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50(d): What Does It Mean for the Tax Credit Market?

Recent guidance from the IRS will provide certainty to the tax credit market.

Recent guidance from the IRS will provide certainty to the tax credit market.

Last month, we wrote in SOURCE that after years of anticipation, a 50(d) income ruling would soon be released. Sure enough, the Internal Revenue Service (IRS) issued temporary regulations in the Federal Register on July 22. In its issuance, the IRS clarifies its recognition of the income associated with the tax credit for lease pass-through transactions and whether that income should be included in a partner’s outside basis calculations. It has broad implications for many market participants.

To take a step back, let’s look at the lease pass-through structure and understand how it has different capital accounting treatment for the investment tax credit (ITC) compared to the partnership flip.

Under the partnership flip structure, the regulations direct tax equity investors to deduct half of the value of the 30 percent investment tax credit (ITC) when calculating their outside basis in year 1. Solar tax equity investors utilize outside basis for the purposes of realizing the depreciation associated with the investment, and calculating a gain or loss upon exit from the partnership that owns the project after the recapture period. Reducing an investor’s outside basis therefore means reducing the investor’s ability to absorb losses and/or take a capital loss upon exit – both of which are benefits for tax equity investors.

In a lease pass-through structure, the ITC is instead passed through to the Master Tenant where it is then allocated to the partners. Section 50(d) requires the partner to include one-half the ITC ratably into income across the depreciable life of the asset (in this case, five years). The inclusion of one-half the ITC value into income results in greater taxable income for the partner.

But here’s the key. Under normal accounting treatment, any taxable income received increases the capital account. An increase to the capital account, you guessed it, allows a partner to absorb greater losses, offset taxable income, and enjoy a larger loss on exit (depending on the particular deal). In other words, for a tax-laden investor, 50(d) income is a good thing. The industry broadly followed this interpretation, making the lease pass-through structure quite popular despite its particular complexities.

Then, almost two years ago, the IRS sensed peace in the kingdom and announced it would issue clarity on this subject. In December, news broke that guidance was pending, creating uncertainty in the tax credit market, mainly in the form of price bifurcation as investors and syndicators priced these transactions differently depending on views on how IRS would ultimately interpret the rule, variations on who would wear the risk, and bets on when the guidance would in fact be released.

In its ruling, the IRS states that:

  • Investors are not entitled to an increase in their capital accounts under 50(d)
  • 50(d) income is a partner item not a partnership item, and each partner in the lessee partnership is the taxpayer
  • 50(d) income does increase a partner’s outside basis

Now that the industry has more clarity on IRS intent, it is our expectation that the tax credit market will find a new equilibrium for transactions moving forward. Moreover, additional certainty may attract new investors to the solar ITC space, as historic and other tax credit markets also adapt to these changes.

If this all sounds wonky, it is. Don’t worry; we are here to help. To learn more, contact from our tax structured team at finance@solsystems.com with the subject line “Tax Equity”. We have placed tax equity into over 200MW of solar assets across the country, and can explain what the temporary regulations mean for investors.

This is an excerpt from the August 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 leading solar energy investment and development firm with an established reputation for integrity and reliability. The company has financed approximately 450MW of solar projects, and manages over $500 million in assets on behalf of insurance companies, utilities, banks, and Fortune 500 companies.

Sol Systems works with its corporate and institutional clients to develop customized energy procurement solutions, and to architect and deploy structured investments in the solar asset class with a dedicated team of investment professionals, lawyers, accountants, engineers, and project finance analysts.

FERC Ruling Opens Solar Market Potential to Co-ops and Munis

FERC

FERC obligated DMEA to “purchase from QFs offering available energy and capacity”

Access to solar energy has significantly increased as the cost of solar installation has dropped 70 percent within the past decade (2006-2016). Cost declines, when paired with supportive energy policies, have enabled the growth of solar in new markets. One such policy, the Public Utility Regulatory Policies Act of 1978 (PURPA), has been critical for driving solar development by requiring utilities to purchase electricity from qualifying facilities (QF), which include solar and other renewable generating facilities.

A 2015 Federal Energy Regulatory Commission (FERC) ruling—citing PURPA as the ultimate authority that overrides contractual obligations between two electric cooperatives—gives more purchasing control to rural electric co-ops and municipal utilities nationwide. Further upholding its ruling, FERC rejected a June 2016 declaratory order request made by the appellant co-op. Both decisions contribute to the increasing solar capacity owned and purchased by co-ops, which plan to add over 375MW  between 2016 and 2018.

