Below, we have included excerpts from Sol Systems’ February 2014 Project Finance Journal, which is a monthly email newsletter that our project finance team distributes to our network of clients and solar stakeholders. Our newsletter contains solar statistics from current real-life solar projects, trends and observations gained through monthly interviews with our solar project finance team, and it incorporates news from a variety of solar industry resources.
If you would like to receive our Solar Project Finance Journal via email every month, please email firstname.lastname@example.org with a request to be added to our Project Finance Journal distribution list.
Project Finance Statistics
The following statistics represent some high-quality solar projects and portfolios that we are actively reviewing on behalf of our investor clients.
Capacity: 120 kW – 5 MW
Average Capacity: 1.7 MW
Developer all-in (asking) prices*:
- <500 kW: 2.35-3.15/Watt
- 500 kW – 2 MW: $2.15-2.65/Watt
- >2 MW: $2.00-2.62/Watt
* Note: Statistics may be “above market” because they only represent projects with the strongest financial profiles, and many projects and portfolios have been awarded high rebates or incentives. Our system price statistics continue to exclude projects from Hawaii where all-in prices remain over $4.00/W.
Average PPA rates & escalators (20-year terms and 2% escalator unless noted):
• CA: 11 – 17.5 cents/kWh
• CT: 8.5 – 14 cents/kWh** (1.0% escalator)
• MA: 9 – 15 cents/kWh**
• MD: 8 – 11 cents/kWh**
• NJ: 8 – 13 cents/kWh **
• NY: 10 – 18 cents/kWh
Recent Feed-in Tariff Rates (20-year term):
- HI: 23.8 cents/kWh with no escalator (HECO)
**Note: These projects are assumed to have an additional SREC (or ZREC) contract.
Below we have included updates on some of the most active U.S. solar markets. In addition to the information provided below, there has been a noteworthy rally in Pennsylvania SREC prices, new community solar legislation in Maryland, and a great deal of solar legislative activity in Virginia. While Maryland continues to be a strong market of its own accord, the developments in Virginia and Pennsylvania have not led to significant commercial pipeline, or at least not yet. More markets coverage is available on our blog or in the Solar Blogs synopsis below.
California: Aggregated virtual net metering, also known as “meter aggregation,” went into effect in the Golden State on February 15. Property owners can now generate up to 1 MW AC of solar power at a single site in order to offset all their energy bills, so long as all the electricity meters are owned, leased, or rented by the same owner as the property site where the solar energy facility is located. Separately, Palo Alto extended their FIT program cap from 2 MW to 3 MW.
Connecticut: Showing its love for systems 100 kW and smaller, the Constitution State began accepting applications for the small ZREC program on Valentine’s Day and will continue to accept applications through February 28. All applications submitted within this window will be ranked based on a random selection process, and contracts will be awarded based on that ranking until the funding limit is exhausted. Prices have decreased from 2013’s Connecticut ZREC program; Connecticut Light & Power’s (CL&P) pricing is $103.01/ZREC and United Illuminating (UI) is $112.54/ZREC, whereas CL&P pricing was at $164 last year, and UI at $148. We have a strong interest in investing in ZREC awarded projects. We recently executed a term sheet for a ZREC portfolio, and we have several pending term sheets.
Massachusetts: Some Massachusetts utilities have hit their net metering caps, which will stall development for certain projects. This leaves many developers who have not yet already applied for or received their net metering allocation with uncertainty that their projects will ever be completed. Rumor has it that a net metering cap increase will be addressed with SREC II this spring, but a formal confirmation has yet to be made. A bill has been introduced to the Massachusetts legislature that would expand access to net metering through 2016 and establish a commission to review its long term viability, but nowhere in this bill does it address an actual increase in the cap.
New Jersey: The Garden State’s solar market is heating up again. We recently saw SREC prices jump as high as $170+, and subsequently, we have locked in 3, 5, and 10-year investment-grade SREC contracts to help our developer clients secure third-party financing. Additionally, the Public Service Electric and Gas Company (PSE&G) Solar Loan II program will start accepting applications on February 25. Our team is happy to speak to developers and advise on what it will take to secure a winning bid; we are currently working with a number of PSEG projects.
New York: We have consistently seen NYSERDA PON 2112 projects with municipalities seeking financing, but none have actually been awarded the incentive. Combined with low electricity prices, it remains to be seen if these projects can meet investors’ return hurdles. Meanwhile, the LIPA-II deadline was January 31, 2014. Developers with winning contracts should hear back in early March.
Trends & Observations:
Below, we have included some trends and observations from our solar project finance team.
How Will the Small Survive as the Big Get Bigger? – The solar industry trend towards mergers, acquisitions, and consolidation continues. In the last month, Real Goods Solar completed its acquisition of Mercury Solar Systems, and Sunrun acquired REC Solar’s residential division, AEE Solar, and SnapNrack. In Sunrun’s move toward vertical integration and rumored IPO, it is better positioned to compete with residential giants SolarCity and Vivint Solar.
