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Split Decision: Massachusetts Net Metering Task Force Draws Lines in the Sand.

An amendment to a climate change action bill (S 1973), sponsored by State Senator Ben Downing, has passed in the Massachusetts Senate in favor of raising the state’s net metering caps.

An amendment to a climate change action bill (S 1973), sponsored by State Senator Ben Downing, has passed in the Massachusetts Senate in favor of raising the state’s net metering caps.

An amendment to a climate change action bill (S 1973), sponsored by State Senator Ben Downing, has passed in the Massachusetts Senate in favor of raising the state’s net metering caps. Lifting the net metering caps is critical for the Massachusetts solar industry, which now employs over 9,400 solar workers, second only to California in solar jobs. In 2014 alone, Massachusetts installed 308MW of solar electric capacity. However, solar development in Massachusetts has slowed since National Grid hit its private and public net metering caps earlier this year. Now, the House and governor must decide if the caps will actually be raised, bringing the Commonwealth closer to its goal of 1,600MW of solar by 2020.

An amendment to a climate change action bill (S 1973), sponsored by State Senator Ben Downing, has passed in the Massachusetts Senate in favor of raising the state’s net metering caps. Lifting the net metering caps is critical for the Massachusetts solar industry, which now employs over 9,400 solar workers, second only to California in solar jobs. In 2014 alone, Massachusetts installed 308MW of solar electric capacity. However, solar development in Massachusetts has slowed since National Grid hit its private and public net metering caps earlier this year. Now, the House and governor must decide if the caps will actually be raised, bringing the Commonwealth closer to its goal of 1,600MW of solar by 2020

The caps, along with other solar regulatory issues, were analyzed by the Massachusetts Net Metering and Solar Task Force, tasked by the legislature to report on the issues surrounding solar incentives and regulation.

On April 30, 2015, one month after their original deadline, the Task Force released their Final Report to the Legislature. While the report intended to include the needs of utilities, customers, solar industry representatives, legislators and non-Task Force stakeholders alike, the original document was disjointed, drawing a firm line in the sand over the divisive issues without a strong solution.

For many issues, the Task Force actually released two separate opinions with Task Force members associating their names with a specific opinion, distancing them from the alternative. Regarding the incentive delivery mechanism – or program design – for large scale solar projects, one group supported a Declining Block Incentive (like we see in New York’s Megawatt Block, for example), while the other supported a Competitive Procurement Model (similar to what one would see in Illinois, Delaware, and other comparable markets).

Program Design: What Will the Commonwealth’s Next Solar Program Look Like?

The pro-solar group supporting Declining Block Incentive (consisting of representatives from the solar industry, town administrators, legislative appointees, and others), sees this program design as optimal for clear, reliable, and sustainable solar development. With a Declining Block, the program is “always on,” meaning developers know the rate they can receive as they develop a project, and they don’t have to tie their development schedule to a procurement schedule. A bidding process would tie developers to a schedule, and prevent earlier stage projects from attaining a certain level of certainty that they can proceed.

Net Metering Caps: Raise Now, Later, or Not at All?

The Task Force was also split on net metering compensation, as well as immediate and long term changes to net metering Caps. Nine members supported raising the caps in the near-term, while three members opposed a short-term cap raise. Absent an interim solution for the net metering caps that have been met, or are close to being met, solar installations are already beginning to stall in Massachusetts. Rabinowitz asserted that the caps in National Grid territory do not need to be raised, since National Grid is still receiving applications. On the contrary, developers are most likely applying in hopes that other projects fall through and they can move their own projects forward. It is incorrect to assume that the program is unnecessary simply because applications are being received after the cap has been met. As noted in this July’s SOURCE: the Sol Project Finance Journal, some projects such as completely behind the meter and small projects in municipal territories can continue without any change to the caps.

Solar Geography: Getting Beyond National Grid

The Task Force took a united stance on some issues such as Geographic Distribution stating that “The Task Force Members agree that there should be an equal opportunity for solar development across the state.” This is likely to have minimal to no impact on the industry however, and was low-hanging fruit for consensus.

What Solar Needs in Massachusetts

What solar needs to be successful, in Massachusetts and elsewhere, is a clear regulatory framework to operate within. While the Task Force was a prime opportunity for developing a sustainable plan for solar in Massachusetts, they seem to have stuck to their own interests. Providing such disparate recommendations to the legislature is not only inefficient, but it fails to reduce uncertainty within the industry.

Sen. Downing’s amendment may face an uphill battle in the house, and with Governor Baker, who has come out against the caps being raised until more protections are put in place for non-participating rate payers. With the report from the Task Force, it is still unclear what those protections are, and if they’re warranted. What is clear is that at least in the short-term, the net metering caps must be raised for solar development to continue in the nation’s #4 solar market.

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 262MW solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management. Inc. Magazine named Sol Systems on its annual Inc. 500 list of the nation’s fastest-growing private companies for a second consecutive year, ranking it No. 6 in the nation’s top solar companies in 2014. For more information, please visit www.solsystems.com.

What Can Community Supported Agriculture Teach the Solar Industry?

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Like Community Supported Agriculture offers individuals a portion of a crop yield, shared solar models are sprouting up throughout the U.S., offering people opportunities to choose clean energy without owning their own solar energy system or leasing their rooftop.

In 1965, amidst destruction of arable land and the growing use of pesticides in food production, a group of Japanese women invented “tei kei,” a system where consumers supported local farmers on an annual basis in exchange for a share of their crop. In the 1980s and 90s, this idea spread to the United States, where consumers desiring to take control of their food choices enrolled in CSA (Community Supported Agriculture) programs, purchasing a share of a local farmer’s crop each season. Starting in cities in the Northeast where residents didn’t have access to their own gardens, thousands of CSAs have spread across the country. Like Community Supported Agriculture offers individuals a portion of a crop yield, shared solar models are sprouting up throughout the U.S., offering people opportunities to choose clean energy without owning their own solar energy system or leasing their rooftop.

Why Shared Solar Matters

The residential solar market has seen dramatic growth over the past few years due to rapidly declining module costs and innovative financing models like power purchase agreements (PPAs) and leases. Unfortunately, even these forces cannot seed solar development for millions of people who can’t install a system on their homes because they have shaded roofs, weak credit scores, or don’t own their homes. This leaves more than half of Americans without the ability to host a solar array. Businesses have also been taking advantage of the savings and predictable energy costs that come from owning or hosting a solar array, whether on-site or remote. Companies like Wal-Mart, Ikea, Apple, Amazon and Google have all been major players in cultivating the solar boom of the last five years. While it is actually relatively straightforward for them to do so in any deregulated electricity market, many businesses haven’t taken advantage of opportunities to go solar.

Enter shared solar – also known as community solar. Like a CSA for solar energy, people who may not be able to host a solar installation on their roof can buy shares of a solar installation that is installed in a field or on a rooftop in their community. Customers can either pay upfront, or sign a contract to pay for the energy for a fixed period of time. At the end of each billing cycle, people or businesses will see the fruits of their investment as they receive credits on their electricity bill for the amount of solar produced by their share of the installation. In Minnesota and Colorado, these installations are called “solar gardens.”

The Shared Solar Opportunity

While the concept of shared solar has been around for years, recent legislative wins have made it ripe for flowering. Colorado, Minnesota, Massachusetts and California have all passed legislation legalizing the shared solar model and other states are following suit.  Even places like New York, D.C., and Maryland have passed legislation improving the economics and streamlining the administration of these systems, in the absence of industry uptake in a non-legislated model. The National Renewable Energy Laboratory (NREL) estimates that the extra customers that solar gardens bring in could cultivate over 10GW of solar capacity over the next five years representing half of new solar development and billions of dollars in investment opportunity. By removing the barriers to owning or hosting a solar panel on one’s rooftop, these models also potentially open direct participation in clean energy to 100% of electricity customers.