The favorable change for renewable energy stakeholders stems from petitioner Delta-Montrose Electric Authority (DMEA), a member-owned and not-for-profit rural electric co-op distributing electricity to approximately 28,000 members in Southwest Colorado. Having entered a forty-year wholesale electric service contract in 2001, DMEA was required to purchase at least 95 percent of its energy needs from a Colorado-based generation and transmission (G&T) co-op known as Tri-State. However, DMEA was eventually offered the opportunity to interconnect with and purchase power from a local hydroelectric project. Taking this offer would exceed the contractual five percent cap, so DMEA petitioned for relief from its power purchasing constraints with Tri-State.

FERC obligated DMEA to “purchase from QFs offering available energy and capacity,” a ruling that ultimately upheld PURPA to supersede any conflicting contractual obligations. Namely, this 2015 order allows DMEA to purchase local hydropower as desired and continue to support similar-scale renewable energy generating projects. Tri-State, wanting to recover lost revenues from member co-ops that have since diversified their energy purchases, then filed its own petition a year later. Nevertheless, in June 2016, FERC rejected the declaratory order request that “would effectively undo Delta-Montrose’s statutory obligation to purchase from QFs and correspondingly limit QFs from selling power to Delta-Montrose at negotiated rates.”

The FERC orders open parallel opportunities to the 835 other rural electric distribution co-ops as well as municipal utilities across the United States. Like DMEA, many such co-ops and utilities face similar contractual constraints on their percentage of self-generated power. This fact helps explains why, for example, two rural electric co-ops in New Mexico recently issued a request for proposal (RFP) for a large-scale solar PPA much larger than their original five-percent limits would allow.

U.S. co-ops currently own and purchase about 16.7GW of renewable capacity (including contracts for federal hydropower), and this number will continue to rise in part by solar photovoltaic projects’ expanded presence. As many distribution co-ops and municipal utilities exercise their independence to purchase more renewable energy, Sol Systems continues to provide financing for local solar developers.

The mass integration of solar into existing energy systems is not achieved overnight; financing, development, increased grid flexibility, and additional means to ensure the energy source’s reliability will be necessary. Still, the future of solar among rural electric co-ops and municipal utilities is certainly brighter.

ABOUT SOL SYSTEMS

Sol Systems is a leading solar energy investment and development firm with an established reputation for integrity and reliability. The company has financed approximately 450MW of solar projects, and manages over $500 million in assets on behalf of insurance companies, utilities, banks, and Fortune 500 companies.

Sol Systems works with its corporate and institutional clients to develop customized energy procurement solutions, and to architect and deploy structured investments in the solar asset class with a dedicated team of investment professionals, lawyers, accountants, engineers, and project finance analysts.

Employee Spotlight: Rebecca Tilbrook

"Our responsibilities are to identify and quantify potential technical risks to projects that might exist and then, based on what we find, decide how best to mitigate them."

“Our responsibilities are to identify and quantify potential technical risks to projects that might exist and then, based on what we find, decide how best to mitigate them.”

The unique and dedicated team of people who work at Sol Systems have been a key part of our success over the past eight years. With a growing staff of nearly sixty full-time employees, in offices at Washington, D.C., Philadelphia, and San Francisco, the driven, talented group of industry professionals have created resourceful financing mechanisms for the solar industry and thousands of individual projects. Every month, we give you an inside look at some of the incredible work our team members have been doing. This time, we are featuring Rebecca Tilbrook of the Technical Advisory team, to hear about her experiences and opportunities at Sol Systems.

1. Why did you choose to pursue a career centered around solar energy?

I have always been interested in the environment. Specifically for solar, I think I am relatively pragmatic and practical, and to me solar PV (photovoltaics) is the simplest way to produce electricity. With coal or oil, the process started millions of years ago when animals and plants would die and after centuries of high pressure and heat, they became the fossil fuels that we are now extracting for energy – a very long process. With solar energy, it is just the electrons and the photons at work. The sun provides energy straight to the panels that directly convert it into electricity. I think the simplicity of that process always interested me.

2. What aspects of Sol Systems made you want to join the team here?

The fact that Sol Systems is purely a solar company made it stand out for me. Working at other utility and renewable energy companies, it was difficult having to fight internally for the spotlight since solar was not the only focus of those companies. However, at Sol Systems, everyone is focused specifically on solar energy which unifies our vision and goals.

On top of that, I hadn’t heard about Sol Systems before I had seen the online job posting, but many of my colleagues and industry contacts both knew about Sol Systems’ reputation and have glowing reviews for the work they were doing. It gave me a great impression of the company and I became very engaged in the work they were doing.

3. Since joining Sol Systems, what has been your favorite part about working here?

I have only been here for a little over a year now, and I think that my favorite parts about Sol Systems have changed over this past year many times. I am always grateful to work with such an energetic and passionate team – they are also a group of people who always respects each other.

4. As with any technology, there are technical risks to investment associated with solar, what are some of the ways you can mitigate these risks?