In residential solar, much like commercial solar, pipeline is king, and Sunrun is hoping to drive its pipeline with REC Solar’s established residential business and direct sales force. Sunrun previously utilized a national installer network to drive sales, and it is still unknown how the REC Solar acquisition will impact Sunrun’s smaller installer partners. The growing trend towards consolidation begs the question: in a growing, maturing industry, will the small survive? And if so, what are the best success strategies?
We expect the mergers and acquisitions to continue, and a number of solar companies are probably eager to be bought, but we believe that there is opportunity for solar players of all sizes. Our perspective is that the smallest players will be more successful if they focus on core competencies instead of trying to “do it all” with turnkey services. For example, many installers are good at generating pipeline through local relationships. For these players, it is certainly more efficient, and probably more profitable, to sell a 200 kW project for a developer fee, when compared to the time (and brain damage) they would expend trying to source tax equity and retain ownership in such a project.
ITC Language Disagreements Commence – Senators from Colorado and Nevada have introduced the Renewable Energy Parity Act of 2014, more commonly known as Commence Construction Legislation. Currently, projects are eligible for the full ITC if they are placed in service by the end of 2016. However, Commence Construction language would allow projects to utilize the full ITC if construction commences prior to the expiration of the 30% investment tax credit. This legislation is especially essential for large projects; if the build period ends up being longer than expected (which often happens), a project may miss a December 2016 cut-off date and could face lower project economics with a 10% ITC instead of 30. While the Solar Energy Industries Association has applauded this legislation, critics say that the solar industry has been too “soft” in its position and should take a stronger stand to extend the ITC. In last week’s Solar Wakeup, Yann Brandt, founder of the news source, said he would have preferred the following language: “The solar industry represents over 140,000 workers and always welcomes additional clarity for an industry larger than U.S. coal and steel. Millions of U.S. homeowners and businesses benefit from low cost solar energy and the ITC should be extended to continue driving down the cost of overall U.S. electricity for consumers.”
- Former Duke Energy Chairman, Jim Rogers recently stated: “Utilities need to embrace the future. They need to embrace distributed generation.” If he were starting his career, he said that: “My goal would be to take customers away from utilities as fast as I could, because I think they’re vulnerable. Regulations will not be changed fast enough to protect them.”
- Spread the good word: the U.S. solar industry currently employs 142,698 workers. This represents a 20% growth over last year, which is 10 times faster than the national employment growth rate.
- Developers are realizing that verifying investor interest in project pricing is an essential prerequisite to negotiating effective contracts. An increased number of solar developers are coming to our project finance team for input on pricing before they finalize PPA and lease agreements with solar hosts. Many of these developer partners have also reported that our financing terms are equal to or more favorable than other investors. We appreciate the confirmation.
- Some investors are interested in financing projects without Tier 1 panels, but the diligence process can be lengthy and muddled. It’s especially complicated because newer panels and some Chinese companies have some of the most efficient technologies.
Company News, Events & Updates:
Call for Projects – Sol Systems recently launched two new funds, a $100 million debt fund and a mid-market take-out financing fund, in order to address financing limitations in the commercial and industrial (C&I) solar space. These funds improve Sol Systems’ ability to address all the components of the capital stack, while they also streamline and reduce financing soft costs for our developer partners. Construction and Term Debt Fund: This $100 million debt fund provides construction and term debt loans as small as $1 million and sometimes smaller. The smaller loan sizes and term loans, which carry tenors as long as 18 years, are very unique in the solar space. Ideal projects for the debt fund will have the following characteristics, however projects without these criteria will be given consideration if a developer has extensive project pipeline, or if the projects show exemplary returns.
- Size: 750 kW – 20 MW
- Location: U.S. solar markets, as well as projects in U.S. territories and Ontario, Canada
- Credit: Investment-grade off-takers are preferred, but other strong credit off-takers will be considered
Mid-market Fund: Sol Systems has recently been allocated a commitment from one of our utility investor partners for the acquisition of behind-the-meter solar projects. The new fund is uniquely suitable for commercial solar deals, as well as hosts that do not necessarily have an investment-grade credit rating. Qualified projects that are smaller than 1 MW will be aggregated into portfolios with other similar projects to standardize the acquisition process.
Ideal projects will have the following criteria:
- Size: 200 kW – 5 MW
- Location: Arizona, California, Connecticut, New Jersey, New York, or Massachusetts. (Upon request, Sol Systems can advise on PPA pricing, build costs, and SREC factors for each of these markets.)
- Credit: Investment grade hosts are not required. Upon request, we can provide metrics for hosts without a credit rating.
- Timeline: Potential to be closed in Q1 or Q2 of 2014 and placed in service in 2014. Priority consideration will be given to developers who can demonstrate progress on site control, interconnection, and permitting.
- IRR: 8 -10%
Solar developers with projects that fit the criteria above should contact our project finance team immediately to discuss financing options.
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.