Frequently Asked Questions by Energy Investors and Customers
We’ve put together a list of questions along with responses that you may find useful as an investor/energy customer.
The minimum investment requirement varies depending on the investment mandate expectations. For direct investments, the minimum investment requirement is $100,000. If you choose to investment in our managed portfolio, the minimum is $25,000. For investors committing $500,000 or more, Distributed Energy offers the option of creating a dedicated special purpose vehicle (SPV).
As an investor in one of our projects, you can expect 15%-25% annually, based on the leverage model and size of project. Distributed Energy targets projects with a minimum IRR of 15%. Further leverage normally enhances the IRR to 20% plus.
Distributed Energy signs Power Purchase Agreements that have a term length ranging between 7– 20 years. Depending on the length of the Power Purchase Agreement, there may be a balloon payment at the term end or a free of charge transfer to the customer.
Our income is tied to power generation i.e. performance of the plant. Distributed Energy charge fees of 5% (sweat equity) in the SPV and an annual fee of 15% as a Management Fee from the plant revenue. For investors, the minimum project IRR projection of 15% is after all our management fees have been factored in.
What are some of the mitigation measures taken by Distributed Energy to minimize risks associated with solar projects?
i) Product damage – using only Tier 1 rated panels, supplier warranty on panels/inverters (20+years) and additional product insurance secured by the SPV. There are force majeure insurances available that cover unexpected events.
ii) Production loss – tying up with world class EPC contractors and production guarantees backed by bank guarantees.
iii) Client default – all our customers go through a rigorous credit risk process and credit insurance is available in place against default. We also diversify the portfolios to spread risk and take 3-6 month bank guarantees from our customers. The cost of moving the panels is usually 10-15% of the total project value.
iv) Fluctuation in tariff – as per the contract between the SPV and the end-client, the tariff is a fixed, pre-decided absolute number and therefore government tariff does not impact our revenue.
i) Own the plant directly – you can invest in a solar plant directly. This is attractive if you want to leverage the depreciation benefits of the asset in the relevant jurisdiction or if the customer in the Power Purchase Agreement is a related party.
ii) Co-Invest in a HoldCo- Invest in a Commercial & Industrial focused managed HoldCo for renewable assets in India. Your equity will be valued at Net Present Value (NPV) and become part of a portfolio of investors. The risk is diversified and returns are based on existing customers and new assets.
iii) Dedicated Special Purpose Vehicle (SPV)- For investors committing $500,000 or more, Distributed Energy can create a dedicated SPV for the investor. Distributed Energy will manage the SPV as well as the customers end to end, ensuring there are no management overheads or challenges for the investor.
Distributed Energy can build a portfolio of 4 assets for as little as $100,000 – you will be co-investing with Distributed Energy and other investors in these assets. Additionally, you will benefit from the following:
i) Automatic Diversification – benefit from investing across multiple energy customers in geographies varying from East Africa, the Middle East and India. You can focus your investment on geographies you feel comfortable with.
ii) Dependable Cash Flows – Distributed Energy targets investments in physical assets with strong, contracted cash flow profiles.
iii) Further Leverage Options – Once the capital is invested, through our banking relationships, Distributed Energy can leverage your portfolio 30:70 at attractive interest rates, vastly improving your IRR.
If the Customer opts out of the Power Purchase Agreement before the agreement term, how will the investor’s projected IRR be protected?
If the Customer chooses to exit the Power Purchase Agreement before the agreement term, a buyout clause will come into effect, which is detailed in the Power Purchase Agreement, on a year-on-year basis. The pre-determined residual value for each year will safeguard the targeted IRR of the project and ensure it is met.
All of the projects evaluated by Distributed Energy undergo a financial due diligence. Each project has its unique set of qualities, ranging from project size, location, type of customer, annual solar generation potential and depending on the location, a unique grid tariff rate. The IRR of a project is fundamentally influenced by the tariff rate (i.e. what is the discounted tariff rate we can offer), solar generation potential and the cost of the overall project. These parameters vary on a project to project basis, meaning some projects will have higher IRR potential compared to others being evaluated. At Distributed Energy, we target projects with an IRR potential of at least 16%.
How does leveraging an Investor’s portfolio at 50:50 at attractive interest rates, vastly improve the IRR?