Our responsibilities are to identify and quantify potential technical risks to projects that might exist and then, based on what we find, decide how best to mitigate them. The risk key areas we focus on are technology, design, energy production, counterparty, and execution. For the most part we evaluate risks by a variety of standards that are all widely adopted by most financial and risk rating companies. We usually work with Tier 1 manufacturers who provide robust warranties and guarantees.

The team is also increasingly focused on energy modeling and observing the risks around production. We predict the future energy production based on system type and location in order to give detailed projections of returns on the investment of the project. Overall, we end up working with a wide range of contractors, developers, and investors as we work to shape projects to fit investor preferences so that each project we bring will perform like other projects in their portfolio and meet their standards for quality, reliability, and investment returns.

5. What role do maintenance and upkeep of solar energy systems play into managing solar investments?

Solar doesn’t have many maintenance requirements after the initial installation compared to other generation types and it ends up being very low cost over the lifetime of the system.

6. How do investment risks associated with solar compare to those of other energy sources and technologies?

Compared to something like gas, the biggest difference is the fuel source. Once you have begun extracting fuel – like gas – for energy, you are pretty certain of what the short term prices may be, yet it can be difficult to project the prices and costs years out. The biggest difference is that solar doesn’t need the same type of fuel and instead uses the light from the sun. As a result, while you may not be able to forecast exactly when a cloud will block out the sunlight hour to hour, the year to year production and costs are fairly predictable for solar energy. When stacked against other renewables, solar tends to be more predictable than wind and doesn’t require as much maintenance as marine, hydro, wind, or geothermal systems. In the end, since solar energy doesn’t include any moving parts, won’t pollute while producing energy, and has long-term predictability it compares pretty well to other utilities.

7. Do you think that even in the face of these risks, solar is still a wise investment?

I definitely think investing in solar is worthwhile. In a more ethereal or visceral way, for thousands of years people have been worshipping the sun and it has always been seen as life giving because it provides us with considerable amounts of energy. Only in this last century have we found a way to efficiently capture that energy to create electricity. But in terms of why other people should care about investing in solar – I think that we have clearly come across a technology that not only creates energy without any pollution, but also does so silently, without any moving or kinetic parts, is made of one of the most abundant materials on Earth, requires little maintenance, lasts for nearly half a lifetime, and can be installed on nearly every exposed surface – investing in solar energy is a very logical and wise choice.

8. Outside of Sol Systems, what do you do with your free time?

Outside of work, I enjoy playing and writing my own music.

Want to be a part of the Sol Systems team too? We are currently hiring new employees at all three of our offices, in Washington, D.C., Philadelphia, and San Francisco. To learn more about available solar energy careers with Sol Systems, please visit our careers page.

ABOUT SOL SYSTEMS

Sol Systems is a leading solar energy investment and development firm with an established reputation for integrity and reliability. The company has financed approximately 450MW of solar projects, and manages over $500 million in assets on behalf of insurance companies, utilities, banks, and Fortune 500 companies.

Sol Systems works with its corporate and institutional clients to develop customized energy procurement solutions, and to architect and deploy structured investments in the solar asset class with a dedicated team of investment professionals, lawyers, accountants, engineers, and project finance analysts.

Procurement DE-claration, 2016: SRECDelaware Announces 2016 Procurement Results

The Delaware solar renewable energy credit (SREC) program, SRECDelaware, recently announced the results of its 2016 Procurement. This year, procurement was marked by a higher than anticipated volume of SRECs produced by new systems between 25kW and 2MW in capacity. In response, Delaware’s state utility, Delmarva, decided to buy the resulting 2446 excess SRECs. The overall outcome of Delaware’s procurement oversubscription was a slight price drop from last year for SRECs in the oversubscribed tiers.

What is the Procurement Program?

Delaware has a unique structure of SREC procurement that allows customers to bid competitively on SREC purchase contracts with the Delmarva. These contracts were meant to address price volatility in the DE SREC market. Accordingly, solar energy systems in DE are categorized into one of five tiers based on system size and installation date. Customers in each tier bid on contracts with Delmarva to sell their SRECs at a fixed price. The customer with the lowest priced bid in each tier wins the contract. Additionally, Delmarva can buy up to 6,000 more SRECs from customers after all the tiers have been sold.

See below for a chart detailing the tiers for DE SREC Procurement:

Graphthree

*N-1, E-1, and E-2 compete for the same pool of 4,400 SRECs

How is this year’s procurement different from years past? At the most basic level Delmarva buys more SRECs and tier cutoffs have evolved. Delmarva can now purchase up to 6,000 additional SRECs after establishing its 20-year contracts with bid winners. In the past, Delmarva was limited to a purchase of 3,000 additional SRECs. Furthermore, the DE SREC program has changed the nameplate capacity cutoff for systems in E-1 to 25kW, rather than 30kW. Additionally, this year’s contracts last for 20 years. Customers sell their SRECs to Delmarva at the bid price for the first 10 years and then for $35 per SREC for the last 10 years of the contract.

