The 5 Phases of Building a Solar Park
Building a solar park from scratch requires learning many things about the solar industry. First, you must know how to get an optimal solar park location. Then come the technical installations and solutions. It also means building relationships with distribution companies, investors, suppliers, and sales consultants. Equally important is the feasibility and market research for the proposed solar farm.
Today is the best time to invest in a solar park to receive a high turnover. Below, let us guide you on how to build a solar park.
What is a Solar Park?
Other Names: Photovoltaic (PV) power station; solar farm; solar garden; solar power station
A solar park is a large-scale installation of solar panels that supplies electricity to the grid. If the purpose of the solar park is to produce electricity on an industrial scale, we can also refer to such a park as a solar farm or photovoltaic (PV) plant. The such photovoltaic plant varies in type, size, shape, and purpose. But its end benefit is to produce electricity from a renewable energy source such as the sun. The electricity can be consumed either directly by an adjoining community of buildings in form of savings on electricity bills or fed into the electricity grid where it can be sold on the electricity market.
Some solar parks are installed on rooftops of residential apartments or commercial buildings. Larger solar farms typically are built directly on the ground. These may be on capped landfills, large croplands, farmlands, or other industrial sites.
Small solar gardens typically yield less than 1 Megawatt (MW). On the other hand, the world’s biggest PV power stations produce over 2,000 MW.
Surprisingly, today you can obtain solar panels in all types of custom shapes, even adorable shapes, like the Mickey Mouse solar park that powers Walt Disney World. Furthermore, also solar panel producers such as Megasol in Switzerland increasingly can cut solar panels in all kinds of shapes and fully integrate them into rooftops and building facades. Therefore, more and more building space can be equipped with solar panels and turned into small electricity plants which can generate revenues or savings for years to come.
A substantial distinction between the type of solar parks is their purpose. There are the so-called utility-scale solar farms and community solar farms. Power companies or utility providers typically focus on obtaining electricity from utility-scale solar farms for profit and diversifying their energy mix. Those photovoltaic plants typically are large-scale and consume sizeable pieces of land. In contrast, local businesses or residents-financed community solar farms are built to primarily locally produce the electricity they consume. They consist of smaller-scale photovoltaic installations and either receive solar credits for the power from renewable energy they produce or can directly reduce their electricity bills, therefore generating savings for themselves. As smaller-scale solar parks, they will typically have a capacity of less than 1 MW or just a few Kilowatt (KW).
It may take anywhere from 1 to 6 years to build a solar park depending on how easy it is to obtain the building permit, a guaranteed price to off-take the electricity production, and financing. When building a solar park, you’ll need to undergo this project in five phases:
· Phase 1 — Securing a Location with Optimal Solar Radiation and Grid Access
· Phase 2 — Technical Design and Permitting
· Phase 3 — Negotiation of a Power Purchase Agreement
· Phase 4 — Securing Financing
· Phase 5 — Building and Commissioning
Phase 1 — Securing a Location with Optimal Solar Radiation and Grid Access
The ideal location for a solar farm is a clear, flat, and flood-free land that receives plenty of sunshine. For this, you will need to study the solar radiation of the chosen location. This can be done by using a tool like the Global Solar Atlas where you can understand how much electricity output an installed capacity of solar panels can generate. An arid location with many days of constant sunshine — such as a place in a desert — might be a great location in terms of solar yield but might lack in terms of infrastructure and grid access to a local market of electricity consumers.
Depending on the size of the solar park you are going to build you might need to secure a sizable piece of land. You may need 100 square feet of space for every kW of installed production capacity of solar power. That’s equivalent to 2.5 acres per MW. Besides the panels, you also need space for access to roads, equipment, and infrastructure. As such, a 1 MW solar farm may need around 5 to 10 acres of land.
You also have to note that not just any plot of land will do. It needs to be near an electric grid and power lines to market your solar production. Utility-scale projects connect to transmission lines with a voltage of 69 kV and above. Alternatively, they can also tap into substations. These fenced facilities are necessary to convert and match the power voltage needed. A cost-effective interconnection should be within one mile of the solar farm. It differs between utility-scale and community solar park projects. Community solar parks always connect to a three-phased distribution line with a voltage lower than 69 kV.
Moreover, the selected site for a photovoltaic project should meet local zoning regulations. In addition, the cost of the land should be as affordable as possible to minimize the potentially already high investment required. Therefore, many times the land for solar parks is contributed by the local government or made available at preferential land lease rates. The project typically can only be launched once a suitable site for a solar park is secured which then allows entering the next phase of the project.
Phase 2 — Technical Design and Permitting
Defining the technical design of the solar park will be the next stage when building a solar park. There are four main components of a solar system. These are
· solar panels,
· inverters,
· racks, and
· storage units (if applicable).
The available land area will define the size of the solar park. Therefore, the technical configuration of such a solar park will need to be planned accordingly. The main concern should be the quality of installation, system performance, and warranties to ensure that the solar panels can produce a maximum electricity output during the park’s lifetime. The general rule of thumb is to look for products with a 20-year to 30-year performance warranty. Replacing faulty modules later on can become very costly, therefore it is important to avoid this. Especially the selection of the equipment should focus on using one of the quality brands among the original equipment manufacturer. Suppliers of solar modules include brands such as Canadian Solar, Jinko, Phono, and Trina. If you opt for premium brands, QCells, LG, SunPower or Megasol might be evaluated as well.
