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 @ jbinstock@scf.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!

4) New Jersey: New Jersey is a challenging but exciting market. While the SRECs in the state are some of the highest in the country, their price volatility creates uncertainty and risk exposure for owners of PV systems. As a result, the cost of capital typically is the highest for states like New Jersey with uncontracted risk exposure. However, there is considerable discussion going on within the state related to modifying the current SREC structure to make it look more like the MA and IL incentive programs. Everyone will have to wait to see how these conversations ultimately play out.
5) Rhode Island: Rhode Island is a smaller more nuanced market than the previous states listed. There is a feed-in-tariff opportunity called the Renewable Energy Growth Program which allows developers to supply electricity directly to National Grid in exchange for a bid-rate locked in for a 20 year term. Similar to the MA SMART program, SCF can provide programmatic site lease pricing using the SCF Suite. Please contact us if you would like to learn more.
6) Arizona: Sunshine galore. Arizona has some of the highest insolation rates in the country. Combined with sophisticated solar developers & installers, Arizona is a state that is trying to compete with California for state-unsubsidized solar. As build prices continue to decline and the price of electricity continues to rise, we are finally reaching an inflection point where financing becomes an attractive option for this market.
31 May 2018
May 31, 2018

Talking SMART

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Introduction:

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 @ jbinstock@scf.com or Dan Holloway @ dholloway@scf.com.

18 Jan 2018
January 18, 2018

January Industry News

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Regulatory News

New Jersey Senate Passes Bill 2276 to Raise Solar Energy Targets

The New Jersey Senate passed a bill on January 8th, 2018 as a short term fix to avoid the collapse of the solar market once the current goal is hit later this year. It is still unknown as to whether or not Gov. Chris Christie will sign the bill and his term expires next week.

FERC Rejects Energy Secretary’s Plan to Bail Out Coal and Nuclear Industries

The Federal Energy Regulatory Commission issued an order officially ending Energy Secretary Rick Perry’s plan to bail out both the coal & nuclear industry, citing the DOE didn’t provide evidence that the existing market rules are “unjust and unreasonable”. The proposed plan helped subsidize the stored fuel costs required to operate coal & nuclear plants.  FERC’s order was praised by both environmental groups & energy advocates.

Technology News

Panasonic Begins to Ramp Up Solar Cell Manufacturing at Tesla Gigafactory 2

Back in 2016, Tesla and Panasonic developed a partnership to produce and distribute high-efficiency Panasonic cells & modules. After a year of delays and trial runs, the Gigafactory 2 is officially producing both cells & panels. A portion of the manufactured panels are dedicated to the Tesla’s much hyped solar-roof. Systems are starting to be installed on roofs of non-Tesla employees.

DOE invests $12 Million in 8 projects with goals to improve solar forecasting.

These projects will seek to improve solar forecasting, building upon similar projects that were awarded funds in 2012. Expanding the solar forecasting from 24 to 48 hours in advance will help grid operators manage day-ahead planning. An example of one of the awarded projects is IBM’s Watt-Sun Program.

Schneider Electric SE & Cybersecurity Firm FireEye Confirmed Successful Hack of Industrial Control Systems at an Unnamed Facility

Cybersecurity has become an increased focal point for the electric industry in 2018 & beyond. With more and more cyber-attack attempts occurring every year, industry leaders are being challenged to address such a critical issue. Consulting Firm Accenture recently found that more than 75% of utility executives in North America believe a cyber-attack is probable in as soon as five years.

12 Dec 2017
December 12, 2017

Employee Spotlight: Jonathan Worthley

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What are 3 words to describe SCF?
Solar financing specialists.

What do you like most about SCF?
I enjoy being part of a small, knowledgeable team, that get’s to work on very interesting solar projects, from schools and churches, to home owners associations, municipalities and general commercial Jonathan Worthleycustomers.

What is your role at SCF?
I head up the project operations team, as their Project Operations Manager (please don’t call me the POM 🙂 that manages the due diligence, development and construction process on all of our acquisitions and developments. Our team prepares financial models, updates contracts, reviews various technical documents and manages schedules to ensure that projects meet our requirements.