As discussed earlier, Delmarva was allowed to purchase up to 6,000 additional SRECs after establishing contracts. However, Delmarva actually purchased nearly 2,500 SRECs more than that limit by purchasing all SRECs priced below $95 from the oversubscribed tiers of N-2 and N-3. SRECDelaware cites that the undersubscribed tiers N-1, E-1, and E-2 were filled with low-priced excess N-3 bids, since tiers N-3 and N-2 had more SRECs than Delmarva originally intended to purchase. In years past, none of the tiers have been undersubscribed.

Bid Pricing Results

SRECDelaware’s 2016 Procurement resulted in a bid price increase for tiers N-1, E-1, and E-2, but a decrease for the oversubscribed tiers, N-2 and N-3. Below are the results of this year’s procurement, as well as the changes in average bid price over time.

Graph1

Graphtwo

ABOUT SOL SYSTEMS

Sol Systems is a leading solar energy investment and development firm with an established reputation for integrity and reliability. The company has financed approximately 450MW of solar projects, and manages over $500 million in assets on behalf of insurance companies, utilities, banks, and Fortune 500 companies.

Sol Systems works with its corporate and institutional clients to develop customized energy procurement solutions, and to architect and deploy structured investments in the solar asset class with a dedicated team of investment professionals, lawyers, accountants, engineers, and project finance analysts.

Meet the New Faces of the SREC Customer Service Team

Sol Systems is pleased to introduce two new members of the Solar Renewable Energy Credit (SREC) Customer Service Team: Lauren Miller and Avery Sellers.

IMG_2615

Avery Sellers and Lauren Miller help manage over 7,000 customer accounts

Along with Bridget Callahan, Kate Brandus, and Jessica Cowan, Lauren and Avery are responsible for managing over 7,000 customer accounts, with tasks ranging from registration with regulatory entities to assisting with the distributing of SREC payments.

As a SREC Customer Operations Associate, Lauren works directly with customers by registering their solar energy systems and monitoring generation reports for SREC minting with the generation tracking entities PJM-GATS and NEPOOL. Avery, an SREC Operations Associate, verifies meter readings and assists the IT team in improving the customer dashboard.

Lauren and Avery both started at Sol Systems as interns in the SREC Operations and Marketing teams, respectively. Previously, Lauren worked at the White House Council on Environmental Quality in the Office of Federal Sustainability. Avery has worked at Smart Electric Power Alliance, formerly the Solar Electric Power Association.

Lauren graduated from Georgetown University with a B.S. in Science, Technology, and International Affairs, specializing in energy policy. Her passion for clean energy grew out of a commitment to sustainability that started at a young age. Lauren grew up loving hiking, and her family always emphasized the importance of environmental conservation.

Avery holds a B.A. in Political Science from George Washington University. Renewable energy has always been close to his heart, especially since his father also worked in the renewable energy sector. Avery wants do work that is globally impactful and finds the energy sector as the perfect place to make a positive change.

When they’re not at the office, Lauren and Avery both enjoy music. Lauren enjoys nature by hiking and kayaking, but is also an avid dancer, specializing in jazz and hip hop. Avery almost went to film school and now focuses on photography over filmmaking. He also enjoys spending time outdoors, whether it be kayaking, snowboarding, or cycling.

Please help us in welcoming Lauren and Avery to the team.

Working at Sol Systems

Interested in becoming a member of the Sol Systems team? We are currently seeking new employees at all three of our offices, in Washington, D.C., Philadelphia, and San Francisco. To learn more about available solar energy careers with Sol Systems, please visit our careers page.

ABOUT SOL SYSTEMS

Sol Systems is a leading solar energy investment and development firm with an established reputation for integrity and reliability. The company has financed approximately 450MW of solar projects, and manages over $500 million in assets on behalf of insurance companies, utilities, banks, and Fortune 500 companies.

Sol Systems works with its corporate and institutional clients to develop customized energy procurement solutions, and to architect and deploy structured investments in the solar asset class with a dedicated team of investment professionals, lawyers, accountants, engineers, and project finance analysts.

Employee Spotlight: James Machulak

"Being able to form the section of Sol Systems in Asset Management from scratch and build it to what it is now was an experience I really looked forward to when accepting a role on the team."

“Having the opportunity to lead a new department at Sol Systems and build it from scratch has allowed me to accomplish an important life goal.”

At Sol Systems, our team is the foundation of our continued success. With nearly sixty full-time staff and counting, our talented team of industry professionals have brought creative financing solutions to the solar industry for the past eight years. Giving our clients, partners, and growing staff a chance to get acquainted with the Sol family, our Employee Spotlight blog series features interviews with new hires. This month, we sat down with James Machulak, the Director of the Asset Management Team.