All of our projects available for investment are screened on the basis of providing a project IRR of at least 16%. This means we are assuming 100% equity financing. Having said that, through our banking relationships, we can leverage (borrow from bank) an investor’s portfolio at attractive interest rates. When financing projects, the required amount of equity reduces (e.g. 50% of project value comes from investor and the balance 50% comes from the bank). Hence the return on equity (which is now half of the total project value) improves based on the bank interest rate payment. This is how the overall IRR improves.
Solar plants are tangible assets and will provide investors an additional layer of assurance. As an investor, you will have ownership of the asset through the Special Purpose Vehicle that owns the assets. Tangible assets provide a form of value diversification and as a hedge against economic uncertainty. Put another way, these assets have a physical form and a natural value.
Does all of the materials used in the installation of the solar plant have warranties and are they covered for the same period? Will replacement of materials, for example solar inverters, be the Investor’s responsibility?
At Distributed Energy, we procure Tier 1 materials for the construction of the power plant. Solar panels come with a performance warranty of up to 25 years and solar inverters will have a warranty of 5-7 years.
As part of the management fees charged by Distributed Energy for maintaining the solar plant on behalf of the Investor for the duration of the Power Purchase Agreement, replacement of solar inverters will be under Distributed Energy’s scope. Our goal is to ensure peak performance of the solar plant at all times.
What is the due diligence conducted by Distributed Energy to evaluate and minimize the financial risks of undertaking a project?
Distributed Energy evaluates the financial viability of the project across two fronts:
1. Preliminary Investigation – The objective of the preliminary survey is to identify deal-breaking issues upfront before money and other valuable resources are committed to a detailed investigation. Some of the critical issues that may emerge during this exercise are concealment of facts and figures, core management succession, statutory non-compliance; industrial sickness (erosion of net worth); and legal proceedings.
2. Detailed financial due diligence:
- Detailed company information;
- Corporate solvency;
- Directors, their interests and conflicts, if any;
- Statutory compliance with the applicable regulations;
- Taxation issues – income tax, customs, excise and sales tax;
- Contractual liabilities and commitments;
- Operating ratio analysis;
- Optimal debt-equity structure
- Receivable days average
- Track record on making payments for electricity
- References about the company from suppliers or customers, where possible.
- Other relevant business or financial information available in the public domain.
If there is a fluctuation in the grid tariff rate, say for example the grid tariff rate goes below the Power Purchase Agreement tariff rate after the agreement is signed, will this affect the rate agreed with the Customer?
As per the contract between Distributed Energy and the Customer, the tariff rate is a fixed pre-decided absolute number. Therefore, government tariff does not impact our ongoing revenue post agreement.
Given the uncertainty in solar regulations i.e. risk of changes such as removal of net metering/gross metering introduction (which may affect PPA tariff rates and solar plant sizes), how will you ensure the Investor is protected?
All our offers do not consider net metering for the Customer. If net metering is available that is a net benefit for the Customer that they can choose to avail. We size our plants for 70% of peak consumption to try and reduce any export of power. If gross metering comes in play at rates lower than ours, we can install reverse protection device to block any export of power to the grid.
Distributed Energy finances commercial and industrial sector solar projects that have an energy consumption requirement equivalent to 100 kW – 5 MW.
Distributed Energy focuses primarily on Commercial and Industrial sector projects. Commercial and Industrial sector businesses require large amounts of energy to run their day-to-day operations. Additionally, more often than not, they are charged at a higher electricity tariff bracket compared to other users. As a result, we are able to provide a more competitive Power Purchase Agreement (PPA) rate, resulting in substantial electricity cost savings and avoided CO2 emissions. Distributed Energy is open to Government and large residential community PPAs. Please note however, these are not a priority for us.
I am a commercial/industrial sector business owner – what are the steps I need to take to list my project on Distributed Energy’s aggregation platform?
Before any project is listed on our platform, Distributed Energy conducts a preliminary screening to determine the project viability – both in terms of technical and financial feasibility. In order to do this, we require the following information from you:
i) One year electricity bills.
ii) Audited financials of customer’s business from the last two years.
iii) Site location (google map link).
