Sol Systems Co-founders to Travel to New York as Solar Shines on Wall Street
The Sunshine Backed Bonds Conference will be held May 3rd, 2013
On May 3rd, the Information Management Network will be hosting its first annual Sunshine Backed Bonds conference in New York. The event, aimed at introducing investors to solar as a viable asset class, will be located at the Union League Club in lower Manhattan. Sol Systems’ co-founders, George Ashton and Yuri Horwitz, will both be in attendance. George will be participating in a panel discussion entitled “Exploring the Role of Securitization in Renewable Energy Finance.” The conference will largely focus on large-scale financing opportunities available through securities, allowing typical developers to network with ABS investors seeking alternative financing ventures.
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Sol Systems Speaks at the American Solar Energy Society Conference in Baltimore
Sol Systems CFO and co-founder, George Ashton, will be attending SOLAR 2013, an annual conference held by the American Solar Energy Society. This is the 42nd installment of the event, and will be held April 16-20 at the Baltimore Convention Center. George will be participating in a 90-minute panel discussion titled “Financing DG Projects,” where he will speak alongside Rich Deutschmann of Ameresco, Chris Lord of Capiron, and Steve Remen of GroSolar. The panel will be held on Wednesday, April 17th, from 1 PM until 2:30 PM and will focus on funding distributed generation installations.
Sol Systems Brings New Tax Equity to Solar, Finances 5 MW
Sol Systems successfully placed $15 million in tax equity into two 2.5 MW North Carolina projects on behalf of a Fortune 100 company. The financing arrangement marks the Fortune 100 company’s first investment in solar and provides the solar industry with a new source of tax equity.
The US solar industry is supported by a 30% investment tax credit that generally requires outside investors with profitable businesses to invest in projects, typically known as tax equity. Tax equity is currently the most critical limiting factor in solar project development, and has the potential to limit the growth of the industry in the coming years.
What Does the Fiscal Cliff Deal Mean for the U.S. Solar Industry?
Several weeks ago, we wrote on the potential implications of the “fiscal cliff” for the U.S. solar industry if Congress and the President failed to reach an agreement to prevent dramatic tax increases and spending cuts, which would have taken effect January 1, 2013. Sequestration would have led to a reduction in the value of 1603 cash grants by 7.6%, and we hypothesized that overall the poor economic climate and high degree of uncertainty caused by a fiscal cliff would likely hurt the supply of tax equity available for solar projects, although the contraction would not be as detrimental as in 2008.
Since then, the U.S. House of Representatives passed the American Taxpayer Relief Act of 2012 257-167, after it had passed the Senate 89-8 on December 31st. This deal reinforced the Bush-era tax cuts for individuals making under $400,000 and families making under $450,000, while increasing the marginal income tax rates, the tax on capital gains and dividends, and the estate tax for those making over this $400,000/$450,000 level. These measures should raise around $600 billion in additional revenue. The deal also extended 2009 stimulus tax breaks for low-income Americans for another 5 years, and extended temporary business tax breaks (including the wind PTC) for one year. It did not extend the payroll tax holiday or solve the sequestration issue, and although financial markets have reacted positively, it is impossible to know how beneficial this deal will be for the U.S. economy. Moreover, the deal did not solve the long-term deficit issue.
The deal also had significant effects on the solar industry. First, the bill extends the 50% accelerated bonus depreciation to qualifying solar projects that are placed in service before January 1, 2014. Solar projects with a commercial operation date (COD) in 2013 were already being modeled without this accelerated bonus depreciation, and this change will therefore will lead to a bump in the returns on solar project tax-advantage investors. Second, the bill delays the sequester for two months, meaning there will be no immediate reduction in 1603 cash grants from the Department of Treasury. However, this 1603 reduction can still happen on March 1, 2013 if Congress does not enact another extension or strategy to avoid sequestration. Finally, the bill extended the production tax credit (PTC) for wind projects for one year – to the end of 2013. Furthermore, the language for PTC eligibility was actually altered. This means that now a project must only have begun construction by the end of 2013, essentially giving wind projects a two year extension to achieve commercial operation. This is good news for the U.S renewable industry and highlights the importance of attracting enough tax equity for both solar and wind projects in the U.S. over the next couple of years.