1. What first made you interested in the solar energy industry?

I have always been interested in the environment. As an undergraduate and graduate student, I studied economics, so having the chance to combine two of my favorite things, finance and the environment, was an opportunity I was very excited to pursue.

2. Why were you attracted to accept a position at Sol Systems?

I joined the team in October 2015, and when looking at Sol Systems at the time, I thought that it would be very interesting to join the company at such a strong and clear inflection point. With the solar industry and Sol Systems itself growing so quickly, I knew that there was going to be a lot of new and engaging work happening. The opportunity to build-out the Asset Management department was something I really looked forward  to when accepting this role. There is still a significant amount of progress going on at Sol Systems and my role continues to develop.

3. Since joining the team, what has been your favorite part about Sol Systems?

Definitely the people. The people make all the difference and here at Sol Systems they are the core of what we have been doing. Everyone here is really passionate and smart, and the organization allows them to bring new innovative ideas and perspectives to their work here. Also, the people are so dedicated to the mission of Sol Systems and the work that we are doing here.

4. What are you currently working on the Asset Management Team?

Our role continues to develop and be defined since we are still a smaller team and continue to bring on more people. Currently, Asset Management means that we manage the investments of tax equity assets for investors. For companies investing who are not in the solar industry, we make sure that we maximize the returns that they get on their investment. Additionally, since the solar industry is a little more technical than others companies may be investing in, we also manage technical performance and make sure that the stakeholders understand how their finances are being invested and any issues that may come up and impact their returns.

5. In what ways do you see the solar energy industry, and the role of asset management in the field, changing?

Since solar is still relatively new and growing rapidly, the available pool of assets is also increasing. As the industry progresses, asset management is definitely going to see a lot of growth. With this increase, asset management in solar will likely get more mature and see considerable standardization, such as more polished electronic reporting and data. Also, with more tax equity and credit options available, there will be extensions of opportunities for new tax investors who may need guidance and advice in the process of investing in solar energy.

6. Outside of Sol Systems, what do you like to do with your free time?

I actually really enjoy playing bridge a lot. I also like playing videogames when I get a chance. Walking and hiking around parts of D.C. is something I really like to do too.

Interested in becoming a member of the Sol Systems team? We are currently seeking new employees at all three of our offices, in Washington, D.C., Philadelphia, and San Francisco. To learn more about available solar energy careers with Sol Systems, please visit our careers page.

ABOUT SOL SYSTEMS

Sol Systems is a leading solar energy investment and development firm with an established reputation for integrity and reliability. The company has financed approximately 450MW of solar projects, and manages over $500 million in assets on behalf of insurance companies, utilities, banks, and Fortune 500 companies.

Sol Systems works with its corporate and institutional clients to develop customized energy procurement solutions, and to architect and deploy structured investments in the solar asset class with a dedicated team of investment professionals, lawyers, accountants, engineers, and project finance analysts.

SOURCE: The Sol Project Finance Journal, May 2016

2015-04-29-Sol-Cover-Banner2

SOURCE is a monthly solar project finance journal that our 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 industry resources.

Below, we have included excerpts from the May 2016 edition. To receive future Journals, please email pr@solsystems.com.

PROJECT FINANCE STATISTICS

The following statistics represent some high-quality solar projects and portfolios that we are actively reviewing for investment.

PPA-RATE-May

SizeAllinCombo

STATE MARKETS

Connecticut – Applications for the LREC (solar projects up to 2MW in size), Large ZREC (projects 250kW – 1000 kW), and Medium ZREC (projects greater than 100kW under 250kW) programs opened on April 28. Bid forms are due on June 16 at 1pm ET.

Our biggest piece of advice would be to keep your bid realistic. Competitive bid programs tend to be a race to the bottom, with developers bidding in at rates ultimately too low for projects to pencil. This leads to attrition of projects with these programs, which go through multiple iterations before all money is finally awarded to projects that can reach the finish line.

Want a second set of eyes before bid submission? Check in with our team by contacting finance@solsystems.com; we’d be happy to assist.

Ohio – Here we go again… At the end of April, Ohio state Senator Bill Seitz introduced SB 320, legislation that would extend the freeze on the state’s renewable portfolio standard. Since the original freeze bill, SB 310, passed in 2014, solar deployment plummeted from a high of 48.3MW in 2012 to only 10MW last year. To put that in perspective, Connecticut, a much smaller state, installed 91MW in 2015 alone. In addition to freezing the RPS and driving energy investments out-of-state, the bill waters down the RPS by allowing non-renewable resources to participate and introduces bold net metering provisions that would jeopardize the ability of future homeowners and businesses to choose solar. If the Seitz bill wasn’t bad enough, HB 554, introduced this month by Rep. Amstutz, would permanently freeze the state’s renewable energy and energy efficiency standards.

