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 December 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 email@example.com. We would love to hear from you.
Project Finance Statistics
The following statistics represent some “hot,” high-quality solar projects and portfolios that we are actively reviewing on behalf of our investor clients. Because the statistics below represent projects with the strongest financial profiles, developer asking prices may be “above market.”
Please note that we have intentionally excluded select projects that have particularly high and low pricing, including projects located in Hawaii, Missouri, Nevada, Oregon, and a California portfolio with single-axis trackers.
Capacity: 180 kW – 16 MW
Average Capacity: 2.52 MW
Developer all-in (asking) prices:
• <500 kW: $2.60-3.30/Watt
• 500 kW – 2 MW: $2.20-2.57/Watt
• >2 MW: $1.90-2.37/Watt
Average PPA rates & escalators (20-year terms, unless noted):
- AZ: 12.0 cents/kWh with 2.0% escalator
- CA: 12.0 cents/kWh with 2.0% escalator
- CT: 11.8 cents/kWh with 1.0% escalator
- GA: 8.6 cents/kWh with no escalator
- NJ: 10.8 cents/kWh with 2.0% escalator
- NM: 8.1 cents/kWh with 2.5% escalator (25 years)
- NY: 9.8 cents/kWh with 2.0% escalator
Recent Feed-in Tariff Rates (20-year terms unless noted):
- CA: 12.3 cents/kWh with no escalator (CREST)
- CA: 16.1 cents/kWh with no escalator (LADWP I)
- HI: 23.8 cents/kWh with no escalator (HECO)
- NY: 22.0 cents/kWh with no escalator (LIPA I)
Here are updates on some recent activities within a selection of the U.S. solar markets.
California: Our team is engaged with an increased number of California projects that pencil without local incentives. We are also working with a number of high quality Renewable Market Adjusting Tariff (Re-MAT) projects and the California Renewable Energy Small Tariff (CREST) projects. Re-MAT’s second deadline passed on December 1st. The current price is $89.23/MWh, and prices will continue to adjust upward or downward every 2 months based on the number of bids and capacity in each solicitation.
Hawaii: Development on commercial Hawaii projects has slowed due to interconnection issues. Utility interconnection used to be a problem primarily for larger solar projects, but it is increasingly a problem for smaller commercial deals as well. In the numerous areas where HECO has more than 15% of electricity coming from renewables, the utility is calling for interconnection studies and/or improved grid infrastructure to accommodate variable renewable energy capacity. One way developers can give their projects a better chance of survival is to be forthright with host customers about the risk of interconnection issues and take measures to ensure that hosts are financially committed to going solar.
Massachusetts: Although the SREC II program is undeniably complicated, it aims to make a more viable market for project development. The SREC-II draft is on the governor’s desk for review and should be published and announced by the end of this month. It will then go through a series of public comment periods and other regulatory aerobics. The expected effective date is in March 2014.
New Jersey: Solar in the Garden State is heating back up. A lot of projects that fell through during the SREC crash are resurfacing thanks to falling system costs, increased SREC values, and a more stable long-term market. The improved SREC values are helping developers model stronger project returns which may attract investors (contact us for realistic long-term SREC contract values). The PSEG Solar Loan III program may also bring about increased financeable projects. PSEG has not yet begun to notify applicants from the November 12th solicitation of their status, but is on-track to do so in the near future.
New York: We are working with a number of quality projects (under 200 kW) for NYSERDA’s PON 2112 program. Of course, small projects are difficult to finance individually, so aggregation is key. The current rebate is $1.15/W for the first 50 kW of installed capacity, and $0.75/W for the remainder. There appears to be some capacity remaining for additional projects. Additionally, the LIPA II feed-in tariff just opened for projects sized between 100-2,000 kW, and it will close on January 31. We have seen a lot of new and early-stage LIPA II projects, but the move to a competitively-bid solicitation poses new complexity for developers.
Trends & Observations
Below, we have included some trends and observations from our solar project finance team.
Rising Interest Rates & Project Returns
Many in the solar industry hope and expect that solar project return requirements will decrease as funding sources get more comfortable with solar as an asset class. However, there is a general consensus that interest rates are going to go up sooner or later. If interest rates rise, it will increase the required returns for investments for many funding sources.
