A well-executed solar project can be almost as satisfying as Thanksgiving dinner; the only difference is that you are still left hungry for more.
With a little bit of digging (and an active imagination), we found plenty of parallels between a commercial and industrial (C&I) solar project and Thursday’s familiar feast.
- Deal Structure: Good meals start with a great recipe. Whether you’re taking on a project with a PPA, lease, or cash purchase will affect every other piece of the deal. When developing a project, we encourage our partners to think ahead and select off-takers and materials with the deal structure in mind.
- Modules: Obviously, the center of the meal is the turkey. Just as the turkey is the centerpiece of the meal, modules drive the project’s value in producing clean, secure solar energy. While there remain alternative brands in the space, we typically recommend sticking to a familiar brand in order to avoid additional steps of diligence (the blog author has a personal aversion to tofurkey as well…). Tier 1 turkey, anyone?
- Inverters: Just like with mashed potatoes, the question with inverters is how to distribute them. If placed correctly, they boost the performance of all other components.
- Mounting Type: The variation in racking is reminiscent of stuffing/dressing. There are a lot of options here—numerous manufacturers combined with options for tracking, carports, etc. mirror the countless ways that your Thanksgiving chef can stuff their bird.
- Contracted Revenue: Let’s be honest with ourselves: the entire Thanksgiving meal is essentially a carrier for the gravy. Investors are flocking to the solar space for the long-term cash flows that solar project assets deliver. The value statement for solar remains stronger than ever.
In sum, Thanksgiving is much like a C&I solar deal: they both require careful preparation, essential ingredients, special knowledge, and hard work. The comparisons between solar projects and Thanksgiving dinner are as endless as our appetites. However, getting a project built is not as easy as pumpkin pie, particularly in under-served market segments.
As 2014 comes to a close, it’s a good time to reflect on what’s gone well this year and how we’ll add to it in 2015 (or hustle to finish projects by the end of the year). Only a few weeks are left in what’s been an incredible year for the solar industry—let’s bring it home strong!
About Sol Systems
Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 171MW distributed generation solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. It has over $550 million in assets under management as of October 2014. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management. For more information, please visit www.solsystemscompany.com.
The decisions made along the path of solar project finance and development have major implications for the growth –or stagnation—of the commercial and industrial solar market. How does a developer choose the right financier for their project, or an investor decide to interact during contract negotiations? Together, what impacts do these decisions have on the value chain?
Unlike residential, which has standardized credit scores, or utility-scale, which generally has utility off-takers, commercial and industrial (C&I) credit is incredibly complex – and can often be a deal breaker in middle market deals (which we generally categorize as 200kW – 5MW).
Why is credit such a deal breaker in C&I as opposed to other market sectors? To start, very few facilities are owner-occupied, and it is hard to guarantee that the same tenant will buy the electricity for the length of a 20 or even 15-year PPA. Think of your own booming solar business. As your company expands, you will need more office space. Can you guarantee to a solar developer (and thus, the end buyer: an investor) that you will be there to buy the electricity when your lease is up in five years? If you leave the building, can you ensure another reliable, rent-paying tenant will take your place, or that the owner of the building will be able to quickly find someone who will use electricity and take your place? No? Hence the issue…
C&I solar deals often die when the developer realizes all too late that the host has poor credit. How could that happen? For one, it is inherently uncomfortable for a developer to ask a host to turn over their audited financials, and developers sometimes have a hard time choosing how and when to fit “the talk” into the courting discussion. As a result, C&I developers often rely on the host’s word, rather than financial statements, to ensure creditworthiness (or worse, some subjective indicator – suit or haircut quality, a spic and span facility, etc.). Then, when it gets time to sell the project to an investor and further credit analysis reveals an issue, they realize the project cannot move forward. All of that development time (and money) wasted.
Solar developers and investors alike often ask us the same question: what is the secret to making middle market solar projects work? Often, the key is knowing when to walk away before the transaction costs become too much to bear.
In other words, a project can seldom overcome serious obstacles facing two or more critical financeability metrics, such as:
- Project Size – A one-off 1MW+ project is almost always more attractive than a one-off 200kW project. Bundle that 200kW into a 1MW+ portfolio with different off-takers, and it is still less attractive to an investor than the one-off 1MW+ project with a single off-taker.