Bottom line? A freeze to the RPS is uncool. If you have customers in Ohio, they can take action by going to http://action.votesolar.org/page/speakout/ohio-rps.

Oregon – We’ve written before about Oregon’s new 50% by 2040 RPS, very modest, new $.005/kWh 5-year incentive for solar projects 2-10MW, and recent changes to reduce Qualifying Facilities (QFs) from 10MW to 3MW. The solar market is very nascent, but based on information gathered after attending Oregon SEIA’s conference last week, we’re starting to see more potential for solar to shine in cloudy Oregon. For example, the Public Utilities Commission is starting to define the community solar program, which could take a year; stakeholder meetings began this week. As of now, we know that PPA terms will be 20 years, and that projects can be anywhere in the state, including the sunnier southern region. The bill credit rate will be determined by the Resource Value of Solar study that the PUC is currently undergoing. In the short term, however, we expect for most of RPS compliance to be met with wind and hydro, both of which are rich in the state.

SOLAR CHATTER

  • Good news! New Hampshire Governor Maggie Hassan signed legislation into law doubling the net metering cap from 50MW to 100MW.
  • As we wrote about earlier this year, some investors with tax advantaged equity have shifted their focus back to larger scale projects since the extension of the investment tax credit. This means that developers may need to adjust their return expectations for commercial and industrial or even smaller utility-scale projects.
  • Wondering why Rest of State is already at block 4 within New York’s Megawatt Block program? Based on the pipeline we’ve seen, much of the volume is coming from monetary projects that were grandfathered into a higher credit rate almost a year ago and are now coming to fruition.
  • #MillionSolarStrong. The United States hit one million solar installations this month, or enough to power 5.5 million homes.
  • The race is on. There’s a mad dash right now to complete Massachusetts projects by the start of the next solar incentive regime in Massachusetts (for projects under 25kW), or January of next year (for projects over 25kW). We’re keeping close tabs on the market and the successor program to SREC II and will be in Boston attending the emergency regulation hearing next week. Will you?
  • Did you have a hard time submitting an application for California’s Self-Generation Incentive Program (SGIP) earlier this year? You’re not alone (and neither were we). Submissions for the “first-come, first-served” application process apparently awarded those who could best hack the system. Greentech Media explains why in an article on May 2. Expect for the program’s implementation to see some tweaks.

ABOUT SOL SYSTEMS

Sol Systems is a leading solar energy investment and development firm with an established reputation for integrity and reliability. The company has financed approximately 450MW of solar projects, and manages over $500 million in assets on behalf of insurance companies, utilities, banks, and Fortune 500 companies.

Sol Systems works with its corporate and institutional clients to develop customized energy procurement solutions, and to architect and deploy structured investments in the solar asset class with a dedicated team of investment professionals, lawyers, accountants, engineers, and project finance analysts.

Ohio Tries to Freeze Its RPS…Again. Not Cool.

Late last month, Ohio state Senator Bill Seitz (R – Cincinnati) introduced legislation to extend the freeze on the state’s renewable and energy efficiency standards for another three years.

Unfortunately, that’s not all. The bill – SB 320 – also expands the definition of renewable energy sources that may qualify for the Renewable Portfolio Standard, thereby diluting the demand for solar, wind, and other energy sources that would come to mind when one thinks Renewable Portfolio Standard. In addition to gutting the RPS, the bill introduces some bold net metering provisions that would jeopardize the ability of future homeowners and businesses to choose solar.

Put simply, SB 320 is bad news for the Ohio solar industry and the 235 companies that operate in the Buckeye State.

Déjà vu?

In June 2014, Ohio made history by becoming the first state to “freeze” its Renewable Portfolio Standard (RPS). Two years after the passage of SB 310, and the solar industry is still feeling its effects. Solar build rates have declined significantly from a high of 48.3MW in 2012, to a mere 10MW installed for 2015. Ohio has also missed out on economic growth as a result of the freeze, and its solar jobs ranking has dipped from #18 in solar jobs per capita across the country to a #22 ranking in solar jobs per capita for 2015.

Solar investment has fallen drastically since the passage of the first RPS freeze in 2014.

Solar investment has fallen drastically since the passage of the first RPS freeze in 2014.

 

How Does the Freeze Affect SREC Pricing?

After the passage of SB 310, the price of solar renewable energy credits (SRECs) plummeted immediately by over half, from $70/SREC to $30/SREC. Today, SREC pricing is even lower and has traded down to $13/SREC on the spot market. This is troublesome for solar consumers who have already made good faith investments in their solar installations with certain pricing expectations. The value of these good faith investments were compromised with the passage of SB 310, and would again be diminished if the legislature successfully tampers with current law…again.

