Long-Lived & Infrastructure Assets

How to Underwrite a Solar Project

Underwrite a solar project by sizing debt to independently estimated energy production under a PPA with a creditworthy offtaker. The metrics that matter most are P50 and P90 energy yield, DSCR at each case, PPA price and remaining term versus merchant tail, and annual module degradation and availability assumptions.

What makes solar project underwriting different

A solar project converts irradiance into electricity, so production is driven by the resource at the site, equipment efficiency, degradation over time, curtailment and availability. Operating costs are low and fairly predictable, which makes revenue the critical variable. Revenue usually comes from a power purchase agreement at a fixed or escalating price, sometimes combined with renewable energy credits or capacity payments, and after the PPA ends the project sells into the market. Value comes from long contracted cash flows and tax benefits, while risk comes from resource variability, curtailment, basis differences between the project's node and the settlement point, and module or inverter failures.

Lenders size back-leveraged or construction-to-term debt to conservative energy cases, often P50 for coverage and P99 or P90 for a minimum test, and limit tenor to the PPA term. They also care about how tax equity investors are paid, because tax equity often has priority in a downside. Equity investors underwrite after-tax returns combining tax credits, depreciation, contracted cash and the merchant tail. Sponsors value the tail, recontracting and repowering options, while lenders give them limited credit and usually require the debt to be fully repaid before the PPA expires.

Key metrics

How to underwrite it, step by step

1. Obtain an independent energy yield assessment with P50, P90 and P99 cases using site-specific irradiance data.
2. Review the PPA for price, escalator, term, settlement point, curtailment compensation and offtaker termination rights.
3. Underwrite offtaker credit and any credit support such as letters of credit or parent guarantees.
4. Have an independent engineer review equipment, EPC contract, warranties, interconnection and construction schedule.
5. Model revenue with degradation, availability, curtailment and basis, plus O&M, land lease and inverter replacement.
6. Size debt to the target DSCR on P50 and the minimum test on P99 or P90, with amortization ending inside the PPA term.
7. Map the tax equity structure and cash distributions to confirm what reaches the debt in a downside case.
8. Confirm interconnection, permits, land control and insurance before financial close.

Due diligence checklist

• Independent energy yield assessment
• Power purchase agreement and REC agreements
• Interconnection agreement and grid studies
• EPC contract with performance guarantees
• Module and inverter supply agreements and warranties
• O&M agreement
• Independent engineer report
• Land leases, easements and title
• Permits and environmental reviews
• Tax equity documents and partnership agreement
• Insurance program

Key risks and mitigants

Typical financing and deal structure

Utility scale solar typically combines construction loans, tax equity and back-leveraged term debt at the sponsor level. Construction loans convert to term loans at completion, with amortization sculpted to target DSCR and tenor limited to the PPA. Tax equity investors take most tax benefits under partnership flip structures, or projects transfer tax credits to buyers where policy allows. Because tax equity sits at the project level, back-leveraged debt relies on distributions and may face forbearance requirements. Common features include debt service and major maintenance reserves, distribution lock-ups below a coverage threshold and a cash sweep in the merchant period. Smaller commercial and residential portfolios are often financed through securitizations of lease or loan receivables.

Red flags

• Energy yield based on sponsor estimates rather than an independent resource assessment.
• Debt tenor extends well past the PPA term into merchant pricing.
• PPA settles at a hub with large historical negative basis to the project node.
• Module supplier with uncertain bankability or warranty enforceability.
• Interconnection agreement not executed or network upgrade costs unquantified.

Frequently asked questions

Related terms

Educational content, not investment, credit, legal or tax advice. Benchmarks are common practitioner rules of thumb and vary by lender, market and cycle.