What career advice would you give for people trying to enter the solar field?
Leverage your existing skills and experience as there are a great variety of roles in the solar industry. Whether it be in manufacturing, sales, engineering, construction, science, real estate, tech, insurance, finance, risk, or law, there are numerous people with different specialties that are involved in a project. Be well read on various topics, complete short courses (NABCEP and Heatspring offer affordable courses) and attend various networking events, such as those for young professionals and women in solar (organised/attended by our very own Maggie Parkhurst!).

What professional accomplishment are you most proud of?
Being able to apply my skills in different countries and industries.

What is the best book you’ve read?
I tend to read mostly non-fiction and historical fiction (sad, I know), but I found Richard Muller’s Energy for Future Presidents and Physics for Future Presidents interesting and helpful reads for anyone entering the renewable energy industry.

What do you like to do in your free time?
Stay outdoors and active, catch a game of footy (Aussie rules football) and spend time with family and friends.

What are your hopes for the solar industry?
Given solar is now cost competitive with traditional energy, I think the future is very bright. I don’t believe the phase out of the ITC will be too much of a hindrance as we will likely see more competitive and efficient financing markets. China and the corporate sector’s commitment to securing renewable energy sources, not only for environmental reasons but also for financial ones, is also a good sign. So I hope and believe it will continue to grow.

What is the best concert you’ve ever attended?
Being Australian, I’ve only ever been to Men at Work and ACDC concerts, and they’re really hard to split.

What has been your favorite city you’ve ever lived in and why?
I really enjoyed Hong Kong. It has a good mix of professional, travel and social opportunities. The city itself has a lot of bars and restaurants, but there is also a lot of hiking trails and water activities on its doorstep. It’s also an excellent base from which to travel to any place in Asia, and it’s really easy to meet people and make friends.

If you could only drink one beer for the rest of your life, what would it be?
Fosters

The solar Investment Tax Credit (ITC) is one of the most important federal policy mechanisms to support the deployment of solar energy in the United States.  The ITC continues to drive growth in the industry and thereby job creation across the country.  The ITC is a 30 percent tax credit for solar systems on residential (under Section 25D) and commercial (under Section 48) properties.

The existence of the ITC through 2021 provides market certainty for companies to develop long-term investments that drive competition and technological innovation, which in turn, lowers costs for consumers.  The ITC is based on the amount of investment in solar property.  Both the residential and commercial ITC are equal to 30 percent of the basis that is invested in eligible property which has commenced construction through 2019.  The ITC then steps down to 26 percent in 2020 and 22 percent in 2021.  After 2021, the residential credit will drop to zero while the commercial and utility credit will drop to a permanent 10 percent.

The residential and commercial solar ITC has helped annual solar installation grow by over 1,600 percent since the ITC was implemented in 2006, which represents a compound annual growth rate of 76 percent.  According to the Solar Energy Industries Association (SEIA), solar installations increased 30% in 2014, thanks partly to cheaper photovoltaic panels (according to GTM Research).  Solar proponents note that the solar industry employs more than twice as many U.S. workers as coal mining and has added jobs 20 times faster than the rest of the economy. Additionally, approximately 27 gigawatts of solar energy were installed in the US in 2015 with installations expected to reach nearly 100 gigawatts by the end of 2020.

The 30% investment tax credit is paying dividends for America.  Solar is growing faster than any other domestic energy source as prices continue to plummet, even beating out coal and cheap natural gas in some markets.  The solar industry created one in 78 of our country’s new jobs last year while providing living-wage salaries for more than 200,000 Americans.

Moreover, the roughly 210,000 Americans currently employed in solar is expected to double to 420,000 in the same time period, all this while spurring roughly $140 billion in economic activity.  The continued success of the ITC demonstrates that stable, long-term federal tax incentives can drive economic growth while reducing prices and creating jobs in one of America’s fastest-growing industries.