Finally, in the last article, we tried to predict the supply of tax equity if the fiscal cliff caused another recession for the U.S. economy. We concluded that less fiscal uncertainty was the best solution, as this would allow potential tax equity investors to generate more profit, as well as have confidence in their net income. However, although a deal was reached, fiscal uncertainty remains. Treasury Secretary Timothy Geithner informed Congress that the U.S. has hit its debt limit and will only avoid default for an estimated two months through the use of emergency funding solutions. Therefore, there will be another looming “cliff” at the end of February. To avoid this looming cliff, Congress will need to raise the debt ceiling, as well as address the sequestration issue. Failure to address the debt ceiling would lead to default and likely downgrade the U.S. credit rating, potentially creating an economic reaction that will once again threaten the supply of U.S tax equity for renewable projects. Finally, there is still the underlying need to find a way to reduce the deficit, something that the fiscal cliff deal failed to do.
In conclusion, there are a few specific effects that the American Taxpayer Relief Act of 2012 will have on the solar industry, most notably in regards to the extension of accelerated bonus depreciation. Moreover, the deal may still affect the the supply of tax equity available for solar projects. Therefore, this bill is likely just a temporary solution before another “cliff” once again threatens the U.S fiscal position.
About Sol Systems
Sol Systems is a solar finance firm and a leader in financial innovation in the renewable energy industry. Since its inception in 2008, Sol Systems has partnered with 350 solar installers and developers to bring over 3,000 solar projects from conception to completion by offering innovative financing solutions for residential, commercial, and utility-scale projects.
Sol Systems’ financing programs catalyze investments for a broad set of solar projects by simplifying their origination, diligence, and financing processes. Developers seeking financing for solar projects can access over $2.5 billion in capital through the Sol Systems investor network.
In addition to providing financing, Sol Systems also offers project due diligence, deal structuring, and asset management services – all designed to reduce overhead and transaction costs and quicken project development timelines.
For more information, please visit www.solsystemscompany.com
IRS Rescinds PLR: Changes Valuation Structure of Energy Facilities
In January of 2012 the IRS released a Private Letter Ruling (PLR) indicating that energy facilities with specific PPAs would be valued based on the pooled value of the physical asset as well as the value of the PPA. In essence, this means that two otherwise identical projects would be valued differently if one has a more lucrative PPA than the other. Through this ruling, energy facilities with favorable PPAs could increase their value, thereby increasing the size of the Investment Tax Credit.
However, on December 7, 2012, the IRS released a “Revocation of Private Letter Ruling”, stating that the asset and the PPA would be valued separately, not together, as originally specified. Since 2011 the Treasury has been valuing projects in this manner, and the IRS’ most recent ruling aligns the valuation methodology between the two agencies.
At this time, it is unclear how exactly this change will play out in the ITC marketplace. Our initial analysis indicates that many projects will have a less favorable valuation. If a project with a PPA already in place is purchased, a certain amount of the purchase value in a sale of the project may be allocated to the value of the PPA. As a result, a reduced portion of the overall purchase price would then be allocated to the hard project assets (the basis upon which the ITC is calculated). Thus, project valuations may experience a marginal decline, as may the amount of the related ITC.
About Sol Systems
Sol Systems is a solar finance firm and a leader in financial innovation in the renewable energy industry. Since its inception in 2008, Sol Systems has partnered with 350 solar installers and developers to bring over 3,000 solar projects from conception to completion by offering innovative financing solutions for residential, commercial, and utility-scale projects.
Sol Systems’ financing programs catalyze investments for a broad set of solar projects by simplifying their origination, diligence, and financing processes. Developers seeking financing for solar projects can access over $2.5 billion in capital through the Sol Systems investor network.
In addition to providing financing, Sol Systems also offers project due diligence, deal structuring, and asset management services – all designed to reduce overhead and transaction costs and quicken project development timelines.
For more information, please visit www.solsystemscompany.com
Sol Systems Featured in Greentech Media: What Would the Fiscal Cliff Mean for the U.S. Solar Market?
Sol Systems Associate Andrew Gilligan was recently featured in Greentech Media for a piece he wrote on the fiscal cliff.
What Would the Fiscal Cliff Mean for the U.S. Solar Market?
As the impending “fiscal cliff” appears looms, government agencies and many industries are preparing for federal tax increases and spending cuts. Although the solar industry is not as directly vulnerable as some, it is still helpful and pertinent to understand what a post-fiscal cliff landscape might entail for the U.S. solar industry.
What is the Fiscal Cliff?
