rights to use the equipment for a contracted time with the leases coming in two basic forms: finance and operations. From our experience, it is incumbent on the end-user to find the capital, which can sometimes come from the developer, but can include other sources as well. Consult with your financial advisor to discuss potential risks, such as:

• Credit Risk: Developer + Financier – Developer takes on the credit risk of the end-user while the financier takes on the credit risk of the developer
• Construction Risk: Developer + Contractor – Both share the risk of delays and cost overruns
• Performance Risk: Depends – End-user under a finance lease, but developer under an operating lease
• Revenue Risk: End User

The third option is shared benefit financing, which is where the developer funds a project on a customer’s property using either debt or its own capital and in return takes a contractually agreed share of the value created over a period.

This option suits early-stage markets, where the developer takes on greater levels of risk across the board. Some of the risks to consider with shared benefit financing are listed below:

• Credit Risk: Developer + Financier – Developer takes on the credit risk of the end-user while the financier takes on the credit risk of the developer
• Construction Risk: Developer + Contractor – Both share the risk of delays and cost overruns
• Performance Risk: Developer – Due to the developer’s ownership of the system and increased responsibility
• Revenue Risk: Developer + End-User

For managed service agreements (also referred to as “as-a-service”) the investor/developer owns the asset, which is located on the end-user’s site. This end-use entity then enters into a contract with the developer to purchase the system’s output. This option allows the end-user to account for spending on new energy assets as an operating expense (OpEx). Financial professionals will outline the potential risks associated, which include:

• Credit Risk: Developer + Investor – The developer takes on the credit risk of the end-user while the financier takes on the credit risk of the developer
• Construction Risk: Developer + Contractor – Both share the risk of delays and cost overruns
• Performance Risk: Developer – Agrees to service and performance parameters with the end-user
• Revenue Risk: End-user – Passes control of critical energy infrastructure to a third-party

Decisions about financing are frequently amongst the most complex customers must make in the microgrid development process, and making the right decision is critical to the success of any project. Siemens can help customers accelerate their decision by examining the financing options available to them and providing the guidance on which options may work best.

Clark Wiedetz is director of microgrids and renewable integration for Siemens Digital Grid.