Deal analysis: Aura Solar

DEAL ANALYSIS: Aura Solar

29 May 2013

Read more: [gauss] [ifc] [nafinsa] [baja california sur]

Solar has huge potential in Mexico’s Baja California state. The climate is favourable, diesel and other fossil fuels can be expensive, and the state is close to the epicentre of the US solar boom – the south-west states of California, Arizona and Nevada.

But Mexico has not to date been friendly to solar developers and most installations have been of facilities with a capacity of less than 1MW. By the end of 2012, Mexico’s installed photovoltaic base was about 52MW in total and about 14.5MW had been installed in that calendar year, according to the International Energy Agency’s photovoltaic power system programme. Self-supply rooftop and ground-mounted arrays accounted for the vast majority of that total capacity.

The explanations for the dearth of PV capacity are straightforward. Mexico and its state-owned power utility the Comisión Federal de Electricidad (CFE) do not have a generous incentive programme, such as a feed-in tariff, to drive the addition of new capacity. And sources familiar with the local market say PV costs are still comparatively high, despite an oversupply of panels that has pushed down costs in recent years.

The CFE has attempted, directly and indirectly, to foster a PV culture, but its direct efforts are in their infancy. Under a pilot programme, it started operating a 1MW plant last year, and built a 5MW facility that had yet to begin generating electricity by April 2013.

The utility, which operates within a regulatory framework that lenders understand, also launched a small producer programme that allows sponsors to connect units of up to 30MW to Mexico’s transmission systems. But it also involves merchant risk, because while the CFE contracts generally require the utility to buy the power that plants dispatch, they do not specify the price.

This backdrop makes local developer Gauss Energía’s closing of a $75 million debt financing for a 30MW PV project in Baja California all the more remarkable. The project, Aura, is one of the first PV projects of any importance in Mexico – and among the largest – and is also probably the first renewables financing in Mexico to feature merchant risk.

A project with that credit profile would usually struggle to attract conservative commercial bank lenders. The country has few precedents for financing PV at all, despite solar’s obvious potential, and features price risk. But these factors interested the International Finance Corporation (IFC) and Nacional Financiera (Nafinsa), a Mexican state-owned development bank. Both were keen to foster the development of PV in Mexico and saw Aura as the first utility-scale project in the country that was ready for financing. The IFC also liked the idea of creating a template for financing merchant renewables projects in Mexico.

The IFC took the lead role in arranging the peso-denominated Gauss financing, which signed on 28 April. It lent $25 million equivalent – a $15 million senior loan and a $10 million mezzanine subordinated loan. Nafinsa provided a $50 million loan in parallel with the IFC’s senior loan, as well as a separate VAT facility of about $10 million. Gauss does not think it will need to draw on the VAT facility, however.

The senior loan has a tenor of less than 12 years and is said to be priced competitively against power projects in the region. The floating-rate debt, which is priced off the Mexican TIIE funding benchmark, has been swapped to fixed-rate. Gauss developed the project and Corporación Aura Solar raised $25 million in equity from about 10 domestic investors. The company’s president and chief executive officer, Héctor Olea, is a former chairman of Mexico’s Energy Regulatory Commission.

The $100 million Aura project will be located near La Paz and will sell electricity to the CFE under the small producer framework. According to the 20-year Aura offtake agreement, the CFE must buy Aura’s output, but it will pay for power based on its marginal costs of producing power, according to Cheryl Edleson Hanway, the IFC’s chief investment officer in Washington, DC.

Revenue volatility is possible. The CFE’s cost of electricity changes about every 10 minutes, according to bankers in Mexico City, and is cheaper at night than during the day, as is common in most power markets. So with Aura, its tariff is highest when it is operating at its highest capacity factor. It receives a tariff based on the CFE’s marginal cost at the nearest node, which for Aura is La Paz.

So the project has another significant advantage: Baja California Sur is not interconnected with the rest of the CFE’s transmission network, and the price of electricity on the Baja peninsular is high. The majority its generating capacity runs on expensive heavy fuel oil and diesel, so PV should achieve parity with conventional fuels faster in Baja than in other parts of Mexico. Baja’s total capacity on this island is believed to be around 350MW.

The IFC was prepared to accept price risk to demonstrate both that a project financing can be structured around merchant risk and that solar in Mexico is viable. IFC believes that the project will be cost-competitive against diesel-fired generation in Baja California. Construction began in January, and the plant should enter operations in the third quarter of this year. Gauss expects Aura to produce 82GWh annually. The plant will use 132,000 polycrystalline single-axis trackers. 



Aura Solar
STATUS:
Closed 28 April 2013


SIZE:
$100 million


DESCRIPTION:
30MW solar photovoltaic project, located near La Paz in Baja California Sur, Mexico


SPONSOR:
Corporación Aura Solar

DEVELOPER: Gauss Energia


EQUITY:
$25 million


DEBT:
$75 million peso-denominated debt package, split between a $65 million senior facility and a $10 million mezzanine subordinated loan, plus a roughly $10 million VAT facility


LENDERS:
International Finance Corporation (lead arranger), Nacional Financiera


LENDER LEGAL ADVISER:
Ritch Mueller


SPONSOR LEGAL ADVISER:
Skadden