The term “fiscal cliff” was originally coined by Federal Reserve Chair, Ben Bernanke, and refers to the estimated $500 billion in tax increases and $200 billion in spending cuts that are scheduled to take effect on January 1st, 2013. Congressional decisions over the past few years, combined with the expiration of certain measures at the end of 2012, have created a need to reach a deal by the end of the calendar year. Without a deal, austerity measures could throw the U.S. back into a recession, as the Congressional Budget Office (CBO) estimates that tax increases and spending tax cuts would equal four percent of GDP — greater than the approximately two percent of the U.S. economy growth rate– thus creating a contraction in the economy.
Some of the most significant triggers of the fiscal cliff include the expiration of the Bush tax cuts and payroll tax holiday which would raise taxes significantly for many Americans (over $300 billion). The other major basis of the fiscal cliff is sequestration – spending cuts of around $110 billion in Medicare payments and discretionary spending – which would go into effect as mandated by the Budget Control Act of 2011, which was enacted during the debt ceiling debate. Neither Republicans nor Democrats want these austerity measures to go into effect, and many analysts are in agreement that failure to reach a deal could hurt the majority of Americans.
Sol Systems was recently featured in Greentech Media.
However, according to President Obama and House Speaker Boehner, the opposing leaders in this negotiation, little progress has been made in reaching a deal. The main sticking point has been taxes for those individuals making $250,000 or more annually. Democrats would like to increase this marginal tax rate (for those making more than $250,000) to Clinton-era levels of 39.6 percent, thus creating around $1 trillion of revenue. Republicans are opposed to any tax rate increases and want the Bush tax cuts to be extended for those making over $250,000. Republicans, meanwhile, have indicated they are open to raising revenue by eliminating deductions, but neither party appears any closer in finding compromise on tax revenue versus spending cuts, especially as it relates to increasing the marginal rate for wealthy individuals.
Assuming that no deal is reached, then the tax increases and spending cuts mentioned above would go into effect over the next two years, and the U.S. would be at risk of falling into a recession. The stock market would also likely react poorly, driving stock prices and company valuations downwards, potentially comparable to the response of global markets to the financial crisis experienced in 2008.
How would the fiscal cliff affect the solar industry?
One direct effect the fiscal cliff would have on the solar industry would be the reduction in the 1603 cash grant payable for qualified projects. The Sequestration Transparency Act of 2012 states that the 1603 cash grant would be reduced by 7.6%, resulting in a total spending reduction of $279 million. As an example, if a developer had a 2 MW solar project that was expected to receive the 1603 cash grant at $3/Watt, their expected grant payment would go from $1.8 million to $1.66 million (a 7.6% reduction in the grant means that it would now be payable for 27.72% of the project cost). This ~$137,000 difference would decrease the project’s IRR from 10% to 9.4%. In certain cases, this IRR reduction could be below the investor’s required return hurdle, thus jeopardizing the financing for the project, and the developer’s ability to complete the system.
However, the OBM’s report does not specify exactly how the grant will be reduced or if the application process will change at all. Moreover, there is no effective date provided in the sequestration. This environment causes uncertainty for investors closing deals and building “safe harbored” projects and may cause many investors to price in an extra margin for the increased risk.
Solar Investment Tax Credit (ITC)
On the bright side, the main federal incentive for solar, the Investment Tax Credit (ITC) will still be in effect through 2016 and should not be affected by the sequestration spending cuts. In fact, the lack of progress by Congress and the White House, in terms of larger tax reform, could actually be seen as a positive thing for the ITC. Congress has discussed targeting tax loopholes and government subsidies as a long-term strategy for reducing the federal deficit, and it is likely that ITC would at least be considered for the chopping block. However, the current gridlock and timeline has limited Congress’s ability to examine all tax loopholes and deductions.
How would the solar industry fare if the fiscal cliff caused another recession?
If the U.S. fell into another major recession with higher unemployment, increases in taxes, and a reduction in consumer spending, it’s safe to assume that the industry would see fewer customers purchasing residential and small commercial solar energy systems. However, with the growing popularity of third party financing for residential and commercial systems, a reduction in purchased systems may turn out to have a negligible effect on the overall industry. Much more important is the effect that the fiscal cliff could have on the tax equity market…
The Tax Equity Market in a post-Fiscal Cliff World
Prior to 2008, the tax equity market for solar and wind projects in the U.S. was fairly robust, although still very specialized, with 15-20 potential investors comprised primarily of financial institutions and insurance companies. With the 2008 recession, the number of tax equity investors greatly contracted. In order to support the economy and encourage investment, the federal government elected to provide a “grant in-lieu-of tax credit” which is also known as the Section 1603 cash grant. This grant, which stemmed from the American Recovery and Reinvestment Act of 2009 (ARRA), became a lifeline for the solar industry as the tax equity market dried up following the 2008 financial crisis. Although new players are entering the market now, tax equity has still not returned to pre-financial crisis supply.