Seeing these opportunities, a number of developers are sowing the seeds for large solar gardens. In Minnesota, the utility Xcel Energy has received bids for nearly 1GW of projects (the state currently only has 22MW of installed capacity). However, Minnesota offers an important case study regarding the regulatory challenges that shared solar faces across the country. Solar gardens in MN are capped at 1MW in size, but many proposed gardens are larger installations co-located on the same site. Xcel has announced it won’t allow co-located gardens and has stalled all Minnesota community solar projects until the Public Utilities Commission reaches a decision. While shared solar models offer the promise to bring solar to millions of new customers, many implementation hurdles still prevent these programs from reaching maturity.

Sowing the Seeds for Shared Solar

Despite the many weeds that still need to be rooted out, the opportunities for shared solar models to accelerate growth are vast. Over three-quarters of Americans believe in further developing our solar resources, and community solar enables people to have direct choice in creating the clean energy future they desire. In the foreseeable future, participating in community solar may be as ubiquitous as purchasing a share in a CSA or shopping at the farmer’s market.

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 262MW of distributed generation solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management. For more information, please visit www.solsystems.com.

Employee Spotlight: Jason Cimpl, Director of Trading

“Our team is changing the way solar is financed, and the industry is small enough where the ripples we make are felt by everyone in the water.”

“Our team is changing the way solar is financed, and the industry is small enough where the ripples we make are felt by everyone in the water.”

Over the past seven years, Sol Systems has grown from two college friends with a bright idea to an industry leader in solar project finance with offices in San Francisco, D.C., and Philadelphia and nearly 50 full-time employees. We’ve brought some of the industry’s most talented professionals along for the ride, and we want you to get to know them. Meet Jason Cimpl, Sol Systems’ Director of Trading. Jason got his MBA at the University of Wisconsin and hasn’t looked back since.

What got you interested in the solar industry?

Before I came to Sol Systems, I was doing equity research here in D.C. I was naturally a good trader, and solar appealed to me because it’s a relatively new market with only a few players. Plus, I’m a big a believer in renewables.

Now that I’ve been in the industry for a few years, I really feel like I’m on the ground floor of something special. In solar, you can have a noticeable impact on a technology that’s not only beneficial to society, but one that’s going to scale tremendously.

What do you like most about working at Sol Systems?

Figuring out ways that solar renewable energy credits – or SRECs – can finance solar projects has been fun and challenging. It’s required building a team to better understand the SREC markets, and Sol Systems gives us the ability to take smart risks. SRECs are exciting because they’re more than just a tradable commodity – they are a true incentive. Successful traders make a capital gain on the trade and finance a solar project. Equities, debt, or other commodities don’t have the same social impact, which has made learning the SREC market so exciting.

Beyond that, Sol Systems gives you the freedom to take professional risks as a person, no matter what gender or age you are. Regardless of what level of experience you have, Sol Systems says, “Hey, we’re going to treat you as equal if you have a good idea. We’re going to allow you to grow and we’re going to take your idea seriously.” You can’t really find that type of culture anywhere else. Our team is changing the way solar is financed, and the industry is small enough where the ripples we make are felt by everyone in the water.

What’s one thing about the solar industry you’d like to see change?

When I think of all of the incentive packages that exist for conventional fuel sources, I don’t see why solar shouldn’t be given similar support. Solar is a proven technology that has widely accepted economic and social benefits. As proof, many big businesses advocate for the use of and investment in solar.

What do you like to do when you’re not trading SRECs?

Anything that’s outdoors, really. Sol Systems is a pretty athletic office, so there’s always something active to do with the team. I think my ideal outdoor activity would be biking 40 miles in one direction and then taking an Uber home.

Sol Systems is currently seeking an asset manager and fall interns. To learn more about solar energy careers with Sol Systems, please visit our careers page.

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 262MW of distributed generation solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management. For more information, please visit www.solsystems.com.

Why Are There So Few Bankable Inverter Manufacturers?

July 30, 2013- 67 kW (STC rating) photovoltaic array with a PVI 82 kW inverter at the Mesa Verde Visitor and Research Center in Montezuma County, Colorado. The array consists of 286 Schott Poly 235 watt solar modules (13.8% efficiency) wired in 22 series

And another one gone, another one gone…We called it.

This post was co-authored by Senior Director, Investment Analysis Joe Song.

And another one gone, another one gone…We called it. It’s a new ball game for the inverter business. Advanced Energy (AE), the #3 inverter manufacturer in the U.S., recently announced its intention to “wind down” its inverter business. With Satcon’s bankruptcy and SMA announcing its own struggles earlier this year, it is evident that inverter manufacturers are experiencing the pricing compression that module manufacturers have batted against for the past decade.

When considering equipment preferences for our own investments, we count nearly two dozen Tier-1 module manufacturers, as opposed to five or so inverter companies (and we find this to be market with other financiers). Why is it that there are far fewer bankable inverter manufacturers than bankable modules?

For one, engineering and manufacturing modules is a much simpler and more standardized process that is nearly commoditized, with a lower hurdle rate and learning curve as opposed to tech-heavy inverters. All inverters are not created equally; these are highly complicated, highly sophisticated machines that are arguably more important than the modules to which they connect.

As opposed to modules, inverters do have moving parts, and they are exposed to a harsher degree of operating conditions, with parts that are more prone to failure but also depended on to perform at a high degree of availability. In addition, inverter manufacturers often have much more intensive service programs, being called upon much more frequently than any other core technology provider, presenting resource demands that are challenging to fulfill sustainably. In comparison to module manufacturers, where only a few have unique technologies, the majority compete mostly on marketing and pricing, with little differentiation in the actual product itself.

Module manufacturers were the first to feel the extreme downward pricing pressure from foreign competition. Then, as most low hanging cost reductions were exhausted, inverters became the next target of price compression for the last few years. Foreign companies like Chint and Sungrow are contributing to the same trends in the inverter market, causing a tremendous downward effect on pricing and creating highly competitive conditions in the U.S. While it is a positive news for the industry that all-in project costs have become more competitive, we may continue to see high quality manufacturers no longer able to sustain profitable business lines.

In the near term, we do not expect consolidation of the inverter business to have a dramatic impact on project development, inverter pricing, or delivery schedules. We project that for the most part, the remaining manufacturers have the ability to scale. This may, however, give investors pause as they reconsider bankable inverters and how to evaluate this properly in light of these change-ups. It is highly likely that recent newcomers will ultimately prove worthy of participating in non-recourse financed projects; the amount of time it takes for the market to gain this comfort in these newcomers will be a key consideration.

The biggest question that remains in light of AE’s news is about servicing the operating inverters still under warrantee, and to what degree the warranties will be honored. Since AE is not closing up shop – just “winding down” its manufacturing – we remain optimistic that AE will service the parts or certify a third party to handle for them.

This is an excerpt from our July 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 pr@solsystems.com.

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 262MW of distributed generation solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management. For more information, please visit www.solsystems.com.

“Commence Construction” Conjecture for the Solar Investment Tax Credit

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The “commence construction” concept in solar dates back to the 1603 Treasury Grant program

No one can predict the future of the solar industry after 2016 – but don’t let that stop you from trying. If a full extension or gradual step-down of the thirty percent investment tax credit (ITC) is out of reach, the next best compromise may be an extension for those projects that are under construction when the 2016 step-down to a ten percent ITC occurs. At the Novogradac Financing Renewable Energy Conference in Las Vegas this past April, Keith Martin of Chadbourne & Parke predicted a “better than 50/50” chance that a form of “commence construction” language is passed, while Michael Novogradac went on record as being “cautiously optimistic” that we will see commence construction language as part of an extensions package. Why the optimism, and how might this work for the solar industry?

