The solar market in New Zealand has continued to grow of late. In Q3 2023 alone, approximately 670 MW of projects were announced. While cost challenges remain, there have been large decreases in module prices (up to 35%). The power purchase agreement market also provided two notable deals in the solar market, with The Warehouse Group’s 20 year deal with Lodestone Energy, and Prime Energy’s power purchase agreement with Lightyears Solar. These are important steps towards establishing a deep and liquid PPA market to increase the pace of development in the solar market.

We also expect to see the new New Zealand Government execute on the National Party’s vision of doubling renewables capacity, and electrifying industry and transport, to help to grow the economy while delivering on climate targets. In the solar market, consents appears to be progressing quickly, and National intends to speed up consenting further and provide additional certainty.

All of these factors point to a continuation of the recent influx of green capital into New Zealand. This article highlights key considerations for new entrants looking to project finance the construction of solar projects in the New Zealand market. If you are interested in a more general overview of the New Zealand renewable energy market, our Investing in New Zealand’s Renewable Energy Sector Guide is available here.

Raising project finance in New Zealand

Project financing on a non-recourse basis is common in New Zealand. New Zealand and Australia’s major banks are active in project financing, and often a large debt syndicate will include offshore sponsors’ other relationship banks and institutional investors. The debt tenor typically allows for a period after anticipated project completion to demonstrate successful operations before the project needs to be refinanced.

Project vehicle

There are several different structures available to enable sponsors to invest in and fund a project in New Zealand. However, in most cases the project vehicle will be either a company established under the Companies Act 1993 or a limited partnership established under the Limited Partnerships Act 2008.

Almost exclusively, the project vehicle is set up specifically for a project or a portfolio of projects, with no other assets or business beyond the projects themselves. This means the financial risk is tied directly to the project vehicle and the project (or portfolio).

Project finance structure

The assessment as to whether financiers will lend against the project on a limited recourse basis is the same as undertaken in offshore markets. The main issues relate to whether the project will be built on time, on budget and in accordance with the applicable specifications and performance criteria, and the generation of adequate cashflow to service debt. The key issues to address and/or consider include:

• The financial strength, technical competence and track record of sponsors and project counterparties, including the sponsor’s ability to coordinate project workstreams and manage technical, operational and financial challenges, and marshal the project towards financial close. 
• A “turn-key” construction contract with a single contractor, with no risk of price escalation or cost overruns, and employing tried and tested technology.
• Fixed completion dates with minimum grounds for extension, and adequate compensation for delay. 
• Adequate compensation for any decrease in revenue generating capacity if the project does not meet the performance criteria.
• Appropriate parent guarantees and bonding in place and from institutions with acceptable credit ratings.
• Appropriate assessment of electricity market and pricing risk. This is of particular relevance to sponsors seeking to achieve financial close of a renewables project without long-term power purchase agreements, as reliance on merchant sales to the grid at the prevailing market price is likely to limit the availability and quantum of the project debt.
• Mitigation of environmental and social impacts, and sustainable operation.

Security

The key financiers’ requirement is that the project must be capable of being transferred intact to a new project vehicle. Project financiers will also expect full flexibility to sell project assets (although in a renewables project the benefit in doing so is likely to be limited). Financiers will typically expect:

• Security over the equity interests in project vehicle (commonly achieved by establishing a New Zealand company or limited partnership as the holding vehicle of the project vehicle, with that holding vehicle giving security over all its assets, including its equity interests in the project vehicle, and avoiding the need for the sponsors to grant security).
• Security over all assets of the project vehicle (including all physical assets, interests in land, rights under contracts, bank accounts, and rights under consents).
• Direct agreements with key project counterparties, to allow financiers to step into the applicable project documents and to negotiate with the counterparty to them to avoid termination.
• Rights in relation to the performance security and guarantees granted to the project vehicle by its key contractors.

Refinancing and transactional exit

Term debt has traditionally been the most common refinancing product, although sustainability-based instruments are becoming more common and appetite for green bonds is expected to increase given NZX’s support and that renewable energy is a recognised asset class for green bond issuance. Sponsors and project entities will need to pay early attention to ESG matters (for example, by ensuring ESG certification as a condition to financial close) to maximise the refinancing strategies available. Sponsors should also consider exit strategies upfront, especially the tax and change of control implications. These implications depend on the form of the project vehicle and the tax profile of the investor.