- State Market – Certain solar markets are more attractive than others to investors. Flip through the “markets” section of past Project Finance Journals, and you will see what those markets are
and what incentives they offer, though some should be obvious (DC, CA, & MA are generally more attractive than IN, PA, OH).
- Host / Off-taker Credit – Municipalities, universities, schools, and hospitals (MUSH) hosts with investment grade credit are the most attractive, and unrated credit is the least attractive. Perhaps counterintuitively, unrated credit with three years of audited financials falls somewhere in the middle, very much depending on a real read of the customer’s situation.
- Project Development Status – Projects with an executed PPA, site control, interconnection, approval, and completed permitting are most attractive to investors. Earlier stage projects will have a hard time securing financing until they have reached these milestones.
Though there are exceptions to every rule, the further your project is from these desired characteristics, the least likely they are to receive financing. And, the further that projects are from this spectrum, the more costly the complexities are.
At this stage in the evolution of our industry, if you haven’t seen your proposed financing model “in the wild,” it’s not because no one else has thought of it; it’s because it is unlikely to work. The reality is if your creative project development idea sounds too creative to be true, it probably is; complexities don’t add, they multiply. Or, as one of us here is fond of saying, “every minute of explanation on top of the base deal is another basis point on the returns.” In a market sector where transaction costs weigh down relatively smaller project opportunities, it is better to walk away before you burn too much time on a deal that won’t make it. Your time is much better spent on a cleaner project.
The above is an excerpt from our Solar Project Finance Journal, a monthly electronic newsletter analyzing the solar industry’s latest trends based on our unique position in the solar financing space. To view the full Journal or subscribe, please e-mail email@example.com.
About Sol Systems
Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 171MW distributed generation solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. It has over $550 million in assets under management as of September 2014. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management. For more information, please visit www.solsystemscompany.com
Uncertainty in interconnection timelines is nothing new, but it nonetheless remains an issue in a number of solar markets. When looking to complete projects within an investor’s target commercial operation date (COD), often the biggest unknown is how long it will take the utility to enable a successful interconnection, which may include utility provide equipment, testing and commissioning, and issuance of approval notices. In the worst case, you might be waiting for someone to handcraft a transformer for you, or take care of some vegetation management.
Timelines and processes vary utility by utility. But ultimately, this uncertainty hurts the EPC who will face damages if the project is not done on time. This issue is especially relevant now as end-of-year deadlines approach.
In addition to timeline sensitivities, another issue lies in interconnection costs. If you go through the entire development process and then realize that interconnection costs make the deal challenging to finance, the deal may not fully materialize without additional solutions.
Several members of the Sol Systems project finance team attended the Midwest Gateway to Solar conference, hosted by the Minnesota chapter of SEIA, on November 4th and 5th. On Tuesday, Sol Director of Project Finance, Ben Margolis spoke among other subject matter experts on Developing Solar Finance for Minnesota.
The Sol Systems team is actively reviewing solar project investments in the Minnesota solar market. As we discussed in our October Solar Project Finance Journal, we especially see possibility in the state’s community solar program. We are also interested in 400kW+ portfolios of <40kW projects that have been awarded Made in Minnesota grants and will be keeping an eye on the Value of Solar Tariff, which we expect to be active in 2015.
To learn more about financing for Minnesota solar projects, please contact our team at firstname.lastname@example.org.
While residential solar installers battle for market share and YieldCos gobble up utility scale projects, the commercial and industrial (C&I) solar space has been relatively quiet. Broadly defined as behind-the-meter projects between 50kW and 5MW, the middle market remains untapped due to market fragmentation and complexity associated with relatively smaller deal sizes. In fact, the number of middle market solar projects interconnected in Q1, 2014 was down 12% from the same quarter in 2013, according to Greentech Media (GTM) and SEIA’s Solar Market Insight Report. Additionally, Q1, 2014 marked the first quarter that residential solar MW installed exceeded those installed in the C&I niche since 2002.