The “commence construction” concept in solar dates back to the 1603 Treasury Grant program, which allowed investors to take the thirty percent ITC as an upfront cash grant instead of applying it towards their tax bill (particularly convenient in a recession). Created in 2009 as part of the American Recovery and Reinvestment Act (ARRA), the 1603 Treasury Grant program expired on December 31, 2011, but with one key exception – projects that started construction before the end of the program could qualify for the cash grant until the expiration of the thirty percent ITC in 2016.

Commence construction language for 1603 grants sounds simple – and for projects that were unequivocally under construction, it was. But for projects in development rushing to qualify for the extension, the guidelines became quite technical. If a similar provision is passed for the thirty percent ITC, we should expect an equally meticulous process determining which projects do – and don’t – qualify before ‘the cliff’.

What can we expect if commence construction language is applied to the thirty percent ITC? With the 1603 program, we saw specific guidance surrounding 1) how a project qualifies as under construction, 2) the sale of “safe-harbored” projects, and 3) the final deadline for interconnection.

      1. How can a project qualify as “under construction”? Under the 1603 program, a project could use one of two methods. The owner could either incur five percent of construction costs before the end-of-year deadline, or begin “physical work of a significant nature” on site – with no interruptions of work between beginning and completing construction. The first method proved most popular, since it did not require the permits or approvals otherwise necessary for commencing construction on a site, and did not bring up potentially vague questions of “significance”. (“Physical work of a significant nature” is generally interpreted as pouring concrete pads for inverters or beginning installation of racking; site clearing, grading, and geotechnical work do not qualify; anyone who’s seen a site undergoing site clearing as opposed to the infrastructure for a pad pour might disagree, but the line has to be drawn somewhere.)Incurring five percent of costs, by comparison, is a relatively easy matter. Land acquisition costs and legal fees do not qualify, but most system equipment does. If equipment is ordered, it must be delivered within three and a half months of payment, providing that the accounting method of the solar company incurring the cost books the expenditure upon payment and not delivery. Just one more wrinkle: the five percent cost calculation must be on the final, eligible cost of the system used as basis for the tax credit – not the cost as estimated when the equipment is purchased. In other words, if cost overruns are likely, a company would be wise to overestimate their five percent safe harbor by a comfortable margin.
      2. Can projects be sold once they have commenced construction? In short, yes – though a tax attorney specializing in solar tax credits should sign off on any transfer of the project assets to avoid losing the safeharbor qualification.  Sales to a related entity (with greater than twenty percent common ownership) are easier than sales to unrelated parties. Similarly, sales of project companies are easier than assignment of individual assets (like the PPA and the safe harbored equipment) so long as the project company is a “real” project company, and not a shell LLC company created specifically for warehousing safe harbored equipment without any additional project assets (like a PPA, permitting, or an interconnection agreement). But be wary – with the 1603 program, the longer the wait between the expiration of the credit and the placed in service date of the project, the greater the likelihood that the full expected value of the credit is jeopardized due to haircuts applied by the IRS.
      3. How long of a runway will projects have before they are required to be placed in service? The 1603 program allowed safe harbored projects until the end of 2016 to reach completion, in line with the thirty percent ITC step-down. A five-year term is more than sufficient to benefit fully from commence construction language. Of course, an extension term for safe harbored thirty percent ITC projects is very much up in the air, since the impending step-down is a permanent change – with no additional milestone or change on the books that might serve as a de facto final deadline.

If we do see commence construction language similar to the 1603 program, we can expect to see equipment orders from project owners seeking to safeharbor their deals flood an already tight supply situation. Considering the veritable juggernaut of projects rushing for completion by 2016, delivery schedules will likely feel the crunch. One question everyone should be asking is – it’s June of 2015, do you know where your equipment supplier relationships are?

The primary benefit of the commence construction language would be to reduce the frightening risk that a project misses a December 31, 2016 deadline and loses the key to its value proposition. The importance to investors of this safety net cannot be overstated. However, it would also introduce a layer of complexity to deals that would increase transaction costs and risk for projects hoping to qualify for the thirty percent ITC well after 2016. Our takeaway if a commence construction clause is passed? Build in a little something extra for legal fees – our blog won’t serve as a definitive authority if you get audited.

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for over 200MW of distributed generation solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management. For more information, please visit www.solsystems.com.

Approaching the Tax Credit Horizon: Where Will Commercial Solar Succeed in 2017?

Last year, solar installations in the U.S. commercial sector fell by 6 percent. The market is expected to bounce back in 2015, but there are still many challenges in financing and aggregating commercial-scale projects.

This post was co-authored by Sol Systems Portfolio Analyst Eric Scheier and originally published by Greentech Media. 

Last year, solar installations in the U.S. commercial sector fell by 6 percent. The market is expected to bounce back in 2015, but there are still many challenges in financing and aggregating commercial-scale projects.

Sol Systems has focused heavily on financing commercial-scale solar, with the same kinds of success and bruises as others. This focus mirrors a broader philosophy of ours: solving complex problems to deliver value to both investors and developers in the United States.

As such, we’re quite focused on understanding how the planned federal Investment Tax Credit (ITC) step-down from 30 percent to 10 percent will impact this market segment. It is a topic we’ve explored in the past in our two-part series “Peering Over the Horizon,” in which we discussed the continued decline in the cost of capital and the impact of the step-down in the ITC.

This article builds on that work, as well as recent reports from Morgan Stanley and a recent LCOE analysis from Lazard. We believe all of these articles are critical reading, as they provide a framework to analyze the industry. Our research reaches different conclusions because it is designed to serve our investor and developer partners, and because we disagree with previous assumptions about SREC prices, build costs and the cost of capital.

Investor returns will tighten

Not surprisingly, the reduction in the ITC means an overall smaller “economic pie” that can be split between solar developers, the EPC, the financier and the host customer. Assuming turnkey costs do not change, the ITC step-down correlates to a 3 percent to 5 percent unlevered post-tax return for the investor that is purchasing a project. This means that an investor that used to be securing a 9 percent return on their investment in a commercial project would receive a 4 percent to 6 percent IRR, if turnkey prices did not change.

Structured transactions like a flip or lease-pass-through will either scale in size (portfolio sizes will need to increase to support the same investment) or disappear. Further, structured transactions will have a reduced impact on overall implicit IRR (these structures can effectively reduce IRR by 1 to 300 basis points in certain markets currently). Given this combination, we believe that there will be more tax-advantaged capital (like utility affiliate funds) buying solar projects.

This analysis can be illustrated through a “heat graph” comparing costs of capital, PPA rates and build costs. We originally provided this graph in 2014 and have updated it below. The reader can use his or her own assumptions to arrive at a conclusion. (Click to enlarge.)

cocppaTable

The industry has matured to a point where investors are bidding on commercial projects within a 150-basis-point differential, generally between 8 percent and 9.5 percent. If build costs are not reduced from an all-in price of $2.09 per watt, as SolarCity recently accounted, investors will need to be comfortable with a 5 percent to 6 percent return for many commercial projects. That will not happen in the next 18 months. Instead, our industry needs to focus its energies on increasing build and development efficiency.

Build costs will come down

Sol Systems’ research team has run what we term our “Sol Map Analysis” to look at required build costs on a state-by-state basis, and to provide a national snapshot that summarizes the planned 2017 step-down.

This analysis runs a specific project through each state model simultaneously, calculating differences in taxes, average commercial retail electricity, SREC monetization, production tax credits, etc., to determine the break-even build costs for that state. In each iteration, we assume that the PPA is 90 percent of the expected retail electricity rate, a savings of 10 percent for the customer. Our model utilizes proprietary forward SREC curves based on those we see in the market.