Moreover, it is unlikely that current investors, such as infrastructure funds, will start accepting returns lower than the current market of 8-11%, unlevered. Infrastructure investment funds typically have a cost of capital between 6-8% and therefore need to yield 8-10%, regardless of the technology. This fact paired with the prospect of rising interest rates could mean solar projects will need even stronger returns to obtain financing, not lower ones as many in the industry hope.
That said, the recent push toward securitization and yieldcos by SolarCity, NRG, SunEdison, Pattern Energy, Hannon Armstrong and others are game-changing financing vehicles that do have the potential to bring in new and less expensive sources of capital, and potentially enable projects with lower IRRs. There may simply be a natural floor to potential reductions in costs of capital based on broader market trends.
Net Energy Metering (NEM) Debate Continues
Fierce debates are taking place on a state-by-state basis regarding net metering policies and whether utilities can charge extra fees to solar system owners. Thus far, it appears that utilities will not be able to reverse net metering policies but may have the ability to adjust rate structures.
Last month, the Arizona Corporation Commission (ACC) ruled to keep its net metering program but allowed Arizona Public Service (APS) to implement a fixed fee of $0.70/kW installed for residential solar rooftop owners. Although APS had lobbied for a higher charge, it may be able to raise fees through future rate cases.
The California Public Utilities Commission (CPUC) is also studying some of the issues related to net metering and battery storage. Specifically, there are 10 MW of solar projects with battery storage systems that are facing interconnection delays because the utilities are requiring customers to install “net generation output metering” to prove that they are feeding green power, and not stored brown power, into the grid. For now, the CPUC seems to be siding with system owners, but the outcome of these debates may have implications for net metering and battery storage across the country.
Shift to Competitive Solicitations
Early-stage solar development is getting a bit more complicated in East Coast markets which rely on utility feed-in tariffs and SREC programs. In the last two years, several programs have shifted from fixed price regimes to competitively bid solicitations in order to drive down program costs.
For example, in its initial pilot program, the Delaware Procurement provided a 20-year contract for $260/SREC for the first 10 years and $50/SREC for the remaining 10 years. Now, the first 7 years are bid competitively and the remaining 13 years receive $50/SREC.
Similarly, Rhode Island used to provide a 31.6 cents/kWh rate for 15 years, and LIPA used to provide 22 cents/kWh for 20 years. Now, rates for both programs are based on competitive bid solicitations. This shift forces developers to obtain realistic assessments of site lease payments, interconnection costs, and roofing costs so that their bids are as aggressive as possible while remaining attractive to financiers.
Here are some of the tidbits we are hearing from our friends within the solar industry.
- Financing solar projects is becoming more competitive. The best developed projects are often able to find multiple interested parties, and investors have noted a lack of “bargains” in the market.
- Projects with newer technologies continue to face uphill battles in securing third party financing. Many projects with good economics will hit a standstill when they reach the desks of prospective investors because investors do not deem the technology to be “bankable.” Yet, some newer technologies are succeeding. For example, an experienced solar investor recently determined to move forward on a 1 MW project that will use thin film panels. We urge you to reach out to us in advance to the extent you are considering new technologies.
- Increasingly, we see projects that pencil without any type of state or utility incentive. Over ½ the residential projects in California are getting done without the California Solar Initiative (CSI). Assuming a 30% ITC and accelerated depreciation, strong insolation (as in the Southwest), relatively inexpensive permitting, and solid PPA prices (in the range of $0.13/kWh to $0.15/kWh), we hope and expect to see more projects like these.
Sol Systems’ pricing for fixed price strips remained the same in all markets this month. Our SREC team has been successful in securing fixed price SREC strips that have ultimately helped several deals to secure financing. The D.C., Massachusetts, Maryland, and New Jersey markets remain the most attractive, but just last week, we executed on a large SREC deal in Pennsylvania. Need an SREC contract for your project? Contact our SREC team at firstname.lastname@example.org or (202)588-6454.
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 facilitated financing for thousands of projects and 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.