Distributed Energy is involved in the full life cycle of the project – starting from financing, solution design, procurement, construction, commissioning and operations and maintenance (O&M) for the duration of the Power Purchase Agreement term.
Distributed Energy wants to accelerate the deployment of renewable energy across the developing world. Our areas of operation are Africa, India and the Middle East. Within Africa, we are specifically focused on East Africa.
As a customer, what is my incentive to partner with Distributed Energy and transition to solar power?
There are three main benefits you can expect:
i) Operational expenditure – we will finance the full project cost, allowing you to focus on your core business.
ii) Better than market rate tariff – our Power Purchase Agreement (PPA) will offer a rate that is better than the market, ensuring substantial electricity bill savings. Generally speaking, we offer PPA rates that are at least 15% lower than what you are currently paying.
iii) Transfer opportunities – if you no longer want to continue with the PPA, we will provide you with other options to explore.
Normally, project viability evaluation takes 2-4 weeks. Confirming funding for the project takes a further 4-8 weeks. Lastly, project deployment takes 8 weeks. So, a plant will normally go live within 4 to 12 months of signing the Power Purchase Agreement.
What is the requirement for reference power whenever the grid supply is off? For example, say there is a power failure or a shut down for maintenance work by the respective utility company?
Reference power can be obtained from the grid, battery or from the generator. Hence, we just need to make sure we are synced with a battery or the generator if grid goes down.
The Customer will only be billed for the quantity of power generated. All of the power generated has to be consumed by the customer. As part of our billing process, Distributed Energy will show transparently during the process of generation what has been consumed so far. More importantly, we only fund 70% of the customer’s average load to ensure that the customer consumes all the power that is generated.
If a roof repair is required after the installation of the solar plant, say to arrest a rainwater leakage, whose scope will it be under?
This will be a localised area repair and unless the Customer needs to take out a large area then Distributed Energy should not have any issue. As part of our installation process, we will conduct an audit after the installation of the solar plant to ensure there is no damage to the roof caused by Distributed Energy. If there are any roof fixes required unrelated to damage due to solar plant, it will fall under the Customer’s scope.
Will Distributed Energy maintain the roof during the Power Purchase Agreement period? For example, suppose there is a deterioration of the roof due to the mounting of solar modules.
Maintenance of roof will remain with the Customer, however Distributed Energy will rectify any issues due to the solar mounting.
Distributed Energy will take plant and machinery insurance during the installation of the plant. The insurance period will be for the period of the Power Purchase Agreement.
What is the minimum off-take from the Customer’s side and minimum supply from Distributed Energy’s side?
As part of the Power Purchase Agreement shared with the Customer, there is a minimum guarantee clause as well as a deemed generation clause which addresses the minimum off-take and minimum supply from the solar plant. The only variable in availability of power available for consumption is a result of poor weather or any shutdowns due to grid failure etc.
What will happen if Distributed Energy does not provide the minimum generation or the Customer has a factory shutdown? What will be the compensation in case of non-compliance of this minimum level on either side?
In the Power Purchase Agreement signed between Distributed Energy and the Customer, there is a minimum generation clause as well as a deemed generation clause that will come into effect. These clauses are designed to compensate either party on the basis of annual generation.
Does Distributed Energy require any form of security deposit from the Customer before commissioning of the solar plant?
Distributed Energy requires a 3 to 6 month security deposit (sum equivalent to 3 or 6 months of electricity bill). The minimum-security deposit amount will be defined on the outcome of the financial due diligence conducted by our team. The security deposit will be returned to the Customer at the end of the PPA term, subject to there being no breach of contract terms.
How does Distributed Energy determine the rate per unit for the Energy Customer? How does this rate compare to the other solar service providers out there in the market?
Our goal is to provide our Customers with a minimum of 15% savings per unit. In some cases, depending on the existing grid tariff rate (i.e. high existing tariff rate), we are able to provide a tariff rate that provides savings beyond 15%. Additionally, unlike other players in the market, our proposals will have several Power Purchase Agreement rates and terms for the Customer to choose from. Generally speaking, longer term Power Purchase Agreement will have a higher solar tariff discount rate when compared to shorter term Power Purchase Agreements. However, over the long term the Customers will save more on their electricity through shorter term Power Purchase Agreements.
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