The State Of Solar Financing: Is Puerto Rico a Myth or the Next Big Solar Market?

Editor’s Note: This article is the fourth in a bi-monthly series that Solar Power World plans to publish on U.S. solar financing to help our readers understand the current states of play in the U.S. solar financing markets.

By Robert Sternthal

For the last two years, Reznick Capital Markets has been working on the island of Puerto Rico with several clients that are developing wind and solar projects. After several years of PREPA (the sole utility on Puerto Rico) issuing over 1GW of PPOAs (same as a PPA, but including operation), very few developers have successfully built renewable energy projects in Puerto Rico. In this article, I will attempt to help you understand the current market and the potential future for renewable energy on Puerto Rico.

Like the United States, Puerto Rico benefits from the Investment Tax Credit allowing U.S. investors to recover a 30% tax credit against the costs of a project. Only three renewable projects built on the island to date – two wind and one solar – have been eligible for the 1603 Grant, although there may be a few others that will utilize safe-harbored panels. Under the current ITC rules, it is possible for U.S. corporations — and potentially U.S. partnerships — that own projects developed in Puerto Rico to avail themselves of the ITC.

As recently as six months ago, we witnessed an influx of major U.S. solar developers, panel manufacturers and utility companies seeking to find solar projects in Puerto Rico, either through acquiring PPOAs already issued and executed, by acquiring Master PPOAs issued by PREPA that allow developers the rights to build 100 MW under an expedited process or by acquiring land rights and hoping to secure their own PPOA from the utility. All PPOAs issued by PREPA are the same, with the exception of tenor (20 or 25 years), and are made public. The economic terms of the PPOAs are excellent — $0.15/kWh escalating 2% annually — especially when compared to current pricing in the United States. In addition, the initial PPOAs were also issued with matching REC contracts with PREPA whereby the owner would also receive $.035/kWh per renewable energy credit for the life of the PPOA.

REC contracts are critical to financing utility-scale solar projects in Puerto Rico due to PREPA’s minimum technical requirements (MTRs). The minimum technical requirements that are standard in all of PREPA’s PPOAs were designed to protect Puerto Rico’s fragile electricity grid from immediate ramp-downs or ramp-ups resulting from these utility-scale solar projects. These MTRs generally require a solar developer to include a battery storage system along with other potential technological advancements that can add significant cost to a project.

Unlike the United States, only a few of the large tax-equity investors and lenders have demonstrated a willingness to finance projects in Puerto Rico. The ambiguity surrounding the MTRs, and whether developers can meet them, has caused several financing parties, as well as some developers, to delay the funding of certain renewable energy projects. Consequently, many developers on Puerto Rico with viable projects have been unable to secure financing and move their projects forward.

The current roster of developers and sponsors in Puerto Rico look much like earlier-day developers in the United States’ solar market — a virtual smorgasbord made up of local developers, engineering, procurement and construction (EPC) contractors and/or panel manufacturers, private equity sponsors (U.S., European and Asian) and more sophisticated solar developers. Given the technical complexity associated with meeting the MTRs, it is critical that all projects have an EPC, sponsor or a third-party utility with significant solar development and battery storage expertise.

With the election of Governor-Elect Alejandro Garcia Padilla, a green energy advocate, Puerto Rico will most certainly see a positive change in PREPA’s desire to execute renewable energy projects and to work with developers to meet the MTRs and get connected to the grid. Due to a lack of an investment tax credit for U.S. wind farms, the overwhelming majority of renewables on Puerto Rico going forward will be utility-scale solar projects. The ramping up of solar projects on the island will most likely create a boom in job and technical growth in the industry and the operating and maintenance requirements going forward will maintain a solid number of those jobs.

Consequently, starting in the first half of 2013, I would expect that we will start seeing Puerto Rico becoming the next hot development spot in the U.S. solar market. As more utility-scale solar projects are completed, other developers and financiers will become more comfortable with PREPA and the rest of the permitting requirements, creating a domino effect whereby more projects will be completed.

The financing of these solar projects will most likely be as varied as the current developers and sponsors with PPOAs in the market and will require significant solar development and financial expertise.

Sternthal is president of Reznick Capital Markets Securities and has extensive experience in financing renewable energy transactions, whether they are in the wind, solar or 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.