SB 310’s pricing impact has been felt not only in Ohio, but also adjacent markets that sell their SRECs into the state given an RPS provision that formerly allowed 50% of compliance needs to come from out-of-state sources. The law removed the 50% cap, and bordering states such as Indiana, West Virginia, Michigan, and Pennsylvania quickly flooded the spot market.

Renewable Portfolio Standards = Good

Why else is preserving the RPS good for Ohio? Let us count the ways…

The cost of complying with the renewable portfolio standard has declined sharply. SOURCE: PJM-GATS

The cost of complying with the renewable portfolio standard has declined sharply. SOURCE: PJM-GATS

  • Ohio is home to 235 solar companies and employs 4,800 people across the state, ranking 11th nationally in solar employment. Nearly 3,000 of these workers are solar installers, and another 834 solar jobs are in manufacturing. These jobs are at risk if the freeze is maintained.
  • Four of the five top states in solar jobs per capita have a strong RPS: Massachusetts, Vermont, Hawaii, and California.
  • Combined, renewable energy and energy efficiency saved ratepayers 1.4% in electricity bills between 2008 and 2012.
  • If no legislation passes this year and the RPS is allowed to continue, economic activity could increase by $5.3 billion over the next 10 years.
  • If PUCO’s recent decision to subsidize Ohio’s coal and nuclear fleet is upheld, it could cost ratepayers $6 billion over the next 8 years. Meanwhile, the cost of complying with the RPS is about 0.5% of that figure.

Bottom Line? Don’t Freeze the RPS.

Freezing the RPS would not only be uncool, it would be harmful solar consumers, businesses, and residents in a state that imports $490M in coal from out-of-state each year, according to the Union of Concerned Scientists.

>> Act now! Protect the RPS by completing this action alert.

 

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for over 400MW of 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, project acquisition 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.

New Solar Interconnection Standards Adopted in New York and Next Steps

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The New York Public Service Commission issued an official update to its Standard Interconnection Requirements

What?

This past March, the NY Public Service Commission (PSC) issued an official update to its Standard Interconnection Requirements (SIR) regarding New York grid connection for solar and other distributed resources. The updated guidelines allow for more standardized and expedient interconnection of projects to the New York state grid. By putting in place a simpler process for developers to acquire key initial circuit information and requiring fewer projects to obtain full studies, the new requirements ease the burden placed on state utilities to monitor applications submitted to the interconnection queue. The New York Solar Energy Industries Association (NYSEIA) has also committed to hosting a number of briefings and full training sessions on the updated SIR and how member companies should navigate it for optimal benefit going forward.

Who?

Crafted after months of cooperation between leading stakeholders in the solar industry including the NYSEIA, Joint Utilities, New York State Energy Research and Development Authority (NYSERDA), and NY Department of Public Service (DPS), the PSC produced this updated legislation in response to the state’s current Energy Plan goals and new Clean Energy Standard. In addition, the changes include a new NY Interconnection Technical Working Group (NYITWC) and ombudpersons established to resolve remaining issues that the updated guidelines fail to address.

Specifics?

The updated NY Solar Interconnection Standards include the following protocol:

  • Pre-application report whereby developers may request key information on circuits and specific substations of interest without needing to submit a full application to the interconnection queue
    • With a $750 fee and an average timeline of ten business days, this preliminary step can cover the actual interconnection application cost if filed within the required timeline, thereby increasing the efficiency of the interconnection application process as utilities move closer to the future development of hosting capacity maps.
  • State-wide technical screens–some mandatory, some optional–to expedite qualifying projects to execution with no upgrades and no study; elimination of blanket upgrade requirements for projects that don’t require a CESIR study (per the screening process described above)
  • Interconnection contract execution payment for projects with a completed CESIR study reduced from 100% of upgrade costs to just 25% of those costs, accompanied by a detailed per-item cost estimate by the utility
  • Projects up to 5MW now allowed to be processed through the SIR, but keeps the current 2MW net-metering limit in place (making it unlikely that this 5MW upper limit will be used initially)

Items not included but scheduled to be worked on by ITWG in the near future

  • Established best practice standards on technical issues such as substation level reverse power flow, remote monitoring requirements, control and protection issues like direct transfer trip (DTT) requirements and other anti-islanding protection schemes, and voltage flicker and regulation
  • Addition of enforcement incentives for utilities to meet interconnection process timelines and cost estimates
  • Increased queue transparency and formal queue management processes including exploration of site control requirement
  • Improvements to supplemental screen implementation and clearer minimum load screenings
  • Elimination of customer name requirement for interconnection applications and ability to update name/address on circuit section
  • Process for updating initial reviews as well as Coordinated Electric System Interconnection Reviews after minor system configuration changes and interconnection cost sharing options to mitigate higher cost upgrades that would benefit multiple projects

Be on the lookout for more information as the new Solar Interconnection Standards are put into effect in New York over the next few months!