We contemplate a tax-efficient buyer acquiring these projects. Structured transactions are slightly more efficient, generally lowering the overall effective cost of capital 100 to 300 basis points for projects depending on state incentives and electricity prices.

We ran four different scenarios in our model, with the worst-case scenario representing an 8 percent cost of capital, and the best case 6 percent. We do not make assumptions about build costs, but instead offer a state-by-state break-even build cost based on a stated investor hurdle rate and the average commercial retail electricity rate for the state.

We use EIA retail electricity rates, which, critically, do not include a consideration of demand / energy split in any given state. We have excluded Alaska, Hawaii and the District of Columbia from these charts, but those regions are on the extremes, one would expect, in all scenarios.

Similarly, we have excluded states where power-purchase agreements (PPAs) are either illegal or unproven, according to DSIRE. Finally, we measure addressable market by load, and not by available space or other technical limitations. These market sizes are most helpful for comparison purposes.

Mapping the future: 2015 commercial market

Build costs: $2.10

Cost of capital: 8 percent

ITC: 30 percent

Approximate addressable market: 258 gigawatts

Utilizing relatively conservative cost of capital estimates of 8 percent, the United States looks like a relatively attractive place for commercial solar. Developers can build solar at a realistic price and commercial customers can save.

It is a challenging market, but one in which a properly aligned developer can succeed. We utilize best-in-class build costs of $2.10, which is aggressive but realistic for larger commercial systems. We believe that an 8 percent hurdle rate is realistic for larger systems. With these assumptions, the addressable commercial market in the United States is 258 gigawatts in our state-by-state analysis.

8_percent_cost_of_capital

2017 Aggressive scenario: 30% ITC with declining costs of capital and build costs

Build costs: $1.80

Cost of capital: 6 percent

ITC: 30 percent

Approximate addressable market: 437 gigawatts

In the best-case scenario, we assume that the commercial segment will secure acquisition capital at a 6 percent IRR for the investor, and that the 30 percent ITC will not change. We also assume that build costs are reduced dramatically in the next 18 months to $1.80, from $2.10.

This could happen as the industry expands and investors become increasingly comfortable with the asset class, but this is a full 200 basis points below where investors are buying large commercial projects today. Structured portfolios would be most likely to achieve this hurdle for investors.

If the industry can adjust this quickly, reducing both the build costs and also the cost of capital for commercial projects — and the ITC does not step down — the addressable market explodes in 2017 to 437 gigawatts, or almost a doubling of market size. Texas, Arizona and New Mexico, all relatively modest markets at the moment, become critical new commercial solar markets.

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2017 positive case: 10% ITC, aggressive drop in cost of capital and declining build costs

Build Costs: $1.90

Cost of Capital: 6 percent

ITC: 10 percent

Approximate Addressable Market: 239 gigawatts

A potential (but optimistic) scenario, would include the step-down to 10 percent in the ITC, and a less aggressive reduction in cost of capital and build costs. In that scenario, we see the commercial addressable market shrink from 258 gigawatts to 239 gigawatts, a small decrease of 7 percent.

We would note that this is an aggressive drop in the cost of capital of 200 basis points, but a fairly realistic build cost as developers scale and equipment costs come down. In this scenario, markets remain fairly stable, with a reduction in penetration.

6_percent_capital_cost

2017 base case: 10% ITC, declining cost of capital and declining build costs

Build costs: $1.90

Cost of capital: 7 percent

ITC: 10 percent

Approximate addressable market: 138 gigawatts

Unless there is a policy bridge to extend the ITC, we think this is the realistic scenario for commercial solar. In this scenario, the cost of capital naturally declines as project economics become less reliant on tax benefits. There is also slight decline of capital, and together they lead to a weighted average cost of capital for these systems of 7 percent. There is also a continued drop in solar build costs based on scale and technology.

As a result, we see a decline in the addressable market from 258 gigawatts to 138 gigawatts, a 47 percent reduction in the market. The commercial segment retreats to core markets, including California, the Northeast, and the Mid-Atlantic.

7_percent_solar_cost_of_capital

2017 worst case: 10% ITC, no decline in cost of capital and slight build-cost drop

Build Costs: $1.90

Cost of Capital: 7.5 percent

ITC: 10 percent

Approximate Addressable Market: 138 gigawatts

Finally, the worst case scenario is a market in which the ITC steps down to 10 percent and investment hurdles do not change. In that case, the commercial segment survives in a much smaller pool of states, primarily driven by high electricity prices and SRECs.

75_cost_of_capital_solar

We should extend the 30% ITC

As we approach the expiration of the ITC, we are able to more accurately predict the impact that it will have on the solar industry, and where the industry needs to improve in order to survive. When asked, many solar executives maintain that they are not worried about the expiration of the ITC, and even go so far as to say that it would be good for the industry. We disagree.

The “good for the industry” hypothesis is premised upon the assumptions that 1) there will be more cash to lever, and 2) there will be lower transaction costs. We won’t argue either of those points.

However, a drop in the blended cost of capital for a project from 8 percent with a 30 percent ITC to even 5 percent with a 10 percent ITC does not yield a higher, or equal, takeout price for the developer, regardless of transaction costs. Nor does it produce a better structured return for a tax equity investor or sponsor. We encourage those of you who think otherwise to model an actual project with whatever aggressive debt terms you can imagine.

We point out that the original reasoning behind the 30 percent ITC also still holds true — it offers solar operators a rough approximation of the tremendous tax benefit offered to fossil operators, who simply write off their fuel as an expense.

Fewer markets, but large markets

The good news is that while only a limited number of states will be attractive for developers looking to do commercial solar, those states represent a disproportionate part of the addressable market. Based on current state electricity rates, and current estimated build costs, we estimate the current addressable U.S. market for commercial solar to be 200-300 gigawatts.

With the ITC step-down, and with decreasing build costs, that market is likely to shrink to between 150 and 250 gigawatts (which, it is worth noting, may not be a shrinkage at all). The heat chart below provides some useful parameters for that analysis.

addressableMarketPivotTable

While there may be a reduction in the current market, we estimate that reduction to be around 20 percent to 35 percent, not a wholesale destruction. We make a number of conservative assumptions about state incentives and the viability of PPAs that will probably be revised in favor of solar over time.

Additionally, as overall construction and development costs come down because of scale and technological development, and as storage technologies enable solar to viably attack demand as opposed to merely energy charges, dormant state markets will re-emerge.  Finally, the addressable market will expand even further as industry participants like ourselves become better at evaluating “off-credit” hosts.

It is clear from this analysis and others that all market participants hold the future of the industry in their hands: smart investors will become more comfortable with the asset class, sophisticated financiers will lower transaction costs, developers and EPCs will streamline their processes, and suppliers will continue to drive down input costs.

We say “will” because the commercial market has such enormous untapped potential: the industry has installed fewer than 10 gigawatts of the hundreds that the market may be able to support. We fully anticipate that the commercial market will be a large part of the solar future.

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 262MW of distributed generation solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management. For more information, please visit www.solsystems.com.

PJM Capacity Performance: Hochi Juhotchi, or Kagamoosha?

This post was co-written by Senior Director, Project Finance Colin Murchie.

From New Jersey to Northeastern North Carolina, a growing number of generators in the PJM region are connecting to the wholesale side of the grid instead of behind the meter. For a sufficiently savvy solar developer, this can offer significant streamlining benefits compared to typical customer-sited development. By effectively decoupling site from load, more sites can be developed more quickly. However, wholesale generators also face a far more complex and dynamic revenue picture than a simple fixed-rate per MWh contract with a customer on-site. In particular, PJM’s multibillion-dollar capacity market has recently transitioned to a scheme with strong parallels to a mid-1990’s Chris Farley sketch. (Watch it, despite its cultural insensitivity, or the rest of this entry will make even less sense than it otherwise would.)