Prepared in collaboration with Sol Systems Intern Mark Noll
On September 29, the Illinois Power Agency released its draft 2015 Procurement Plan regarding renewable portfolio standard (RPS) compliance for the state’s two regulated utilities, ComEd and Ameren – and then, on the very same day, decided to release a second “Supplemental” Procurement Plan for solar PV. The two plans both share great intentions for the best of interventions – and could bring projects with the right entrepreneurial conditions to glory.
Both plans call for the Illinois Power Authority to procure solar renewable energy credits (SRECs), but that’s where the similarities end. They differ with regard to funding, project eligibility, contract lengths, system requirements, and other factors. Sound confusing? It’s OK. We’re here to clear up the confusion.
The First Illinois Plan: Of the Four Procurements, Only Three Matter
The first, “regular” plan sets out the IPA’s 2015 plan for procuring power from renewables for those customers of the state’s two main utilities who have not “shopped” for electricity (most of Illinois’ residents actually have shopped for energy on their own, thanks to electricity market deregulation, and rely on their retail electricity suppliers for compliance). In addition, the IPA has set up a procedure for spending the hourly “alternative compliance payments” (ACPs) the agency has collected from retail suppliers. This is because unlike in many states, some amount of these ACPs are collected each year whether or not the suppliers are otherwise in compliance. It proposes to use ~ $13M of this funding to procure ~80,000 SRECs in one-year contracts.
Sacrificing renewables promised reduced prices for customers; but now could end up raising the bill for Ohioans.
Ohio’s electrical market structure has long been based on market forces such as varying supply and demand, rather than by political regulation. But recently, moving away from an economy driven, market based structure, to one driven by political whims, has not benefited OH ratepayers. The result of this style of decision making has caused a change of heart on a previously supported energy initiative. Ohio’s recently elected conservative Senate, along with Gov. John Kasich, agree that renewables are too expensive to continue funding.
On June 13, the Senate passed Senate Bill 310 and effectively froze Ohio’s Renewable Portfolio Standard (RPS) and immediately halted all projects that solar developers and investors were working on. Not only did the construction of solar arrays freeze, but the prices of Solar Renewable Energy Credits (SRECs) associated with solar electricity production also plunged. Prices went from a prosperous and positive-trending $70/SREC to $30/SREC, and have not rebounded since. The SREC market in Ohio was not the sole victim of a market freeze; it also knocked the value of surrounding States’ (Indiana, Kentucky, West Virginia, Virginia and Michigan) market prices.
Massachusetts solar developers breathed a sigh of relief after last week’s announcement.
After the initial August 26th announcement that the 2016 Managed Growth Capacity Block would be 0MW, the Massachusetts Department of Energy Resources (DOER) opened a public comment period. As expected, solar stakeholders expressed their concern over the 2016 allocation, citing that the DOER had projected overly ambitious growth in Market Sectors A-C. In response to these comments, DOER adjusted the 2016 Managed Growth Capacity Block allocation from 0MW to 20MW .
What is Managed Growth in Massachusetts?
The Massachusetts SREC-II Program, initiated in April, creates differentiated financial incentives for each market sector (“SREC Factor”) to level the playing field. This program makes smaller solar projects more competitive compared to larger ones by ideally giving financial preference to residential and rooftop projects (a higher SREC Factor close to 1.0) and providing less support for larger projects (ground mount, landfill or brownfield projects less than 650kW.) Previously, this program allocated 26MW and 81MW for the Managed Growth sector in 2014 and 2015 respectively. As the legislation mandates, the reconsideration and final decision of the 2016 Managed Growth Capacity Block came from the following formula:
The following is an excerpt from our Solar Project Finance Journal, a monthly electronic newsletter analyzing the solar industry’s latest trends based on our unique position in the solar financing space. To view the full Journal or subscribe, please e-mail email@example.com.
The solar tariff dispute is leading to longer procurement times and altering module selection. Now, as developers build out their initial design specs with a specific module in mind, we are finding that as a project approaches NTP, the modules may become unavailable or too costly. In other words, both developers and investors are finding themselves compromising on module selection, or at least dealing with a scarcity of choices once it comes time to actually procure equipment for a given project.