Once the supplier for the solar panels and inverters is defined, it comes down to planning the technical details. Based on a detailed construction plan approval from the appropriate government offices will need to be obtained afterward. Overall, site assessment and permitting may take only 1 to 5 years. In some cases, an environmental impact study might be required as well to determine the impact of the solar park on the local ecosystem and wildlife. It is important to demonstrate to the authorities the viability of the selected site for the proposed project.
Phase 3 — Negotiation of a Power Purchase Agreement (PPA)
A Power Purchase Agreement (PPA) is a contract between the producer of solar electricity and an electricity distribution company or any other consumer of large volumes of photovoltaic energy. In this contract, the parties will specify the purchase terms of the solar energy to be produced and the purchaser typically agrees to purchase all photovoltaic electricity to be produced for a duration between 18 to 25 years upon commissioning. Typical electricity prices for such off-take agreements today range between USD Cents 3.5/kWh up to USD Cents 7.0/kWh depending on the local market. Obviously, the higher the agreed price and the longer the duration of such a PPA, the more attractive it will be to build such a solar park.
A PPA also offers protection against the risk of not being able to sell the produced electricity. It wouldn’t make sense to incur a huge investment only to find out later that the produced electricity cannot be sold. Therefore, a PPA offers visibility over the expected earnings and mitigates the financial risk. Important to note here is that the quality of the PPA is also dependent on the quality and creditworthiness of the purchaser of the electricity. Only a quality party can ensure that the prices are going to be paid in the future reducing the risk of contractual default.
Therefore, negotiating an attractive PPA is key to any successful large-scale solar farm project and is also essential to have when looking to obtain financing.
Phase 4 — Securing Financing
The next step of our project will be to secure financing. Financing for building the park typically can only be obtained when all required building permits and a solid PPA are in place. For a solar park, typically there are two financing sources:
· Equity Financing
· Debt Financing
Equity Financing
Equity financing is provided in the form of the start-up expenses paid by the promoter of a new solar park project and early-stage investors willing to carry the risk during the construction phase of the park. The main motivation for carrying this risk will be the financial reward.
Many times investors who are involved in the construction of the park will — once a solar farm becomes fully operational and is proven to continuously produce electricity — later on exit the project and sell their equity ownership to institutional investors who are looking for long-term steady yields without having to fear any construction risk.
The way Equity Investors analyze their involvement in a solar park project will be by calculating their expected returns in form of the Levered IRR. The Internal Rate of Return (IRR) figures out what discount rate for a series of cash flow projections will lead to a Net Present Value (NPV) of zero, assuming that returns can be reinvested over time. Levered refers to the use of debt financing, sometimes motivated by financial engineering. This is for the reason that when you can obtain more debt financing from banks, you will need less equity financing, therefore increasing your levered returns significantly.
Important to note here is that for securing investors, in most cases you will also need to have debt financing in place or the equity portion to be contributed might be conditional on obtaining the remaining debt financing.
Debt Financing
As the capital outlay for large-scale solar parks can go into the millions, it is important to obtain debt financing. Debt financing is cheaper than equity financing as you will have to pay the interest rates which typically should be lower than the return expectations from investors who will be first to carry the risk of default in case something goes wrong. Therefore, when planning a new solar park project it is important to come up with a viable proposition to banks for obtaining debt financing.
From a lender’s point of view, they are mostly worried about the ability of not being paid back. Therefore, they will base their evaluation in terms of the collateral offered (E.g. the land, potentially sellable pieces such as solar panels and inverters) and the quality of the cash flow projections. Typically, they will use certain key financial ratios which can become important in such analysis:
· Loan-to-Value (LTV) Ratio
· Debt to EBITDA ratio
· Debt to Equity Ratio
· Debt Service Coverage Ratio
· Interest Coverage Ratio
To receive debt financing, the promoters will have to present a solid financial plan which can outline how the debt can be serviced in a way that allows full repayment of the debt within a usable timeframe and how defined debt covenant ratios can be met during the project life.
To calculate such a suitable funding proposition you might need to use a Solar Energy Financial Model Spreadsheet where you can build financial projections over the lifetime of the solar park.
Phase 5 — Building and Commissioning
Once all permits, PPA, and funding are in place construction would be ready to start and the required equipment can be ordered. The construction period will now depend on how fast the required infrastructure can be put in place, the time required to obtain the ordered solar modules and inverters, and the length and difficulty of the transport route including passing through customs and providing all the required paperwork.
Therefore, the construction of such a photovoltaic park project — depending on size — can take months or several years. Sometimes solar parks are built in phases and the next phase will only be initiated once the previous phase has been completed.
No system is failproof, with a solar park included. That’s where commissioning the production of electricity comes in. It means establishing a baseline of customer-accepted performance tests and formal approval by the electricity purchaser that the park can be commissioned. During the commissioning phase, the electricity distributor mixes the solar energy with different sources. The process involves testing all components and systems of the solar park to be fully functional.
Conclusion — 5 Phases for Success
We outlined above the 5 main phases when building a new industrial-scale solar park project. The phases include securing a suitable site for the solar park, planning the technical configuration and obtaining all required permits, negotiating a Power Purchase Agreement with a suitable buyer that needs to include the price and duration of the electricity off-take, securing funding from equity and debt financing sources and finally the construction of the solar park.
It is important to keep in mind the sequential order of these phases as the outcome of the earlier phases will determine the feasibility of the later phases. Proper financial planning is a must for such a project which involves large capital outlays and bears significant financial risk. To be successful when building a solar park, proper planning, and procedure will be key.
eFinancialModels provides a marketplace to share and sell industry-specific financial model spreadsheet templates in Excel and Google Sheets. Our website is used by many entrepreneurs and startups who obtain help by using our templates and services in their financial planning and modeling tasks.