Capacity market basics

Through the “Reliability Pricing Model” or RPM, PJM region generators receive payment not only for energy produced (MWh), but also for having capacity (MW) available during peak or emergency events – during the hot summer afternoons when demand is highest, for example, or during the polar vortex.

In the past, some utility-scale solar has participated by bidding into the auctions at zero, and being credited with about 38% effective capacity (that is, a 1MW AC generator was treated as a 380kW generator). Actual performance would be measured during the five highest demand hours systemwide, almost invariably summer afternoons, and generators that hit their mark (i.e. a 1MW solar energy system that was producing at least 380kW during those hours) received payments.  Averaged across a year, these might add up to around $10/MWh – a meaningful amount – though one that many solar investors don’t take into account. In the less likely event of underproduction, penalties were minor; generators would just forfeit a portion of future payments. It all seemed like a lark set up by the hotel concierge.

The new plan: Capacity Performance

Then came the polar vortex. While nuclear and renewable generators reliably provided capacity to the market at typical historical levels, many fossil generators failed their obligations. The result was major instability in the power markets, and a push to reform facilitated by financially struggling nuclear generators who argued that they were not being compensated fairly for their reliability.

Accordingly, in early June, FERC approved an expensive new plan, the Capacity Performance Proposal. The decision was described as a “dream come true” for electricity generators. Although FERC Chairman Bay dissented with the approval, implementation is underway. PJM manual revisions, currently available in draft form here, should be finalized on July 23 despite continued stakeholder confusion and contention. PJM’s own analysis suggests that an extra $1.4-4 billion in capacity payments will flow to generators per year under the new structure with higher, but not commensurate, penalties for nonperformance. While market participants are scrambling in order to take part, most of the solar world is unaware of the significance.

The initial proposal to overhaul the capacity market was frankly grim for intermittent generation, to the point of essentially removing all compensation from renewable generators; their historically decent capacity performance (CP) would have been socialized among load-serving entities for free. Some intervenors (hat tip: Community Energy) got after PJM and pushed to make what was ultimately approved by FERC a much better solution.

Specifically, rather than simply being handed a 38% capacity factor and being measured against that yardstick, individual solar generators will pick their own exposure. Should they perform at that level, they’ll be paid the auction clearing price. Should they exceed it, they’ll be paid a share of any penalties from those who fall short.

“Nana ju, hiaku, hochi juhotchi.” – is the new RPM found money?

At first blush, it is possible for solar generators to obtain significant payments from the auction even without having a clear idea of how to do so. This is firstly because overall capacity market prices are anticipated to rise. Secondly, even across newly-expanded performance hours that include an explicit winter component alongside the typically-summer 5 CP, historic performance of solar as a capacity resource should be in the same neighborhood as it was previously. Preliminary analysis carried out by PJM at the behest of Community Energy indicates that solar, in fact, could do better under the new regime than the old. Solar generators can aggregate and even pair with other resources (e.g. wind) to strengthen their capacity, though the details of these coupled bids are still fuzzy and will likely be difficult for many solar facilities to arrange.

“Kagamoosha!” – Confusing and severe consequences for nonperformance

However, penalties for nonperformance will theoretically be stiffer for solar and could prove difficult to predict in advance. PJM’s view is that potential bidders need to be looking at a significant downside to make accurate decisions. Penalties are calculated at a rate equal to the annual net cost of new entry (Net CONE) divided by 30, with an annual stop-loss at 150% of Net CONE. (Further Net CONE explanation available here.) By contrast, the potential upside that flows to generators who underpromise and overdeliver could be low. By shifting to a pro-rata share of any penalties paid, in a market structure that makes paying penalties very undesirable, the system pushes for generators to develop their most accurate possible bid.

Kwakisurpineku?  Or Kwakisurpipiku?  Subtle differences lead to shocking outcomes

Overall, the market has become undoubtedly more complex – and it wasn’t simple in the first place. A simple error in a difficult-to-understand market structure could convert a big win into a serious shock. Potential wholesale bidders in the PJM market will have to develop a significantly more subtle capacity bidding strategy than many have today – or face the loss of what could be 20% or more of their revenue. The first real test will come in early August’s capacity auction for 2018/19 delivery, in which PJM intends to procure 80% of necessary capacity with the Capacity Performance obligations. By 2020/21, the transition is expected to be complete. Sol Systems anticipates that some owners of utility-scale solar assets may watch from the sidelines while the market shifts. However, developers and asset owners who are proactive enough to participate intelligently may end up winning big.

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for over 200MW of distributed generation solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management. For more information, please visit www.solsystems.com.

Is DC’s Sustainable Energy Utility Sustainable?

Groups such as GRID Alternatives have been critical to pushing forward low-income solar in the District.

Groups such as GRID Alternatives have been critical to pushing forward low-income solar in the District.

The District of Columbia City Council is a tried and true champion of renewable energy development. Over the past decade, it has extended and expanded the District’s Renewable Portfolio Standard and solar carve-out, cultivating the strongest SREC market in the country. In 2008, the Council created the DC Sustainable Energy Utility (DCSEU) and the Sustainable Energy Trust Fund (SETF). The Council charges the DCSEU with increasing the District’s renewable energy generating capacity, especially among low-income households. But the DCSEU may face an uncertain future, due in large part to actions that may strip the utility of its main source of reliable funding.

Through the end of 2014, the DCSEU had installed 28 percent of the District’s renewable energy generation capacity. To accomplish this, it installed solar arrays on 105 low-income homes at no cost to the homeowner, relying heavily on the funding it received from the Sustainable Energy Trust Fund. But in passing the “Fiscal Year 2016 Budget Support Act of 2015” on for Mayoral approval last month, funds will be diverted from the SETF to the DC General Fund for the fifth time in seven years. The result will be the removal of over $5 million of ratepayer fees from solar development, potentially stifling local installers and costing low-income residents valuable income.

Where does the DCSEU get its funding?

Natural gas and electric utilities provide most of the SETF’s funding, but the law implies that utilities should recoup their contributions by imposing a small surcharge on ratepayers’ utility bills. That has been working since the law’s passage in 2008. But if this revenue is shifted from the SETF and instead to the District’s General Fund, ratepayers effectively pay extra taxes on their electricity and gas – taxes that are unlikely to be put toward renewable energy development.

What’s the good news?

DC’s Fiscal Year 2015 Budget re-upped the newer Renewable Energy Development Fund (REDF), which enables the DCSEU to continue pursuing its solar development goals in the District. The law mandates that Alternative Compliance Payments, a fee levied against utility companies that fail to meet the District’s renewable portfolio standard, provide the capital for the REDF.

Making solar affordable for everybody

Low-income households often spend a higher proportion of their income on electricity, making access to cost-saving solar photovoltaics especially important for low-income families. One product of the Renewable Energy Development Fund is the Solar Advantage Plus program. Here’s how it works: the DCSEU contracts six developers to install solar energy systems on low-income households, offering energy savings for customers and expanded opportunities for installers. Then, to help provide additional funding for the installations, the contractors can sell the Solar Renewable Energy Certificates (SRECs) that the system generates. Solar Advantage Plus and other programs like it will also help to expand the geographic diversity of residential solar installations, an outcome worth pursuing given the high concentration of solar installations in the District’s wealthier Northwestern quadrant.

Looking to the future

The siphoning of utility-imposed surcharges warrants concern from ratepayers and utilities alike. Under the current funding structure, both contribute more than their fair share to the District’s solar energy development efforts. By continuing to supply the DC General Fund with diverted SETF funds while also requiring Alternative Compliance Payments be sent to the REDF, the DC Council double-charges its utilities for investments that are not earmarked for renewable energy development. For now, the Council has at least secured short-term alternative funding for solar energy installations. However, with Alternative Compliance Payments and SREC prices set to decline in 2017, the future of low income solar in the District remains to be seen.