Some developers we work with have kept their eyes out for module deals throughout the transaction process, and even after financial close, with the hope that another supplier can bring comparable modules into the U.S. market at a more affordable price. As a result, it is becoming increasingly common for developers to swap modules. Overall, investors are comfortable with this last minute module swap as long as the modules are solidly Tier 1 – or the investor has already provided a list of approved vendors. In one case, we made the decision to switch modules on a project rather than wait through a several-month delivery timeline, even though the swap required some redesign in order to accommodate the change. We do not encourage these module “swaps,” but we recognize that sometimes they may be necessary.
Yesterday’s announcement from the Massachusetts Department of Energy Resources (DOER) may have taken some Massachusetts solar developers by surprise.
Immediately following the announcement of the allocations for the 2014 and 2015 Managed Growth capacity, commercial and utility scale solar developers across New England began counting down the days to when the 2016 capacity amount would be revealed. Developers had long awaiting the final figures for the DOER’s 2016 allocation, hoping they could fit their 650 kW+ solar projects into the Massachusetts solar program.
The countdown is now over, and the DOER has released their initial analysis and expectation for the Managed Growth Capacity Block for 2016. The final result is… 0 MW.
After two years of negotiations, the South Carolina House of Representatives voted unanimously on new legislation to promote solar inthe Palmetto State. As a result of the South Carolina Distributed Energy Resource Act (S.B. 1189), Sol Systems expects the South Carolina solar market to expand from a mere 8 MW to 300 MW or more by 2021. Here’s how.
South Carolina’s New Solar Program
Under S.B. 1189, larger utilities (those who serve 100,000+ customers – effectively SCE&G and Duke Power) must obtain 2% of their average 5-year peak power demand from solar energy sources. Of this 2%, 1% must be comprised of 1-10 MW solar projects; the other 1% must be comprised of solar projects under 1 MW, 25% of which must be 20 kW or smaller. Here’s the breakdown of that 2%.
Massachusetts SREC-I Auction Throws a Curveball to the Markets: Here’s how this will impact SREC-II projects.
Round II of the Massachusetts SREC-I clearinghouse auction failed to clear yesterday, July 30. A third round will be held on Friday, August 1st, 2014. As we described earlier in an explanation of the Massachusetts SREC-I auction, This annual auction, which is based on the volume demanded, allows SREC sellers the opportunity to auction their SRECs at the end of each summer for a fixed price of $300/SREC, minus an auction fee (most customers will net $285)
Implications of the Massachusetts SREC-I Clearinghouse Round II
An Auction failing to clear Round II automatically increases the Renewable Portfolio Standard (RPS) obligation by 142,504 to 1,054,933 SRECs for compliance year (CY) 2015. An increase in demand generally pushes prices higher, which is what Sol Systems’ SREC trading team saw yesterday. Massachusetts SRECs with a 2015 vintage stamp increased $35 per SREC to $320 from $285. Since a partial clearance of the Auction is allowed in Round III, compliance entities and SREC investors are likely to bank some SRECs in expectance of this increase in CY 2015 RPS obligation. All unsold auction SRECs will be returned to the owners (with extended life of three years) in proportion to the clearance volume in Round III and will have to be sold on the spot market.
The Massachusetts solar renewable energy credit (SREC) market is undoubtedly the most complex incentive program among its peers. Among its complexities is the annual clearinghouse auction mechanism, which allows SREC sellers the opportunity to auction their SRECs at the end of each summer for a fixed price of $300/SREC, minus any auction and aggregation fees (most customers will net around $271). Sol Systems can provide you with fixed forward pricing. Having a fixed forward price eliminates the need to enter the auction and deal with reminted SRECs. Right now, our 4-year pricing for SREC-I is $270. We offer 3-year, 4-year, 5-year and 10-year pricing for SREC-I and SREC-II. Sol Systems takes care of customer accounts throughout this process, thus allowing our customers to pursue their core business. For more information, email us today at firstname.lastname@example.org.
