Earlier this year, we reported on the recent legalization of third-party financing in several states. However, PPA authorization does not guarantee that a market will be suitable for third party financed commercial deals. Enter what we are calling the Almost There Markets. In these Almost There Markets, PPAs are technically possible, but other factors make margins a bit too tight to pencil.
Take Iowa, for example, which legalized third party financing last year after a highly publicized state Supreme Court case. Despite this newly favorable policy environment, Iowa’s inexpensive electricity rates mean that build costs for sub-1MW deals need to come in under $2/Watt. Even more, the closer to $1.50/Watt the better in order to float PPA rates below $0.10/kWh. Compare that to another market like California that operates without incentives and you will see PPAs as high as $0.19/kWh that can sustain much higher build costs. There are pockets where this market does see development when mechanisms such as local grants or municipal RFPs help some deals reach the finish line. Still, give Iowa some time before it becomes a more competitive solar market.
Georgia is another Almost market that recently authorized PPAs for commercial deals where, again, EPCs will need to build cheap to make deals pencil. We see the commercial market becoming more viable in the next year or so, but first the state must fix its property tax issues, which are significantly stifling development.
Margins may be thin in these Almost There Markets and others: Minnesota (outside of the community solar gardens), Illinois (without SRECs), Pennsylvania, Colorado, and emerging markets. Still, if you are developing projects in these markets, send them to our team for a look. We’ve got tips to navigate issues that increase costs (e.g. property taxes). Better yet, we can provide pricing analysis and guidance on where PPA rates and build costs should be to make a project viable to an investor. In some cases, making projects in tight markets more attractive is only a matter of building a larger portfolio, which will allow the developer to build more cost effectively, and secure lower cost equipment procurement agreements.
Give them time, and these markets will start ticking, especially as equipment costs continue to fall, conventional electricity costs rise, and demand charges are offset by power management. Still, with the bump-down to the ITC looming, much remains to be seen.
This is an excerpt from our June edition of SOURCE: the Sol Project Finance Journal, a monthly electronic newsletter analyzing the solar industry’s latest trends based on our unique position in the solar financing space. To view the full Journal or subscribe, please e-mail firstname.lastname@example.org.
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