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for over 200MW of distributed generation solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management. For more information, please visit www.solsystems.com.

Sol Systems’ Summer Intern Spotlight

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Left to right: Olivia Chen, Will Patterson, Andrew Dewey, Jeffrey Popkin, Joseph Kraut and Louis Winkler. Not pictured: Jacob Sandry

Here at Sol Systems, we make investments of all kinds. Our number one investment? Young people inspired to embark on a career in the renewable energy industry. This summer, we welcome our interns Olivia Chen, Andrew Dewey, Joseph Kraut, Will Patterson, Jeffrey Popkin, Jacob Sandry, and Louis “Cuffie” Winkler.

Olivia Chen joins Sol Systems this summer as an SREC Portfolio Intern. In that role, she assists the SREC Trading team with modeling of state SREC markets. Prior to joining the Sol Systems team, Ms. Chen worked at Apple Inc. in Silicon Valley doing Quality Assurance for both Siri and Apple Maps. Ms. Chen holds a Bachelor’s of Arts in Economics and Communication from the University of California at Davis, and is currently pursuing a Master’s degree in Statistics with a concentration in Quantitative Analysis at American University in Washington, D.C.

When Andrew Dewey came to Sol Systems as an SREC Operations Intern in January, he assisted with customer service and processing residential systems for SREC sales. In his new position as Project Finance Intern, Mr. Dewey assists in outreach to developers, as well as analysis and modeling of potential new projects. Prior to joining Sol Systems, he worked as an intern at the Solar Electric Power Association (SEPA). Mr. Dewey is pursuing a Bachelor’s degree in International Business with a minor in Sustainability at George Washington University in Washington, D.C.

Joseph Kraut comes to Sol Systems as an intern in the Tax Equity group. This summer he will help transition tax equity projects to asset management as well as document processes used in financial analysis of tax equity deals. Before interning at Sol Systems, Mr. Kraut served in the U.S. Navy as a Submarine Officer for seven years. Last summer, he interned at a solar energy start-up where he modeled commercial scale tax equity investments. Mr. Kraut holds a B.S.E. in Mechanical Engineering from the University of Michigan and is currently pursuing a dual Master’s degree from the University of Michigan’s Erb Institute. He will graduate with an M.S./M.B.A. focused on energy and finance.

Since joining the Sol Systems team in January as a Marketing and Communications Intern, Will Patterson has assisted with website maintenance, social media metrics and planning, and company marketing. Before coming to Sol Systems, Mr. Patterson worked as a Communications Intern at the American Academy of Actuaries. Mr. Patterson is pursuing a Bachelor’s of Arts in Communications with a concentration in Public Relations at the University of Maryland at College Park.

Jeffrey Popkin joins the Sol Systems team as a Solar Analyst Intern. He will conduct policy research, assist the SREC Operations team, and develop strategy for long-term installer partnerships. Previously, Mr. Popkin interned at the U.S. Department of Justice in the Environment and Natural Resources Division, where he conducted policy and legal research on the EPA’s Clean Power Plan and assisted in congressional relations. He recently graduated from the University of North Carolina at Chapel Hill with a Bachelor’s of Arts in Economics and Public Policy.

Jacob Sandry is a Project Finance Intern at Sol Systems exploring emerging solar markets with new development models and assisting the team with project modeling. Mr. Sandry has previously served as a Fellow at Solar Mosaic where he conducted research and helped to develop a platform through which communities could develop solar projects. He is pursuing a Bachelor’s of Arts in American Studies at Yale University and is an Energy Studies Scholar. Through the Yale Entrepreneurial Institute Summer Fellowship, he founded an organic sports drink company called SÖL Hydration.

Louis “Cuffie” Winkler joins the Sol Systems team as an Asset Management Intern. He performs financial analyses of future solar photovoltaic and solar thermal projects and also assists in the management of closed projects. Before coming to Sol Systems, Mr. Winkler worked as a Project Management Consultant for Eastern Research Group where he did consulting work for the U.S. Environmental Protection Agency. Mr. Winkler holds a Bachelor’s of Arts in History from Hamilton College in New York and is currently pursuing a joint Master’s degree in Environmental Management and Business Administration from Duke University’s Nicholas School of the Environment and the University of North Carolina at Chapel Hill’s Kenan-Flagler Business School.

The Sol Systems team extends a warm welcome to our summer interns and wishes them well as they continue to develop careers in renewable energy.  For more information on internship and career opportunities, please visit http://www.solsystems.com/our-company/careers.

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for over 200MW of distributed generation solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management. For more information, please visit www.solsystems.com.

Sol Systems to Sponsor Intersolar Women In Solar Energy Breakfast

WISE-LOGO-FINAL

WISE is the solar industry’s only 501(c)3 non-profit membership association dedicated to the advancement of women in the solar energy industry.

Sol Systems will sponsor the Women in Solar Energy (WISE) Intersolar Breakfast, which will take place on Tuesday, July 14 at the Intercontinental Hotel in San Francisco.  WISE is the solar industry’s only 501(c)3 non-profit membership association dedicated to the advancement of women in the solar energy industry.

During the breakfast, which is included in the official Intersolar program schedule, successful women in the solar industry will share their stories and discuss ways that solar companies can work toward a more diverse workforce.

Sara Rafalson, Senior Associate at Sol Systems, serves in a volunteer capacity as President of WISE and will deliver opening remarks at the breakfast. Sol Systems’ Stephanie Smith (COO), Rebecca Tilbrook (Project Engineer), and Jessica Cowan (Office Manager & Special Projects) will also be in attendance.

Diversity is at the heart of Sol Systems, where 36 percent of the team is comprised of women, as compared to 21.6% of the solar workforce at large. In addition to their support of Women in Solar Energy, the women of Sol host monthly brown bag lunches focusing on professional development; the men of Sol are also included.

Interested in meeting up with Sol Systems at the WISE Intersolar breakfast? RSVP today; seats are limited.

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 200MW solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management. Inc. Magazine named Sol Systems on its annual Inc. 500 list of the nation’s fastest-growing private companies for a second consecutive year, ranking it No. 6 in the nation’s top solar companies in 2014. For more information, please visit www.solsystems.com.

Always Be Closing…Efficiently

Always Be Closing

Developers, next time you are closing a deal with us (which we hope will be soon), you will notice several key differences in our closing process.

Standardization and efficiency are the “it” topics in commercial and small utility-scale solar, where high transaction costs for one-off, relatively smaller deals has stifled the market’s potential. We’ve previously covered ways to achieve standardization through legal documents, but what about more standardized and efficient processes?

One way that we are introducing efficiency to the sector is through the improvement of our own internal processes. For projects in the 200kW – 5MW space to succeed, every efficiency improvement during the project financing process matters. After meticulous review of our own internal data and metrics, we crafted innovations to our closing process to ensure that deals with our developer partners will move to financial close in a manner that creates the most value for all parties.

Developers, next time you are closing a deal with us (which we hope will be soon), you will notice several key differences in our closing process. Without revealing too much of our secret sauce, we can say that:

A(lways) After reviewing three years of transaction data, we have been able to identify probabilities of success for projects based on stage or remaining development tasks. This allows us to cost-effectively prioritize key issues to address, and deals to execute.

B(e) Substantial binary risks (e.g. key permits, off-take commitments, net metering allocations, etc.) will be resolved, or at least completely understood, before transaction documents are negotiated. Once development issues are clear, we expedite the exchange of transaction documents to bring the fleshed-out deal to financial close, effectively preserving maximum value for each party.

