Massachusetts and the abundance of solar activity occurring there is the highlight of this month’s solar finance journal.

Every month, Sol Systems distributes a newsletter, the Sol Systems Project Finance Journal, to our community of solar developers and investors. The journal features solar finance statistics, trends, industry news, and SREC market information. We gather this information from our relationships and experience aggregating SRECs and financing commercial and utility scale solar projects.

We have included excerpts from our July Project Finance Journal below. If you have any questions about this information, wish to receive our monthly newsletter via email, or have a solar project in need of financing, please contact our team at finance@solsystemscompany.com.  We would love to hear from you.

Project Finance Statistics

Characteristics of “Hot Projects”

Sol Systems finds that projects with the following characteristics are most likely to succeed. The overall quality of a project depends on the qualitative aggregate of the following characteristics.

Capacity: 232 KW – 18 MW

Average Capacity: 2,378 KW

Competitive all-in (asking) prices**:

  • <500 kW: $2.50-3.15/Watt
  • 500 kW – 2 MW: $1.70-$3.41/Watt
  • >2 MW: $1.80-3.02/Watt

**Does not include Hawaii, Caribbean, or carport projects where respective competitive prices currently average $4.68/Watt, $3.50/Watt, and $3.72/Watt. Also, does not include an operational portfolio which is currently asking $0.37/Watt (the portfolio has monetized the 1603 grant and has existing project debt).

Average PPA rates (20-year terms unless noted)

  • AZ: 8.0 cents/kwh with 0% escalator
  • CA: 14.5 cents/kwh with 1.75% escalator
  • DE: 10 cents/kwh with 2% escalator
  • HI: 24 cents/kwh with 0% escalator
  • MA: 10 cents/kwh with 1% escalator
  • NC: 8.6 cents/kwh with 1% escalator (10-20 years)
  • NM: 8.8 cents/ kwh with .5% escalator (25 years)
  • OH: 7.8 cents/ kwh with 3% escalator
  • TN: 11 cents/kwh with 3% escalator
  • Caribbean islands: 15 cents/kwh with 0% escalator

Average Feed-in Tariff Rates:

  • IN: 23 cents/kwh with 1% escalator (15 years, 2 separate FITs)
  • RI: 28.1 cents/kwh (15 years)

Trends and Observations

Markets: Spotlight on Massachusetts

There has been so much activity in the Commonwealth that we have decided to give it the full limelight in this month’s Markets feature.

  • Market Expansion: Massachusetts may become the fourth largest solar market in the United States in the next few years as the DOER considers expanding the state’s solar market by an additional 1,200 MW. In the short term, the DOER has filed its Emergency Regulation which expands its “SREC I” program beyond the 400 MW cap. To be eligible, projects over 100 kW must have a fully executed Interconnection Service Agreement dated on or before June 7, 2013 and must meet the construction timelines enacted by the DOER. Stay tuned to learn what will happen to projects without a fully executed Interconnection Agreement. If you have projects in the SREC I program, please let us know. We’d be happy to work with you on them.
  • Property Taxes: The state sometimes known as “Taxachusetts” is proving worthy of its nickname. While many “solar friendly” states in the nation have exempted solar projects from property taxes, a number of municipalities in Massachusetts are holding on to the taxes placed on solar projects, ensuring another financial hurdle for solar development. In some cases, municipalities allow a Payment in Lieu of Taxes (PILOT); however, these PILOTs may still add thousands (between $6,500-19,500/MW per year) to project costs. We recommend developers negotiate PILOT provisions, but pay close attention to their financial impact. Please contact our project finance team if you would like an unbiased review of your projects’ financial models.
  • The SREC Countdown: It is no secret that the Massachusetts SREC market was oversupplied for 2012. Trading for 2012 SRECs culminated in June with spot market trading around $220, well below the $285 SREC Clearinghouse floor. The first true test of the Clearinghouse will occur on July 26th, when we will see whether the Clearinghouse will actually clear. If the Clearinghouse functions as it was intended, expect to see a jump in SREC prices closer to the $285 soft floor. If it does not clear, SREC prices may continue to trend downwards as the market continues to expand, and solar development may ultimately slow.

