Since it is June, the 6th month of the year, we wanted to present you with our thoughts on the six hottest markets for solar financing in the country. If you have questions or thoughts on these markets or any others not listed, don’t hesitate to reach out to Dan Holloway @ Dholloway@scf.com or Joel Binstock @ email@example.com
1) California: California is the most developed and saturated solar market in the United States. In 2016, approximately 10% of all energy produced in-state was from solar generation. With $0.15+ per kwh rates, utilities with experience working with solar developers, and ample sunshine California will continue to deploy solar at a substantial clip going forward, particularly in the C&I and community solar markets.
2) Massachusetts: Out with the old, in with the new. Massachusetts has begun to phase out their SREC II Carve-out program and replace it with the new and improved SMART program. SMART is expected to be one of the most attractive solar programs in the country in 2018 & 2019 with significant available capacity to be deployed. Read more about the SMART program and SCF’s SMART offering here!
3) Illinois: Illinois, much like Massachusetts has decided against pursuing a traditional SREC Program to achieve its RPS standards. Instead, it has established the Adjustable Block Program (AB Program) which offers fixed incentives over 5 years in order to encourage solar deployment. The AB program is still in its early stages but anticipated opening is Q4 2018 or early 2019. One thing to note here is that while the Community Renewable Generation category is substantially oversubscribed (some have said by as much as 500% or more), the Distributed Renewable Generation category (2 MW and less) is still relatively unsubscribed. You can read more about it from SCF here!
The state of Massachusetts has a long track record of promoting renewable energy & sustainable development; however, recent legislative changes have prepared the Commonwealth to become one of the largest hot-beds for renewable energy development in 2018 & beyond.
The Department of Energy Resources (DOER) recently finalized the Solar Massachusetts Renewable Target (SMART) Program as its plan to replace the widely successful SREC (Solar Renewable Energy Certificate) Carve-Out II Program implemented in 2014. This program was designed to assist in the procurement of 1,600 MW of solar by 2020. While the SREC program helped jumpstart renewable development in MA, the state’s RPS standards dictate that even more renewable resources be installed; hence the creation of the SMART Program.
The SMART Program
Learning from the past, the SMART Program seeks to integrate the fixed nature of rebates (typically 1 lump-sum payment) with the performance-based & longer-term REC structure. RECs, while critical for solar deployment in Massachusetts, have challenged the financeability of solar projects due to price uncertainty. Simply put, while RECs can offer upside for project economics, they also provide significant risk due to price fluctuations. Rebates on the other hand provide fixed upfront incentives that are often paid within the first year of deployment, therefore ensuring those respective economics. SMART, through significant research & development, hopes to resolve the price uncertainty of RECs through locked-in contracts (20 year terms for projects over 25kW).
SMART is predicated on a “Base Compensation Rate” plus location based, off-taker based, and energy storage based rate adders. The base compensation rate varies based on utility provider, system size, and block availability – once program enrollment hits a certain capacity, there is a 4% step down in the rate for the following block.
SMART Rate = Base Compensation Rate + Location adder + Offtaker adder + ESS adder
These fixed 20-year contracts are incredibly important for solar financing. By locking in revenue that is guaranteed through the SMART program, solar financiers can reduce their risk exposure and offer a lower cost of capital while providing a better solar offering to the market. With base compensation rates ranging from $0.15/kWh – $0.36/kWh, the SMART program expects to be one of the most attractive state solar programs administered in the US.
How SCF is taking advantage of SMART
Sustainable Capital Finance has been following the SMART Program through its development, and is in the midst of incorporating a new site-lease solving feature, soon be integrated into SCF’s Quick Quote calculator and the SCF Suite. SCF’s Developer & EPC partners will be able to use the new feature to approximate site-lease payments that SCF can support under SMART and other programs as well. While the SMART Program is expected to be activated in the coming months, SCF is actively seeking out opportunities for site control in MA. If you are evaluating a project for the SMART program or are interested in learning more, don’t hesitate to reach out to Joel Binstock @ firstname.lastname@example.org or Dan Holloway @ email@example.com.