C(losing) Diligence, transaction, and closing teams have been clustered into sub-processes to allow each team run even more efficiently.

Cheers to a new era of closing solar deals. We think you’re going to like it.

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 pr@solsystems.com.

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for nearly 200MW of distributed generation solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management. For more information, please visit www.solsystems.com. 

The Northeast Solar Market’s Goldilocks Dilemma: Is Your State’s Porridge Too Hot, Too Cold or Just Right?

Most everyone is familiar with the children’s story, Goldilocks and the Three Bears, and the lessons it taught us about a) why not to trespass and, more importantly, b) how to figure out what is best for you when presented with a variety of options. Solar developers and financiers in the Northeast solar market currently experience a dilemma similar to Goldilocks’s as they try a taste of each state’s solar incentive programs to figure out which state’s program is “just right.”

Many developers and financiers have found themselves in this dilemma due to the ever-changing landscape of such programs (e.g. Massachusetts). Ask me about this dilemma five years ago, and the chart below would look significantly different. Developers who found their “just right” porridge in a certain state five years ago are now finding that that same porridge may be getting a little hotter or a little cooler. To better get a sense of the current landscape, below you’ll find an outline of Sol Systems’ view of the Goldilocks issue in the Northeast:

Too Hot

Too Cold

Just Right

New York Lucrative, small projects New York Not lucrative and limited by regulation

????

Connecticut Lucrative, only one solicitation per year Rhode Island Semi-lucrative but small program

????

New Hampshire Lucrative, smaller projects Maine No program exists

????

Massachusetts Lucrative with regulatory limitations Vermont Semi-lucrative, but limited size

????

 

Now, most of these states fall into an unsurprising category. Maine, for example, is a no-brainer.  It’s “too cold” and that is not just because of the frigid winters. You would be hard pressed to find even a handful of residential solar projects while driving around some of the more densely populated, wealthier income class neighborhoods and towns.  Bowdoin College hosts the largest project in Maine at a huge capacity of 1MW. Well, I thought it was impressive when I was there, anyway.

Vermont, my home state’s rival, unfortunately, finds itself in the “too cold” category as well. The Vermont SPEED program is an effective and lucrative program but has limited solicitations, awarding a small amount of contracts each year. Outside of SPEED, developers can develop projects less than 500kW (AC) that qualify for Green Mountain Power’s solar adder incentive; however, investors tend to have a tough time swallowing these projects because of the floating retail rate associated with a project’s Solar Service Agreements. A fixed adder of $40/MWh for 10 years is attractive, but not when the remainder of the credit is determined by a floating retail rate. So even with high electricity prices and a lucrative incentive program, developers in the Green Mountain State are eating cold porridge.

Rhode Island sits in the “too cold” category as well due to its inability to attract and develop the state’s original goal of 40MW by 2014. The state came close last year with 38.6MW of solar projects under development and awarded contracts, leaving some excess capacity to be fulfilled by a “new” program. The Rhode Island Public Utility Commission was then tasked to develop the state’s next lucrative solar program to meet new 2015 goals in addition to the excess capacity. In early April 2015, the RI PUC announced their approval of the Rhode Island Renewable Energy Growth Program, which aims to make 25MW of capacity available for competitively bid incentives in 2015. The Program is expected to open for small scale projects in June and commercial scale projects in July.

New York, on the other hand, finds itself in the “too hot” and “too cold” category, giving the same porridge to two radically different types of projects. The new Megawatt Block Program (MW Block) for projects over 200kW, to be released at the beginning of May, will not provide the full incentive support necessary to make projects pencil on the rooftops – while driving a land rush for remote net metering (RNM) systems. With retail electricity rates as low as they are in New York, especially upstate, a slightly higher incentive starting incentive rate for the MW Block program – and a wall between RNM and rooftop systems would push New York into the “just right” category; unfortunately, we don’t see that happening any time soon.

New Hampshire may come as a surprise, falling into the “too hot” category. The $0.65-0.75/Watt incentives provided through the NH PUC’s C&I Solar Rebate Program are incredibly lucrative for a solar project in the Granite State that already is seeing rather high retail electricity rates. However, the strict and cumbersome application requirements, limited capacity (only $4.6 million in funding), and once a year solicitation will limit the impact. Maybe a shot glass of burning hot porridge?

The Connecticut ZREC Program fits into a similar category as New Hampshire’s rebate. It is an attractive solar incentive for a wide variety of projects but is a once a year solicitation with a limited amount of funding. The program gets placed in the “too hot” category because it provides a lucrative incentive that has spurred a lot of development in the state, but the program does not create the consistency and stability to keep that demand satisfied.

Finally, the last state that should be sitting “just right”, but has found itself in the red zone is Massachusetts. The Bay State would have maybe fit perfectly into the “just right” category until about a month ago when the net metering caps in National Grid territory were hit for both the public and private sectors. Now, many companies have gears to the tougher NSTAR territory projects until new regulation and legislation either increases the caps permanently — or creates a new incentive structure to eliminate the necessity of such caps. Even with this development slowdown, Sol Systems still lists the Bay State as “too hot” due to the high value of SREC prices and retail electricity prices that make the projects that are still floating around very lucrative to an investor. Stay tuned, however, for a post-summer 2015 evaluation of this same Goldilocks issue when the Massachusetts legislature hopefully passes a short term and viable solution. With any luck, legislation will establish an effective way forward for managing the net metering caps while the industry awaits the launch of the next in January 2017.

Like Goldilocks, we hope that developers will find their own “just right” or a porridge that is close enough. If not, we will still consider eating that just too cold or just too hot project as well as we have learned to adjust our pallets to not get burned too many times. Contact our team at finance@solsystems.com to show us your porridge.

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for nearly 200MW of distributed generation solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management. For more information, please visit www.solsystems.com. 

The 7-Year Sol-iversary

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The Sol team celebrates its 7-year anniversary on the Chesapeake Bay

One evening at a party in 2008, Yuri Horwitz and his college track teammate, George Ashton, became immersed in a deep conversation about the inefficiencies in environmental and carbon markets. Several follow-on conversations turned to action as the two began working nights and weekends to build out a vision and viable business plan to make an impact.

Then, in May 2008, Yuri and George launched Sol Systems as a solar renewable energy credit (SREC) aggregator and market maker. Sol Systems’ headquarters were based in Yuri’s kitchen, where he made lunch for the firm’s first full-time employees each day.

Fast forward to May 2015, and Sol Systems has rocketed from a two-person SREC shop to a 50-person, full-service solar finance and investment firm paving the way for the industry’s commercial and small utility-scale sector. Today, the firm has offices in D.C., San Francisco, and Philadelphia, and has financed 200MW of clean, solar energy through a combination of project acquisitions, tax structured investments, debt, and SRECs.

The Sol team had much to celebrate and plan during our 7th anniversary this week. All 50 employees from across the country converged in Annapolis to celebrate the company’s seven-year journey, and plan for the next seven.

On Wednesday, May 13, the Sol Systems team kicked off the birthday at the Chesapeake Bay Foundation, a non-profit dedicated to saving the Chesapeake Bay. The team toured their headquarters, the Philip Merrill Environmental Center, a LEED platinum building. After lunch on the shore of the Bay, the Sol team headed to the marina for a sailing trip and birthday cake. As the voyage reached its midway point, Yuri and George shared inspiring words with the team, reflecting on the team’s journey and vision for the future.

Check out the evolution of the Sol Systems team throughout the years through these pictures.

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 200MW solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management. Inc. Magazine named Sol Systems on its annual Inc. 500 list of the nation’s fastest-growing private companies for a second consecutive year, ranking it No. 6 in the nation’s top solar companies in 2014. For more information, please visit www.solsystems.com.