If the fiscal cliff is not avoided, it is possible that financial markets would react similarly to 2008, leading the U.S. economy into recession. If the U.S. also defaults in February or March 2013, when the current debt ceiling is likely be reached, some analysts believe there could be a financial crisis of even greater scale than 2008. However, assuming that worst case scenario does not happen, and we are only dealing with the austerity measures caused by the fiscal cliff, then it is still likely the solar industry would experience a contraction in the tax equity market.
According to the U.S. Partnership for Renewable Energy Finance (US PREF), there were $6.1 billion of tax equity supplied to wind and solar projects in the U.S. in 2007. That number decreased 44 percent to $3.4 billion in 2008, the year before the grant was implemented. If a comparable decrease in tax appetite occurred between 2012 and 2013, it would substantially slow the growth of the solar industry.
Sol Systems estimates that there will be approximately $3.8 billion of tax equity investment necessary in 2013, and $4.67 billion necessary in 2014 to keep pace with the expected growth of the solar industry. According to US PREF, the current 2012 tax equity appetite, for both wind and solar together, is estimated at approximately $3.6 billion (on an optimistic basis) implying that solar projects are already facing a shortage of tax equity in the market and that this shortage will continue in 2013.
If the $3.6 billion of tax equity available in 2012 decreased as much as it did in 2008, it would imply that only $2 billion of tax equity would be available for both solar and wind in 2013; thus creating a significant shortage in the market, and an environment where developers with good, bankable projects (at least by today’s criteria) would not be able to find requisite financing.
Fortunately, there is reason to believe the tax equity market would not contract as much in 2013 as it did in 2008. Of the ~20 tax equity investors active in renewable projects in 2007 according to US PREF, 10 of them dropped out of the market in 2008 due to insufficient taxable income or bankruptcy. In 2008, these bankruptcies and losses were largely due to too much leverage in the financial system and risky bets on the housing industry by both banks and insurance companies. Therefore, the worst hit companies in the 2008 financial crisis, players like Lehman Brothers and AIG, were also the same specialized investors who were previously active in the renewable energy tax equity market. If there is a fiscal cliff induced recession in 2013, the companies at greatest risk would likely be defense-related companies, not the financial institutions that tend to invest in solar.
Furthermore, despite the imagery invoked by a fiscal “cliff,” the austerity cuts would likely take effect more gradually than would one believe. Therefore, current tax equity providers and new players would not see such a swift and unexpected drop in expected taxable income, as in 2008. The more pertinent question will be if tax equity investors are still able to generate sufficient taxable income during a recession in 2013 to support planned tax equity solar investments.
Unfortunately for the solar industry, obtaining tax equity will continue to be the one of the main limiting nutrients for development in the U.S. over the next several years, with or without a fiscal cliff driven recession.
Conclusion
In the end, no one knows what will happen if a deal is not reached in Washington, but it can be said that fiscal uncertainty is a hindrance, not a help, to the solar industry. A higher degree of certainty would allow tax equity investors, and their clients, to make business investments that generate taxable income, which could be used to invest in solar projects for the ITC and depreciation benefits. Given this perspective, the industry should oppose the idea of letting Congress “kick the can” and push the fiscal cliff off until a distant future date. Instead, the industry needs some type of long-term deficit resolution plan to allow tax equity investors to have the confidence in their future income and encourage active players to remain in the market.
About Sol Systems
Sol Systems is a solar finance firm and a leader in financial innovation in the renewable energy industry. Since its inception in 2008, Sol Systems has partnered with 350 solar installers and developers to bring over 3,000 solar projects from conception to completion by offering innovative financing solutions for residential, commercial, and utility-scale projects.
Sol Systems’ financing programs catalyze investments for a broad set of solar projects by simplifying their origination, diligence, and financing processes. Developers seeking financing for solar projects can access over $2.5 billion in capital through the Sol Systems investor network.
In addition to providing financing, Sol Systems also offers project due diligence, deal structuring, and asset management services – all designed to reduce overhead and transaction costs and quicken project development timelines.
For more information, please visit www.solsystemscompany.com.