Thinning Incentives, Tighter Markets

Despite political acknowledgement of climate change and the need for renewable resources like solar, solar incentives across the country are drying up. Compared to the last few years, few solar programs have emerged in recent months. In the meantime, programs in New Jersey, Colorado, Arizona, California, Florida, and Indiana have been fully subscribed (or oversubscribed), stepped down or retired entirely. Much of this transition is due to the industry’s success, however, the shortage of lucrative incentives has limited the potential profitability of certain projects and concentrated many solar developers into certain markets. In this environment, we encourage our developer clients to move quickly when it comes to securing local incentive programs, to double down in the markets where incentives are more reliable, and to focus on markets like Hawaii, Arizona and California where projects can be economical without incentives. We also encourage developers to be pragmatic in their approach and to optimize their development platform overall by securing broad pipeline rather than optimizing individual project transactions.

Does Moving Upstream Yield Better Results?

Sol Systems works with a range of industry stakeholders, from early-stage solar developers to multinational investors – and everyone in between. Through these interactions, we have noticed that many developers are interested in becoming solar investors, or at least retaining a long term ownership stake in their projects to retain some upside in the eventual monetization of the projects. Many others seek committed capital or investment channels. It is a creative approach, but is it a good one?

If a developer can achieve substantial size and secure significant pipeline, harnessing a committed fund can prove valuable, but only IF that fund is able to provide a competitive cost of capital. Some of the challenges of this approach include ensuring that the:

  1. transaction costs of establishing the fund can be covered by the investor fee arrangement
  2. proposed pipeline translates into real projects
  3. cost of capital remains competitive in a fluid marketplace
  4. funds are actually available in the long-term

Developers should also take care to due diligence their “investor” as the investor is undertaking its diligence of the developer. Remember, not all investors have the same transactional experience and ability to execute.

As a result, we generally do not advise developers to act as investors (or vice-versa). Creating a successful capital pool to deploy into solar projects requires reliable access to tax equity, low cost capital, and a clear workable credit box, which is challenging enough – independent of securing projects that pencil.

Instead, we urge developers to focus on developing high quality projects efficiently and to prioritize the “churn” of their capital through project development. Developers implicitly have higher costs of capital because their business is based on taking on risk, and thus the faster they can deploy and reap the reward from the capital, by selling to investors or selling for a development fee, the more competitive and successful they can be.

SREC Roundup

Pricing for three and five-year fixed rate SREC contracts remains consistent in all markets this month thanks to relatively stable market conditions.

We are happy to highlight that Sol Systems is again offering a 5 and 10-year annuity SREC contract for Massachusetts. Please contact our team to learn more.

Our SREC offers fall into three primary options:

  • Sol Annuity: A guaranteed fixed price per SREC for 3, 5, or 10 years
  • Sol Upfront: One-time, lump sum payment for 10 or 20 years
  • Sol Brokerage: A variable payment for each SREC produced

Sol Annuity and Sol Upfront options depend on system size and location, while Sol Brokerage is offered in 12 states to developers with projects of all sizes.

As necessary, we also negotiate SREC contracts where a credit-rated entity is the SREC counterparty and we facilitate transactions whereby the equity investor will take on SREC risk.

To learn about our SREC services, which include SREC portfolio monetization and management, please contact us at info@solsystemscompany.com or 888-235-1538 x 1.

About Sol Systems

Sol Systems is a boutique financial services firm that offers investor clients direct access to the renewable energy asset class and provides developers with sophisticated project financing solutions. Founded in 2008, Sol Systems focuses on meeting the most critical needs of the industry, including SREC monetization, capital placement, tax equity, and New Market Tax Credits. To date, the company has arranged financing for thousands of projects and facilitated hundreds of millions in investment on behalf of Fortune 100 companies, private equity, family offices and individuals.

For more information, please visit www.solsystemscompany.com