Giving That Matters: Prime Time with Golden Gate National Parks Conservancy

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With some beautiful weather and a lot of teamwork, the team helped with grounds maintenance, including the scraping, priming, and repainting of eight picnic tables.

Last week, Sol Systems West volunteered with the Golden Gate National Parks Conservancy (GGNPC), a nonprofit organization dedicated to the stewardship and conservation of the Golden Gate National Recreation Area. The Sol West team, along with CEO Yuri Horwitz, spent the morning in Crissy Field in San Francisco working on grounds and historic site maintenance. The nonprofit relies on volunteers to keep these popular public spaces well maintained for local and worldwide visitors to use and enjoy.  Sol Systems accompanied the effort with a donation.

“After a quick instruction from our group coordinator, we picked out our tools and put on bright green vests,” said Jessica Cowan, office manager for the Sol West team. “It was hard work, but it was a cool experience and fun to tackle as a team.”

Volunteering with GGNPC – and other community organizations – is essential to Sol Systems’ corporate culture, and its Giving that Matters program. We are relentless in our commitment to organizations that improve the environment, social equity, and the communities in which we live and work.

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 200MW solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management. Inc. Magazine named Sol Systems on its annual Inc. 500 list of the nation’s fastest-growing private companies for a second consecutive year, ranking it No. 6 in the nation’s top solar companies in 2014. For more information, please visit www.solsystems.com

SunFarmer: Powering Nepal’s Recovery

On April 25, a 7.8 magnitude earthquake hit Nepal. Most rural health clinics were completely destroyed, and emergency teams are currently working out of makeshift structures without electricity; there is no power available to charge cell phones, let alone to treat patients.

In the aftermath, SunFarmer, a non-profit that has been focused on solar installations in Nepal for the last two years, is stepping up to the effort and providing electrical and solar water purification systems to hospitals,  health clinics, and shelters.

SunFarmer needs your help to power Nepal’s recovery.  Donate to their Earthquake Relief Fund today.

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This cause is important to the Sol Systems team. Joe Song, Senior Director, is on the advisory board of SunFarmer, where he advises on the technical specifications of the non-profit’s solar installations. In 2013, Mr. Song visited Nepal with SunFarmer to vet solar installer partners and developers, recruit team members, investigate the local solar market, and visit hospitals. SunFarmer is a beneficiary of Sol Systems’ Giving that Matters program.

For more information on SunFarmer, visit www.sunfarmer.org.

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 200MW solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management. Inc. Magazine named Sol Systems on its annual Inc. 500 list of the nation’s fastest-growing private companies for a second consecutive year, ranking it No. 6 in the nation’s top solar companies in 2014. For more information, please visit www.solsystems.com

Massachusetts Updates 2016 Managed Growth Allocation, Developers Still on Edge

Massachusetts solar developers breathed a sigh of relief after last week’s announcement.

Some developers of 650kW+ solar projects may get their projects built after all.

Some developers of 650kW+ solar projects may get their projects built after all.

After the initial August 26th announcement that the 2016 Managed Growth Capacity Block would be 0MW, the Massachusetts Department of Energy Resources (DOER) opened a public comment period.  As expected, solar stakeholders expressed their concern over the 2016 allocation, citing that the DOER had projected overly ambitious growth in Market Sectors A-C. In response to these comments, DOER adjusted the 2016 Managed Growth Capacity Block allocation from 0MW to 20MW .

What is Managed Growth in Massachusetts?

The Massachusetts SREC-II Program, initiated in April, creates differentiated financial incentives for each market sector (“SREC Factor”) to level the playing field. This program makes smaller solar projects more competitive compared to larger ones by ideally giving financial preference to residential and rooftop projects (a higher SREC Factor close to 1.0) and providing less support for larger projects (ground mount, landfill or brownfield projects less than 650kW.) Previously, this program allocated 26MW and 81MW for the Managed Growth sector in 2014 and 2015 respectively.  As the legislation mandates, the reconsideration and final decision of the 2016 Managed Growth Capacity Block came from the following formula:

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Meet the Sol Systems SREC Customer Service Team

Meet the Sol Systems Customer Service (CS) Team: Sara Rafalson, Alex Mas, Victoria Ngare, and Bridget Callahan.

Seasoned SREC Operations Analyst, Bridget Callahan, provides assistance to a customer in need.

Seasoned SREC Operations Analyst, Bridget Callahan, provides assistance to a customer in need.

Together, they manage accounts for Sol Systems’ customer base of over 4,200+ solar energy system owners in thirteen states who rely on Sol Systems to sell their solar renewable energy credits (SRECs). Their responsibilities are broad, including customer management and support, tracking meter readings, and registering systems with the necessary state and regulatory agencies. Sol Systems prides itself on its superior customer service, and we get back to all customer inquiries within one business day.

While many Sol Systems customers may recognize their names, we wanted to give our SREC customer and installer base the opportunity to get to know the friendly voice on the other side of the phone. 

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Sol Systems COO & General Counsel Stephanie Smith Named C3E Award Finalist

Stephanie Smith

Stephanie Smith was named a finalist for the C3E awards.

The Clean Energy Education & Empowerment (C3E) Initiative Ambassadors has named Sol Systems General Counsel and Chief Operating Officer, Stephanie Smith, as a finalist for its annual awards program for mid-career women’s leadership and achievement in clean energy. The C3E Initiative was launched in 2010 by the 23-government Clean Energy Ministerial, serving to create opportunities for women in clean energy. The Clean Energy Ministerial is a global forum encouraging the transition to a global clean energy economy through the promotion of policies, programs, and initiatives that help reduce emissions, improve energy access and security, and sustain overall economic growth.

Ms. Smith’s finalist status is an affirmation to her leadership at the D.C.-based solar finance firm, which she joined in 2012. In her tenure, Sol Systems cemented its reputation as a leader in renewable energy finance. To date, the firm has facilitated financing for approximately 145 MW of solar energy assets throughout the United States through tax structured investments, project purchases, SREC monetization, and debt financing. Just last week, Inc. Magazine named Sol Systems as one of the fastest growing companies in the U.S. on its prestigious Inc. 500 list for the second consecutive year.

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3 Reasons Why a Managed SREC Solution Outperforms an Auction

Our team strongly believes that a managed SREC solution, one in which a third party such as Sol Systems executes trades in the best interest of the SREC owner, provides the customer with the highest sale price. Here’s why the managed approach works so well.

1. Aggregation

Aggregation is important because larger volume SREC transactions often result in higher prices. For example, it’s very difficult to sell 12 SRECs on any given day. However, many SREC buyers would be very interested in purchasing 1200 SRECs. The higher volume that a managed SREC solution allows improves liquidity, and results in higher pricing. Sol Systems has always passed down this higher pricing to SREC owners.

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Employee Spotlight: Ben Margolis

This month's employee spotlight features Ben Margolis from our project finance team.

This month’s employee spotlight features Ben Margolis from our project finance team.

At Sol Systems, our team is our number one asset. Their dedication and passion for bringing creative financing solutions to the solar industry are essential to our company’s success. Our company has experienced a lot of recent growth, and we are proud to employ some of the brightest talent in the renewable energy industry. We were able to sit down with Ben Margolis, who has been with Sol Systems for a little over a year and serves as a Director of Project Finance, to hear about his experience.

Has Sol Systems changed since you first started here?

Since I started, we’ve added construction and term debt for solar projects, and we have grown the project finance group and project finance offerings; change in market place has shifted our approach to the market and forced us to adapt, and it’s all been very interesting to be a part of.

What attracted you to work at Sol Systems?

The people. Sol Systems is a great place to work because of the team; it’s exciting and interesting. As a company, Sol Systems has the right people and the right team and is well positioned in the marketplace to succeed.

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