Thomas Larson

Reaching Beyond the Roof: Three Strategies for Corporate Investments in Solar

The Compelling Solar Asset Class

There are many options available to corporations interested in investing in solar projects. The market for investing in solar projects is an expanding financial sector that provides corporate investors with an opportunity to diversify their investment portfolios and develop or expand tax credit platforms. In 2012, the volume of solar projects being installed in the United States grew 76 percent year over year, with 3,313 MW of projects built at an estimated value of $11.5 billion. These solar projects will provide enough electricity to power over 350,000 households in the United States. In 2013, it is projected that the asset class will grow by an additional 29 percent across residential, commercial and industrial, and utility scale solar projects.

Retailers and other corporations invest in solar through a variety of financing structures.

Retailers and other corporations invest in solar through a variety of financing structures.

Many corporations are joining retailers, tech companies, utilities, and major financial institutions in the solar space with investments both on and off their properties. In numerous locations, the rooftops of Staples, Best Buy, Wal-Mart, IKEA, Kohl’s, and others within the retail industry feature solar arrays. These retailers, as well as many other solar investors, secure reduced energy costs, tax benefits, and clean electricity for their stores, which further company-wide sustainability efforts and appeal to consumers.

Strategies for Solar Investments

There are three primary strategies for corporations to invest directly in the solar asset class and realize the benefits of solar energy: (1) purchasing electricity from an on-site or nearby solar project through a Power Purchase Agreement (PPA), (2) directly purchasing a solar project to provide free renewable energy to a company’s buildings or property, and (3) strategically investing in solar projects to secure long-term cash flows and significant tax benefits. Each is explored below.

Power Purchase Agreement (PPA)

Under a PPA, a company generally “hosts” a solar project on its roof or nearby property and agrees to purchase the electricity from the project long-term in exchange for long-term energy savings and price certainty. The project itself is owned by a separate entity that benefits from the long-term cash flow from the PPA and the tax incentives (depreciation and tax credits) associated with solar ownership. Both are used to finance the system. The PPA typically results in long-term energy savings for the buyer at no upfront cost and provides a certain degree of simplicity. However, the payback period may be longer than direct investments or strategic investments and generally prevents the electricity purchaser from claiming the environmental attributes from the solar system or claiming the policy incentives and tax credits.

Direct Investment

A corporation’s direct investments in solar projects on or near their property requires a large upfront capital investment but may offer greater economic and social benefits to project owners overall. For example, full ownership of a solar asset results immediately in significant reductions in energy costs and also provides the opportunity to monetize tax incentives associated with the project (including depreciation and a 30 percent federal investment tax credit). To the extent that a corporation’s tax appetite allows it to monetize these tax incentives, it can expect to secure between an 8-12 percent internal rate of return (IRR) on their investment even without quantifying the soft benefits associated with fulfilling sustainability goals, attracting socially conscious consumers, and demonstrating the value of clean energy to the general public.

Strategic Structured Investments

Corporations also have the option to strategically invest in third-party owned projects. They can do so through investing in bonds (for example, Berkshire Hathaway’s MidAmerican recently issued bonds for its large Topaz Solar Project) or through tax structured vehicles. Generally speaking, tax structured vehicles are the most compelling investments, but they are also the most complex.

Innovative corporations such as Google, Honda, and Goldman Sachs have all pioneered the use of tax-structured equity investments in solar projects or portfolios to secure cash returns and reduce their tax liability. Other corporations that have traditionally invested in low-income housing tax credits (LIHTC) or historic tax credits (HTC) transactions are considering doing the same.

Tax structured investments secure very attractive returns by securing and monetizing the 30 percent federal investment tax credit up-front to offset tax liability, securing and monetizing the depreciation associated with the solar project over a compressed five-year depreciation schedule, and securing some portion of the cash flow from a project’s PPA with a third party over a rapid investment horizon. Furthermore, because the growth of solar in the United States is constrained by a shortage of tax advantaged investors, there is a general undersupply of tax advantaged capital that drives strategic investor returns up significantly higher than direct investment.

Conclusion

The solar industry is expanding aggressively, and there are significant opportunities to realize the economic benefits of investing in solar projects (and to meet sustainability goals). These opportunities range from third party PPAs to strategic tax structured investments. A corporation looking to invest in the solar asset class should consider all of these approaches, weighing complexity with opportunity. As each option has its advantages and disadvantages, a portfolio approach to investing in solar may yield the greatest risk-adjusted return, while providing both economic and social benefits.

Sol Systems has significant experience in helping Fortune 500 companies and corporations invest in the solar asset class. In addition to tax credit investments, we also assist companies in underwriting legal documents, assessing project opportunities, and structuring solar transactions. Visit our website at www.solsystemscompany.com and contact us at finance@solsystemscompany.com to begin the conversation.

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