The first round of the SREC clearinghouse auction took place today and did not clear; 141,504 SRECs were deposited. Anxious SREC sellers are hopeful all SRECs will be cleared by the end of round two, which is to be held tomorrow, 30th July, 2014. It makes sense for auctions to enter Round II as an increase in the shelf life of SRECs is beneficial for both, compliance entities and SREC owners.
Today TerraForm Power Inc. (TERP), a spinoff from SunEdison (SUNE), had its IPO making it the sixth yield corporation or “yieldco” to go public since NRG Yield (NYLD) became the first yieldco one year ago. High dividend yields and rising stock prices have encouraged a wealth of investment in these new companies. However, investors should be aware of the differences that exist between yieldcos and longer term risks associated with the application of this new corporate structure to the power generation industry.
On July 11, 2014, the Iowa Supreme Court ruled in favor of Eagle Point Solar (EPS), a Dubuque, IA based solar installer, affirming that the company was not acting as a utility when it arranged a third-party power purchase agreement (PPA) with the city of Dubuque. The ruling caps a two year battle between rooftop solar and the two leading utilities in the state, MidAmerican Energy and Alliant Energy. With this decision, the Iowa court system clarified the status of behind the meter solar installations, and opened up the state to further solar investment.
The history of the case goes back to 2012 when MidAmerican and Alliant challenged Eagle Point Solar, stating that the firm’s arrangement with the city violated the utilities’ exclusive right to sell electricity within a given area or region. The Iowa Utilities Board (IUB) sided with the utilities, issuing a Declarative Ruling which defined EPS as a public utility, and therefore unable to sell electricity in Alliant’s state-granted exclusive monopoly territory. Eagle Point Solar appealed the decision and it was subsequently reversed in 2013 by the Polk County District Court.
A Less-Than-Totally-Addressable Market
Commercial solar can be an extremely difficult, uphill sell. Not only must a salesperson overcome traditional customer barriers of ignorance, indifference, or fear, with a product that can seem formidably technical, but they have to do so in what is to date an inordinately small addressable market. Consider a Venn diagram, but one where you must intersect a highly creditworthy client, with a large-enough-to-bother roof, such roof being fairly new (but not covered with mechanical equipment), with some spare structural capacity; generally, commercial instead of industrial electricity rates, low shading, a PPA-friendly state, and one of the markets that makes sense for solar this quarter. In considering all of this, you’ve no longer got a Venn diagram; you’ve got something else entirely.
It’s part of the reason solar developers like to press their nose against the glass as their plane comes in over the big flat roofs on the warehouses next to the airport and dream of what might be.
Of course we should pursue such low hanging fruit where we can find it – and keep in mind that some finance providers are more innovative on host credit than others.
However, there are only so many big retailers and Fortune 500 distribution centers out there. Great credit often comes with truly challenging host sites and vice versa. Further, we’ve seen other issues with over-concentration. In certain substations serving Southern New Jersey office parks, we’ve seen interconnection study results that look like all Three Stooges trying to fit through a door at the same time.
Several members of the Sol Systems team will attend the Intersolar North America conference in San Francisco next week from July 7-9. Sol Systems’ CFO, George Ashton will share Sol Systems’ experiences financing commercial solar projects on the panel entitled The DG Future – the ITC, Cost-cutting & Positioning Yourself for Ever Changing Incentive Regimes. To date, Sol Systems has facilitated financing for approximately 100 MW of solar projects throughout the United States and has another 84 MW at term sheet. Sol Systems finances DG solar projects through a combination of its tax structured investments, construction and term debt offerings, project purchases, and solar renewable energy credit (SREC) solutions.
Several members of the Sol Systems team will be in San Francisco to meet with developer clients to discuss their solar financing needs. To meet with Sol Systems in San Francisco, please contact our team at email@example.com.
The Sol Systems team will attend the PV America 2014 Conference in Boston, MA next week from June 23-25. Sol Systems’ CEO, Yuri Horwitz is the conference’s finance chair this year and will speak on a panel entitled The Future of Solar Financing & Challenges Ahead at 1:30 PM in room 153. Sol Systems will also host a cocktail reception with Hannon Armstrong, our partner on a $100 million solar debt fund that addresses financing challenges in the commercial and industrial (C&I) solar sector.