Life After the 1603 Grant: the Road Ahead
The following is a mutli-part series on the Cash Grant and the Road Ahead. It is part of Sol Systems‘ continuing efforts to provide the industry with the information and ideas (where we can) that we believe it needs to continue to succeed. For additional resources on project development, we recommend you join the SolMarket community, which provides a number of informational resources and the SolSmart suite of legal documents.
In February of 2009, the federal government passed ARRA, and the 1603 Investment Tax Credit (ITC) Cash Grant program with it. The Program effectively transformed what was traditionally an investment tax credit into a cash grant, awarded by the treasury, within 60 days of commercial operation. It was perhaps the single most important piece of legislation for solar in recent history, spurring huge growth in the sector, recently estimated to be 69% year over year. In January of 2012 the 1603 ITC Cash Grant will expire, and with it the ability for developers and investors to secure the cash grant in lieu of a tax credit.
So what’s next? Well, let’s take a look.
Part I: Looking Back
Under the Emergency Economic Stabilization Act of 2008, a 30% tax investment credit for qualifying renewable energy projects was extended through 2016, allowing owners of solar projects to offset 30% of a solar system’s cost through tax credits. So long as a system owner had enough tax liability over the course of 5 years, he or she would be able to deduct 30% of the system’s gross cost from their federal taxes.
Because most solar project companies or developers working on commercial and utility-size PV projects do not generate enough taxable profit on their balance sheets to utilize the 30% tax investment credit (ITC), they had to seek a financial intermediary with the necessary tax liability to buy a stake in the project company and monetize these tax credits, what is commonly referred to as “tax equity investors”. Tax equity investors are effectively companies with large balance sheets, traditionally banks and more recently larger corporations, which purchase tax credits to shelter otherwise taxable income, while also providing an essential financing tool for large renewable projects.
In 2007, the Solar Energy Industries Association (SEIA) estimated there were up to 28 tax equity investors, primarily financial institutions led Morgan Stanley, JP Morgan and others. However, the collapse of Lehman Brothers and the financial crisis of 2008 effectively ended most of these companies participation in the tax equity market for renewables. Several companies, such as AIG and Prudential, departed the tax equity market entirely because of bankruptcy or uncertainty about whether they would have sufficient taxable income.
II. The 1603 Program
In response, President Obama approved the Section 1603 Cash Grant Program (as part of the American Recovery and Reinvestment Act of 2009), to effectively stabilize renewable energy market by providing $1.9 billion of cash grants in lieu of tax credits. Under the 1603 Program, owners of a renewable energy system could simply apply for a cash grant to cover 30% of the system’s cost, regardless of their tax liability.
The 1603 Program catalyzed the solar market, with approximately 80% of solar projects opting for the cash grant, driving growth of 104% between 2009 and 2010 in the United States. As of mid-August 2011, 87% (2,095) of the 2,410 cash grants awarded under the 1603 program were provided to solar energy projects (although only 27% of the nominal value if these grants). Since October of 2010, the federal government has invested over a billion dollars in solar projects through the 1603 Grant Program.
Unfortunately for the solar industry, the Section 1603 Program is set to expire at the end of this year, and it appears highly unlikely that it will be renewed again. With the expiration, interested parties without the necessary tax liability will again have to rely on tax equity investors to fully monetize the ITC. The problem is twofold: (i) the tax equity market has not yet fully recovered and there are only an estimated 10 to 15 investors looking for tax equity deals and (ii) integrating tax equity into deal structures will significantly increase transaction costs, raise the costs of development, and potentially limit smaller deal sizes.
The result will be a bottleneck in 2012-13, where a substantial number of solar developers and other interested parties look to construct or own commercial-sized solar system, but only a select few can secure the requisite tax equity financing. This will mean a number of projects will not be developed, and those projects that do secure tax equity will see increased yields. Some projects are likely to seek safe harbor under the 1603 Program by securing 5% of the total costs of the system, but this strategy brings with it its own challenges.
So now, as we look towards the horizon, what’s next? What will happen to this 80% of the industry opting for the cash grant? Companies like Sungevity, Sanyo and Vivent are quickly lining up tax equity for the upcoming year, and some believe market growth will slow by up to 50% in the second half of 2012. Might these challenges be mitigated by solar modules priced below $1.10/watt? What creative solutions will our industry implement to meet these financing challenges?
Please join us(and others) next week for Part II of this Series: “Life After the 1603 Grant: Looking Ahead”