Many supporters say the abrupt end date of the 30% credit represents a “cliff” for the industry.  Without the current incentive, they argue, installation of solar-power systems will plummet, and thousands of jobs in the industry will be lost as a result.  However, others argue that the “cliff” isn’t as steep as it appears, and that solar will continue to grow even without the 30% credit—albeit not as quickly as before.

Can the solar industry survive without the current credit?

According to Energy Information Administration data in 2015 (when the ITC was scheduled to expire at the end of 2016), if the 30% credit was not extended, rooftop solar photovoltaic installations would plunge 94% in 2017 from a year earlier and utility-scale projects would decline 100%, with neither recovering anywhere close to today’s levels even a decade from now.  Bloomberg predicted solar installations would drop by two-thirds in 2017, which the Solar Energy Industries Association estimate would cost America 100,000 jobs.

The ITC provided certainty in the business model.  The multiyear assurance provided by the eight-year (2008 thru 2016) 30% credit leveraged billions in new high-tech innovation and project development, lowered risks to allow startups to launch new products and services, and resulted in tens of millions of panels installed across America.

According to the Natural Renewable Energy Laboratory (NREL), the elimination of the ITC would not impact the industry growth because financiers, not developers, grab about half of the tax credit.  The credit has proved an essential financing mechanism to getting solar built, even though some projects rely on complex tax-equity structures to monetize the credit.

Optimists also speculate that it will get easier for people to finance solar systems themselves with loans if the credit goes away.  The residential solar market is shifting to more self-financing, but rising prices in the absence of the credit could make solar uneconomical and scare off buyers.  The lack of a credit will also make it harder for utility-scale projects, which account for most solar investment dollars, to compete for scarce capital and against more carbon-intensive generation alternatives.

A study from Bloomberg estimates that the loss of the tax credit will cause solar capacity to only quadruple, instead of quintuple, by 2022, which is still a substantial increase.  A Wall Street Journal analysis reinforces this assessment.  In 22 states, at least one gigawatt of solar (and often much more) could be installed at a comparable cost to retail electricity prices by 2017, tax credit not included.

So why are the grimmer predictions about the future of solar incorrect?  For starters, the cliff that people talk about is smaller than it appears.  Most folks with solar on their rooftop used a third-party lease or power-purchase contract.  That third party took on much of the financial risk and the responsibility for redeeming the 30% tax credit.  These financial middlemen have absorbed nearly half of the tax credit, and as a result, solar developers and customers have received an effective discount of 15% instead of 30%.  So the current incentive isn’t as big as it looks, and the effect of losing the incentive won’t be as severe as many think.

What’s more, the change to the tax credit will open up new options for financing.  Solar energy’s low risk and steady returns are attracting new investors whose profit expectations are much lower than many currently participating in solar financing.  Additionally, solar securitizations are becoming more widely utilized, attracting new institutional investors.

If the change in the tax credit opens the door to more sizable, low-margin investors that offer a discounted cost of debt and equity for solar projects, The Wall Street Journal estimates that the net cost of solar would rise just 2.5% with the loss of the tax credit.

The change to the credit may also drive prospective solar clients, with decent credit, from leasing to lower-cost self-financing.  With less paperwork to file, the relatively lower costs and higher returns of ownership become more evident.

A November 2014 pro forma analysis by the National Renewable Energy Laboratory suggests that self-financing lowers the cost of solar by 23% for residential customers and 87% for commercial customers.

It’s easy to assume that losing the federal tax credit is nothing but a 30% cut in the growth potential for solar energy.  But this ignores several countervailing forces, from the middlemen’s current cut to falling costs to the advent of low-cost financing.  Even though coal and gas retain subsidies like heavily socialized pollution costs, solar doesn’t need the federal tax incentive to compete.  Instead, the market provides several ways to glide over the solar tax cliff.

Comparison of costs

A comparison of the cost per KWH for solar and existing electricity is as follows:

  1. Non-renewable retail residential electricity rates per kWh have increased about 4% on average (Nov 2005 thru Nov 2014), per year, over the last 10 years. According to the Energy Information Administration, residential electricity rates have increased nationally by around 30% in the last 10 years – from about 9¢ per kilowatt-hour (kWh) in 2005 to about 13¢/kWh in 2014.
  2. Natural gas prices are expected to increase, as a result of higher anticipated infrastructure costs.
  3. Coal-fired electricity will continue to rise.
  4. Solar rates per kWh have decreased from approximately $.071 in 2009, to $.050 in 2015.

The cost of renewable energy is decreasing, while the cost of traditional non-renewable energy sources is increasing.  However, the existing electrical grid is designed for continuous energy flow and is not designed to “store” any excess electricity.  If a new grid was to be built today, it would bear little resemblance to the existing system.  The United States electrical grid is wearing out.  Depreciation expense exceeds new investment.

Costs of generation, both fixed and variable are rising.  Costs of transmission and distribution are rising.  The costs of doing business are rising.  On the other hand, utility revenues from energy sales are declining as a result of conservation, energy efficiency, distributed generation and competition.  Utilities generally collect a majority of their revenue through charges for energy usage, a variable quantity, yet the majority of their costs are due to capacity, a fixed quantity that doesn’t diminish with diminished energy consumption.  Traditional approaches to rate design are no longer sufficient.  Simply raising rates to overcome declining revenues only increases the incentive for customers and competitors to further displace purchases from their utility.

According to Philip Moeller, a member of the Federal Energy Regulatory Commission,  “We are now in an era of rising electricity prices”,  the steady reduction in generating capacity across the nation means that prices are headed up.  “If you take enough supply out of the system, the price is going to increase”.

In fact, the price of electricity has already been rising over the last decade, jumping by double digits in many states, even after accounting for inflation.  In California, residential electricity prices shot up 30% between 2006 and 2012, adjusted for inflation, according to Energy Department figures.  Experts in the state’s energy markets project the price could jump an additional 47% over the next 15 years.

New investment has diminished:

  1. Growth in consumption has slowed since 1973
  2. Environmental and other concerns restrict construction of new facilities
  3. Utility companies now incur significant risk of not recovering all their costs much less a reasonable return on investment.

Other factors to consider

A key development and new concept is the “grid edge”.  As further discussed herein, the most important and impactful developments in the electric utility industry in the foreseeable future will be at the distribution edges of the grid, many if not most on the customers’ sides of the meter.  This means tremendous challenges for electric distribution utilities, but at the same time fantastic opportunities to bring a new and better world to their consumers and communities.

The key to the success in renewable energy sources is the development of a new grid system, which provided the following:

  1. Distributed generation and storage
  2. Two-way power flow
  3. Microgrids

The problems confronting the electricity system are the result of a wide range of forces: new federal regulations on toxic emissions, rules on greenhouse gases, state mandates for renewable power, technical problems at nuclear power plants and unpredictable price trends for natural gas.  Even cheap hydro power is declining in some areas, particularly California, owing to the long-lasting drought.

New emissions rules on mercury, acid gases and other toxics by the Environmental Protection Agency are expected to result in significant losses of the nation’s coal-generated power, historically the largest and cheapest source of electricity.  Already, two dozen coal generating units across the country are scheduled for decommissioning.  When the regulations go into effect next year, 60 gigawatts of capacity — equivalent to the output of 60 nuclear reactors — will be taken out of the system, according to Energy Department estimates.

Moeller, warns that these rapid changes are eroding the system’s ability to handle unexpected upsets, such as the polar vortex, and could result in brownouts or even blackouts in some regions as early as next year.  He doesn’t argue against the changes, but believes they are being phased in too quickly.

The federal government appears to have underestimated the impact as well.  An Environmental Protection Agency analysis in 2011 had asserted that new regulations would cause few coal plant retirements.  The forecast on coal plants turned out wrong almost immediately, as utilities decided it wasn’t economical to upgrade their plants and scheduled them for decommissioning.

The lost coal-generating capacity is being replaced largely with cleaner natural gas, but the result is that electricity prices are linked to a fuel that has been far more volatile in price than coal.  The price of natural gas now stands at about $4.50 per million BTUs, more expensive than coal.  Plans to export massive amounts of liquefied natural gas, the rapid construction of gas-fired power plants and the growing trend to convert the U.S. heavy truck fleet to natural gas could exert even more upward pressure on prices.  Malcolm Johnson, a former Shell Oil gas executive who now teaches the Oxford Princeton Program, a private energy training company, said prices could move toward European price levels of $10.

The loss of coal is being exacerbated by problems at the nation’s nuclear plants. Five reactors have been taken out of operation in the last few years, mainly due to technical problems.  Additional shutdowns are under consideration.

At the same time, 30 states have mandates for renewable energy that will require the use of more expensive wind and solar energy.  Since those sources depend on the weather, they require backup generation — a hidden factor that can add significantly to the overall cost to consumers.

Nowhere are the forces more in play than in California, which has the nation’s most aggressive mandate for renewable power. Major utilities must obtain 33% of their power from renewable sources by 2020, not counting low-cost hydropower from giant dams in the Sierra Nevada mountains.

In some cases, the renewable power costs as much as twice the price of electricity from new gas-fired power plants. Newer facilities are more competitive and improved technology should hold down future electricity prices, said former FERC Chairman Jon Wellinghoff, now a San Francisco attorney.

But San Francisco-based Energy + Environmental Economics, a respected consultant, has projected that the cost of California’s electricity is likely to increase 47% over the next 16 years, adjusted for inflation, in part because of the renewable power mandate and heavy investments in transmission lines.

The mandate is just one market force. California has all but phased out coal-generated electricity. The state lost the output of San Onofre’s two nuclear reactors and is facing the shutdown of 19 gas-fired power plants along the coast because of new state-imposed ocean water rules by 2020.

“Our rates are increasing because of all of these changes that are occurring and will continue to occur as far out as we can see,” said Phil Leiber, chief financial officer of the Los Angeles Department of Water and Power. “Renewable power has merit, but unfortunately it is more costly and is one of the drivers of our rates.”

“While renewables are coming down in cost, they are still more expensive,” said Russell Garwacki, manager of pricing design and research at Southern California Edison. The company is imposing a 10% price hike this year to catch up with increased costs in the past.

Officials at the California Public Utilities Commission, responsible for setting utility rates, dispute predictions of large-scale electricity price hikes in the near future.  Edward Randolph, head of the PUC’s energy division, said price increases were not likely to exceed the rate of inflation, though the commission has refused to spell out the data on which it bases its projections.  In any case, while California already has some of the highest hourly rates for electricity in the nation, the average consumer in the state pays bills that are below the national average because overall electricity use is so low.

The push to wean California off fossil fuels for electricity could cause a consumer backlash as the price for doing so becomes increasingly apparent, warns Alex Leupp, an executive with the Northern California Power Agency, a nonprofit that generates low-cost power for 15 agencies across the state.  The nonprofit was formed decades ago during a rebellion against the PUC and the high prices that resulted from its regulations.  “If power gets too expensive, there will be a revolt,” Leupp said. “If the state pushes too fast on renewables before the technology is viable, it could set back the environmental goals we all believe in at the end of the day.”

Conclusion

The solar industry will be economically viable without the ITC.  However, the planned growth would not be as dynamic.  Perhaps this is a good thing as the current grid system is not able to absorb this growth.  If you consider the increasing costs of energy as detailed above, perhaps the ITC could be used as an incentive to fund rebuilding the current grid system focusing on storage, sensors, meters and smart technology.  Hence, the ITC is important in terms of financing future development.

About Sustainable Capital Finance:  Sustainable Capital Finance (SCF) is a third party financier & owner/operator of commercial & industrial (C&I) solar assets and is comprised of experts that specialize in structured finance and solar development. SCF has a vast network of EPCs and Developers across the US that submit project development opportunities through SCF’s cloud-based platform, the “SCF Suite”. This allows SCF to acquire and develop early to mid-stage C&I solar projects, while aggregating them into large portfolios.

SCF has standardized the diligence and transaction process, thus creating cost-efficiencies and risk mitigation, in order to solidify the C&I marketplace as an investment-worthy asset class. For more information, visit http://www.scf.com. Connect with us on Twitter at @SCF_News and follow us on Linkedin and Facebook!

 

19 Oct 2017
October 19, 2017

October Industry News

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Regulatory News

DOE Baseload Power Plant Cost-Recovery Proposal to FERC

Earlier this month, the DoE proposed cost-recovery provisions for baseload power plants helping keep nuclear and coal power plants online as they struggle with high operating costs while simultaneously competing with cheap natural gas and increasingly cheaper renewable energy resources. The FERC will take appropriate action within the timeframe established by the DOE with initial comments due by October 23rd. Robert Powelson, FERC Commissioner, criticized the DOE proposal decrying that this NOPR rule would destroy wholesale power markets.

USEPA (Pruitt) Repealing Clean Power Plan (Obama)

On October 10th 2017, US EPA Administrator Scott Pruitt signed a proposal to repeal the Clean Power Plan, a rule established during the Obama administration attempting to corral carbon emission from the power sector. Pruitt did not suggest a replacement policy, but merely asked the industry to craft an updated carbon rule. Pruitt’s focus would be on internal improvements to coal-based power generation vs requiring utilities to offset their carbon emissions through Renewable Energy Credits (RECS).

Section 201 Ruling

The Suniva trade dispute began when America’s biggest PV panel manufacturer Suniva filed an ill-advised petition with the U.S. International Trade Commission (ITC) on April 26, 2017. Two of our team members wrote an industry analysis on the topic. Read More Here!

 

Utility News

The Domestic Coal Fleet Continues Towards Retirement

As the DOE, EPA, and FERC all deal with the policies behind coal-based generation, the economics are becoming increasingly challenging for Coal plants to compete with other generation sources. A report by the Union of Concerned Scientists disclosed that roughly 25% of all remaining coal plants are expected to close or convert to natural gas. An additional 17% are at risk for early retirement due to natural gas generation. Many more will struggle to compete if there are changes in fuel or operating costs. From 2008 to 2016, the coal component of the US generation portfolio went from 51% to 31% mostly due to market forces (affordability of natural gas & renewable energy resources). A real-time example of this is with Luminant, a power generation business, that plans to retire it’s coal-fired plant in Monticello, Texas in January due to market economics, not environmental regulations.

 

Technology News

Microsoft continues advancing its renewable portfolio

Microsoft agreed to support a wind project in Ireland that will be the first European wind farm to integrate batteries into each turbine. The technology giant entered into a 15 year power purchase agreement (PPA) with GE to purchase all the generation from the 37 MW Tullahennel wind farm.

Bridgestone World Solar Challenge

Since its inception 30 years ago, the Bridgestone World Solar Challenge has been pushing the needle on cars powered exclusively from solar power. Originally in 1987, the solar arrays that were used were allowed to be 8 sq meters. In 2007 that size was reduced down to 6 sq meters and this year’s race has an even more stringent requirement of 4 sq meters. Only 30% of teams complete the journey and this year’s challenge is ramping up to be the toughest yet. The first place teams are expected to complete the journey from Darwin to Adelade, Australia (1,864 miles) on Friday October 13th.

Green Charge Announces Largest Energy Storage Project yet with New Financing Model

Green Charge, an energy storage solutions provider & subsidiary of Engie, an international power producer, recently announced a 3 MW–6 MWh energy storage project in Massachusetts that is expected to go online in April 2018. The project utilizes the investment tax credit by charging from the Mt. Tom Solar plant that Engie built earlier in 2017. The storage system will be owned by PNC Bank and leased back to Green Charge who will operate it on behalf of Holyoke Gas & Electric, its municipal utility customer. Green Tech Media notes that Bank interest in owning energy storage systems is nascent and bodes well for the future of financing for these types of energy solutions.

About Sustainable Capital Finance:  Sustainable Capital Finance (SCF) is a third party financier & owner/operator of commercial & industrial (C&I) solar assets and is comprised of experts that specialize in structured finance and solar development. SCF has a vast network of EPCs and Developers across the US that submit project development opportunities through SCF’s cloud-based platform, the “SCF Suite”. This allows SCF to acquire and develop early to mid-stage C&I solar projects, while aggregating them into large portfolios.

SCF has standardized the diligence and transaction process, thus creating cost-efficiencies and risk mitigation, in order to solidify the C&I marketplace as an investment-worthy asset class. For more information, visit http://www.scf.com. Connect with us on Twitter at @SCF_News and follow us on Linkedin and Facebook!

As solar has continued to mature into a viable asset class, new investors have entered the marketplace. This influx of capital has increased the number of viable financing/investment options available to developers, and has created new structures for capital deployment.

Investors are deploying capital earlier in the project life cycle, looking to provide liquidity to small and mid-size developers while justifying higher returns. Dependent on the long term goals of a developer, this capital can come in both, debt and equity structures.

Debt

Developers can now access debt capital through development/construction hybrid facilities. These structures allow developers to recapitalize and “draw” upon their margin or equity, during development and construction. This is a great benefit for small to mid-sized developers who need to fund working capital and may not have access to other means of financing. Most debt structures will commence draw schedules effectuated by a signed PPA or equivalent revenue contract.

With an increased risk profile, these structures will often have increased security requirements and costs. Investors will likely require a belt & suspenders approach to security, requiring a pledge of project assets, project co membership interests, a corporate guaranty and even a pledge of corporate assets. These facilities often use a multiple approach to cost of capital (as opposed to an interest rate) which can be seen anywhere from 1.5-2x.

Equity

For Developers looking to recapitalize their projects due to longer than estimated project life cycles, growing budgets, or increasing working capital needs, partnership “bridge” capital is available. Investors with development expertise can offer a “cashout” scenario whereby their investment gives them control of the project, while the developer continues to develop through COD. A takeout party will buy the project pursuant to the existing take out agreement, thereby paying the bridge investor. This can be a huge benefit for developers who need to cash out and redeploy capital on the next opportunity.

As with the debt structure, this bridge equity comes at a hefty price. Most structures will see multiple based returns sized at 1.5-2x+.

Both structures are being utilized by Private Equity firms looking for higher returns in the solar market, than those of long term ownership. In either structure, the relationship between the investor and developer needs to be one of trust and transparency, as the investor is taking on a great deal of development risk. If developers have access to this kind of capital, they can aggressively pursue a greater number of projects knowing their origination efforts can be met with liquidity early in the project life cycle.

For developers looking to sell their projects, but monetize their efforts prior to commercial operation, SCF can provide a milestone based payment schedule. This is not unusual in the solar market, however, SCF will also engage with developers during the early stages of development, in order to provide the developer a firm takeout and development assistance, ensuring a bankable project.

With the solar market’s exponential growth and ascension as a viable asset class, project and growth capital will continue to be available for developers, in a variety of structures.

The asset-backed securities (ABS) market has provided a viable means of financing to several asset classes for decades.  In the solar industry, residential players like Solar City, Sunnova, Mosaic, Spruce, and Sunrun have utilized the ABS market for several years.

Residential securitizations have exceeded $500mm thus far this year, highlighted by Sunnova’s  debut securitization, with several additional financings rumored to be on the horizon for the residential market.

With year-over-year solar market growth exceeding 90% in 2016, the apparent demise of YieldCos, and new institutional capital entering the solar market, it’s likely we will see solar securitization growth in 2017 and beyond. Yet, aside from a few whispers, the C&I market has been absent from a presence in ABS.

Why is C&I late to the game?

Looking at the published assigned ratings from Kroll for each of the residential solar and efficiency financings, and the criteria established by Kroll’s General Rating Methodology for ABS, it was clear that a few boxes need to be checked when looking to the ABS markets:

  1. Volume & Historical Performance
  2. Standardized transaction documentation
  3. Investment Grade off-taker credit rating – utilizing an industry accepted rating scale

Other criteria is certainly considered (resume of sponsor, technology, etc.), however, when comparing residential to C&I based on this criteria, one can see why C&I falls short.

Volume & Historical Performance

The maturity of the residential asset class has led to several large players and billions of tax equity dollars dedicated to a programmatic financing approach, and a high volume of cash-flowing assets, to-date. Relatively higher residential utility rates have allowed for a larger national geographic footprint compared to C&I, providing a long runway for the asset class to mature. Nearly a decade in which developers, investors and energy companies have thrown resources at the industry and fine-tuned their development, construction and operating efforts has led to a high volume of performing assets.

The C&I sector is challenged by a smaller geographic footprint, and is scattered with small to mid-sized developers. These developers, compared to their residential counterparts, are relatively new to the industry, and a large portion develop to sell,not to own. This dilution of assets among a smattering of C&I players, is partially responsible for a lack of aggregated portfolios and thus, volume. Like any other capital intensive industry with long term income potential, the market of institutional investors is impacted by the supply of mature alternative investment opportunities. As new institutional and strategic investors join the solar industry, developers will strengthen their balance sheets and be able to produce a larger volume of cash-flowing assets. That critical mass should be reached soon.

Standardization

There’s no doubt residential players care deeply about customer acquisition cost. Without a programmatic, inflexible approach, residential solar wouldn’t exist. Utilizing a standardized document set, transaction process and asset management platform not only reduces transaction and operating costs, but it allows for legal and administrative risk mitigation when evaluating asset financings.

With so many small to mid-sized developers having a market presence in C&I, standardization has been absent, based on each developer’s unique circumstances. As an example, a C&I developer may rely upon a regional bank to provide construction and permanent debt on assets developed within the geographic footprint of the bank. The bank’s requirements might be quite different than those in other geographies, or might be less stringent than a larger nationwide bank, especially on topics involving credit and real estate. This variance can find its way into counter party agreements and ultimately prevent documents from being standardized. Another example lies in developers who develop to sell and not to own. A developer who’s looking to offload its projects, may not object to an off-taker having buyout provisions added to a solar services agreement, while those who take a long-term view may very well object. As the challenge for volume production is met by means of new capital invested into C&I, it’s conceivable to believe that larger developers will/can adopt a programmatic approach and standardize documents, process and risk analysis and can look to ABS for financing.

Credit

When it comes to credit ratings, the residential market utilizes the most accessible and widely used credit rating scale for consumers; the FICO Score. These scores have been synonymous with mapped default ratings and have been utilized by the ABS market for decades. Most solar securitizations boast average FICO scores of 720-750+.

For C&I a comparable rating scale for unrated entities has not yet been widely accepted by the industry. There are certainly benchmarks that exist that have mitigated risks in the eyes of current equity investors, but none have been universally accepted.

When financing projects with bank debt, most unrated off-takers are subjected to a bank’s corporate credit analysis. Some banks will sign off on the use of a third party’s rating scale (i.e. Moody’s Risk-Calc or shadow ratings), but will still utilize balance sheet & income statement ratio checks.

Is there a scale that can be adopted by the industry?

If there’s anyone that should be answering that question, it’s the rating agency that has assigned ratings to each of the major solar securitizations in recent years; Kroll Bond Rating Agency.

While evaluating credit risk for solar off-takers, Kroll will either a) utilize a public rating or b) conduct a credit analysis in determining probability of default for unrated entities. Each entity’s rating is weighted based on the discounted income attributed to the overall portfolio, and a Monte Carlo simulation is performed in order to forecast defaults.

In evaluating the near ABS miss of AES in 2015, it was clear that a lack of an industry accepted credit benchmarks led to underwriters wanting a higher bond spread than what was offered. In other words, credit risk wasn’t mitigated to a point where the offered spreads were reasonable.

Due to scattered ownership for C&I an absence of data exists to support the accuracy of any particular credit rating benchmark. However, as volume increases, data will exist to serve as a basis for projecting defaults on a go forward basis.

The C&I sector has a few years to answer these questions, before the ITC is stepped down, thus requiring a lower cost of capital. With new capital coming to the marketplace and developers growing their balance sheets & assets under management, we’re nearing the critical mass needed for C&I and ABS to converge.