Section 201 Suniva Trade Dispute Update:
On November 10th, The International Trade Commission officially submitted 3 reports pertaining to the Section 201 Trade dispute on imported solar cells & modules. The reports explained the meaning behind the ruling and recommended several remedy scenarios to address the dispute. The president has 90 days to review these reports after-which he can choose to accept the proposed remedies or initiate others. Utility News
Puerto Rico Leadership Resigning Amidst Questionably Awarded Hurricane Response Contract
Aber Gomez, the Director of the Puerto Rico Emergency Management Agency resigned earlier this month as a result of pressure amounting from the failure in emergency response & lack of remedial action. One of the most pressing issues is that the island’s electrical grid is still under immense pressure and stress with as much as 50% of the island remains without power. Another main story to come out of the recovery efforts is a controversial contract signed with Whitefish Energy Holding, a small outfit that seemingly did not have the credentials or solution offering to have been awarded this $300 million contract.
PG&E Investigated for liabilities from Napa & Sonoma Fires
Officials from California’s Department of Forestry and Fire Protection disclosed that they have been investigating Pacific Gas & Electric’s power equipment as a possible cause for the Napa & Sonoma County fires that took place last month. PG&E has combatted this initial claim for the mean time while investigations will continue to shed light on the wildfires.
Hybrid Wind+Energy Storage Technology Ready For Deployment
A Danish Wind Project Developer, KK Wind Solutions, is developing a wind turbine + Energy Storage System (ESS) combined product which would help to reduce fluctuations in output by 90%. The main purpose of the project is to develop a scalable modularized system that is more resilient to fluctuating environmental factors. Another company, Toshiba, recently installed a 2 MW storage system to go alongside NRG Yield’s Elbow Creek Wind Farm in TX. These hybrid systems are starting to leave the lab and meet real-world conditions so there will be much more insight into these projects moving forward.
When evaluating PPA opportunities for Solar PV projects, soft costs often don’t get enough consideration. For most financiers, there’s a general budget for each category of soft costs and that number doesn’t get reevaluated despite the nuances of a project. Soft costs include the following:
- Legal Fees – to review documents like PPAs, EPCs and Site Leases
- Accounting Fees – to review the eligibility of system costs per IRS guidelines
- Real Estate – depending on the type of project being built, a number of different fees can come into play to assure the financier that the off taker is the legal owner of the site and that the project being built does not intrude on any existing encumbrances.
- Independent Engineering – For every project, an independent engineer needs to evaluate the system being built to confirm that it meets local and national building codes, that the system is built to specification, and that the system will meet the production estimates that are built into the financial modeling
For larger projects (Utility Scale), soft costs are impactful, but relatively, to a lesser extent. For smaller projects in the Commercial and Industrial (C&I) market, soft costs can be very impactful, and can actually derail many projects financially. If a project incurs $100K in soft costs for a 5 MW project that can be built for $1.75/watt, (5 MW x $1.75 = $8.75M in total build costs), then as a percentage, soft costs equate to a little more than 1% of the overall project cost ($100K/$8.75M = 1.1%). For a 200 kW system with a $2.25/watt build cost (200 kW x $2.25 = $450K), and $50K of soft costs, 11% is added to the overall project cost; a substantial amount for a project that may be difficult to finance in the first place. If small projects have trouble creating economies of scale with regards to soft costs, it’s fair to ponder, how do residential projects ever get financed then? The simple answer is standardization. Companies like Vivint, Sunrun, and Solar City use the same contracts and don’t expose themselves to lengthy negotiations with several red-lines being lobbed back-and-forth. It’s pretty much a take it or leave it proposition. By utilizing common documentation, one of the main drivers of soft costs, namely legal support, is effectively negated.
So, how can we achieve similar soft cost reductions and economies of scale for the small C&I market? Another way of stating that would be, “How can we make small and medium sized C&I look more like the residential market?” This is the task that SCF has set for itself. Over several years and through the use of the SCF Suite (SCF’s online project pricing, and management software offered to all of its EPC and Developer partners), and standardization of processes and documentation, SCF has been able to significantly reduce costs related to legal, accounting, independent engineering and asset management . This has allowed SCF to reduce its minimum project size to 100 kW, with a focus of an even lower minimum over time. By taming the soft cost beast, SCF is able to provide financing to the sorely neglected small to medium size C&I market.
To learn more about how to partner with SCF please fill our brief partner survey.
About Sustainable Capital Finance: