Editor’s Note: This article is the first in a bi-monthly Solar Power World series intended to help our readers understand the states-of-play in the U.S. solar financing markets. We’d like to thank Robert Sternthal, president of Reznick Capital Markets Securities, for working with us to produce this series.
The Fate of the United States Solar Market In The Post-1603 Grant Era
By Robert Sternthal
First and foremost, the prevalence and viability of financing of U.S. solar projects depends upon the sector of the market in which you are developing.
- Residential Solar
- Small-Scale Commercial
- Large-Scale Commercial/Utility-Scale
The healthiest market in the United States is residential solar. Large operators such as SolarCity, SunPower, SunRun and their dealer networks, and others, not only have significant financial backing, but also appeal to customers in various states where the payback for investing in solar is five-to-seven years if the homeowner pays for part or all of the system — or immediate savings in the case of a lease. The most interesting aspect of this market in the immediate future will be the ability of companies’s to securitization of portfolio cash flows.
The small-scale commercial market, while showing the most promise for positive economics, has the bleakest outlook for financing going forward. Why? Several reasons:
- Lack of equity investors with in-house tax capacity;
- Scarcity of debt;
- High fixed costs for third-party legal, due diligence, operating and maintenance, among others;
- Lack of standardized products — in documentation, system components, permitting, size, offtakers, interconnection, net metering, state RECs or rebates, among others; and
- Offtakers tend to be unrated entities.
For those sponsors or developers that lack tax capacity, all previously cited reasons are amplified because any tax-equity investors will require third-party due diligence and legal review, and could prohibit debt at the project level as well.
The utility-scale market remains fairly healthy due to compelling demand from traditional owners of energy plants, infrastructure funds and private-equity players with large amounts of equity capital to put to work. Further fueling competition in this market is a lack of viable deals given the scarcity of power-purchase agreements (PPAs) available.
Going forward, I would expect that the debt-financing market for utility-scale solar deals will be shrinking, if it hasn’t already done so. One immediate impact of the European banking crisis and the new Basel Rules is the shortening of loan tenors from 18 years to 15 years or less for those lenders still active in the market.
The utility-scale market will also face future challenges as potential buyers without tax capacity will need to find an offtaker for the solar investment tax credit (ITC) and depreciation, where such sums will be rather large vs.1603 Grant deals.
What Does It All Mean
These are all well-known facts — so how will this market develop over time? I would suggest that there are a few possibilities:
- Field-of-Dreams Strategy – “Build it and they will come.” Many sponsors are developing portfolios of solar projects from 500 KW to 3 MW that they plan to sell prior to notice-to-proceed (NTP). This strategy works extremely well for sponsors that have experience developing shovel-ready projects. They maximize value by selling to a turnkey purchaser or another potential owner that has a vertical approach, such as placing panels or a lower-cost engineering, procurement and construction (EPC) or operations-and-maintenance (O&M) model.
- The Remora and The Shark – Vertical integration or partnership with large U.S. taxpayers. The equity sponsor (the Shark) owns the solar projects, while the non-equity partner (the Remora) uses its tax capacity to shield its income otherwise earned through panel sales, EPC or other services provided to the projects. Essentially, the non-equity partner is leveraging its tax capacity to sell products or services to the solar industry.
- No Money Down – Programmatic sales. Using this strategy, the sponsor uses as little capital as possible until NTP, at which time, it enters into a sale-leaseback agreement to finance more than 100% of the project, earning a development fee for each project but retaining little to no ownership.
Sternthal, president of Reznick Capital Markets Securities, has extensive experience in financing renewable energy transactions in the wind, solar and biomass sectors. Working alongside Reznick Group and Reznick Think Energy, Reznick Capital Markets Securities offers one of the most comprehensive financial advisory platforms in the industry.
The Basel (III) Rules
“Basel III” is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector. These measures aim to:
- improve the banking sector’s ability to absorb shocks arising from financial and economic stress, whatever the source;
- improve risk management and governance; and
- strengthen banks’ transparency and disclosures.
The reforms target:
- bank-level, or microprudential, regulation, which will help raise the resilience of individual banking institutions to periods of stress; and
- macroprudential, system-wide risks that can build up across the banking sector as well as the procyclical amplification of these risks over time
These two approaches to supervision are complementary as greater resilience at the individual bank level reduces the risk of system wide shocks.