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for over 400MW of 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, project acquisition 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.

A Tale of Two Carolinas

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North Carolina is the country’s #2 solar market, but the 35% state tax credit is no more.

It was the best of times, it was the worst of times. North Carolina is the country’s #2 solar market, but the 35% state tax credit is no more.

Without the state tax credit, the Tar Heel state starts to look a lot more like its neighbor to the South. And that’s not a bad thing. North Carolina and South Carolina are both in the same genre of solar market. Land lease and labor costs are low, and interconnection costs are low or reasonable for sites near transmission lines or substations. Both share the gift of relatively high production versus their counterparts north of Mason-Dixon line. They’re similar in terms of geography and the types of projects that can be built (ground mounts with low upfront and ongoing costs). Unlike high saturation states such as Hawaii and California, grid penetration is not an issue. The two states even share utility companies in common, and projects in the 5-10MW AC range benefit from long-term fixed contracts at similar rates. Larger projects require directly negotiated bilateral contracts for slightly lower rates, which are becoming more common in both states.

We’d also cite property taxes as a differentiator between the two. Unlike South Carolina, North Carolina benefits from an 80% property tax abatement for non-residential solar projects. This means that in South Carolina, developers must negotiate a payment in lieu of taxes (PILOT) agreement with each solar installation, or head to their local town council and explain that the solar energy system will not be attending public school or driving on the roads, and as such, should be exempt from the bulk of property taxes.

We’re mixing our Dickens here, but all we have to say about property taxes and the expense uncertainty they create, is “Bah! Humbug!”

This is an excerpt from our March 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 over 400MW of 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, project acquisition 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.

The Solar Development Landscape is Shifting. Are You Ready?

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Self-consumption, wholesale projects, and development outside of renewable portfolio standards are a few ways that solar development is changing.

In January, we wrote about how state-level battles over net metering and rate design will push the industry closer to self-consumption. Moreover, challenges to PURPA are encouraging some utility-scale solar developers to finance their deals through wholesale power contracts. Meanwhile, GTM Research estimates that more than half of all utility-scale solar – more than 6GW – will come on-line outside of state renewable portfolio standards (RPS).

In other words, the solar development landscape is shifting. Are you ready?

1. Self-consumption

The trend toward self-consumption can be illustrated by two of the nation’s solar leaders: New Jersey and California. New Jersey has rebooted its energy storage incentive. Though the deadline for open enrollment has passed, a competitive solicitation will take place later this year. In California, the Self-Generation Incentive Program (SGIP) will be increasingly important as the value of electrons exported to the grid is lowered slightly in light of changes to rate design.

Then of course, we saw Hawaii slash their net metering, making it financially feasible to go off-grid with help from storage. Con Edison in New York is also offering a storage incentive that is closely aligned with “resiliency” more than it is for ancillary grid services.

2. Wholesale projects

We are already seeing much activity with wholesale projects. Typically, these projects range from 5-10MW+ in size with relatively low wholesale agreements. Many of the projects that we’ve seen are in the PJM Region or the Northeast and can benefit from strong Tier I renewable energy credit (REC) long-term strip pricing, as well as relatively stable spot market electricity pricing.

Still, given higher land and build costs, projects in the Northeast can be tough to sell wholesale. Moreover, wholesale projects can still be challenging to finance, as without contracted revenue, you can’t put debt on these projects.

Two solutions we’ve discussed internally is bidding these projects into a local incentive program, and then selling the tail (after system size in these programs is maxed out) into the wholesale market. Additionally, these projects can be paired with a synthetic or remote PPA. In certain situations, these PPAs can be shorter in contract length than a traditional behind-the-meter project (10-20 years).

Expect us to write a lot more about this topic in the future.

3. Renewable portfolio standards (RPS)

While utility-scale solar growth may take place outside of renewable portfolio standards, proposals for more aggressive RPS standards are popping up around the country (see: Hawaii, Maryland, D.C., California, Vermont, Oregon, and New Jersey).

However, it’s important to remember than an RPS on its own cannot encourage solar growth. An RPS can force the hand of the utilities to create programs that will help it meet these standards, but without an accompanying program, an RPS can be more of a sentiment rather than the sole driver of market growth.

Maryland, D.C., New Jersey, and Massachusetts have had successful renewable portfolio standards because they are accompanied by a solar carve-out, which created the SREC markets. California is the nation’s #1 solar market year-over-year not just because of their 50% RPS, but because of high electricity prices, favorable rate design, a strong legacy incentive program that jumpstarted their local industry, among several other factors. States like Oregon, which recently passed a 50% RPS, will not immediately jump to North Carolina status with an incentive program at $.005/kWh. Moreover, the 50% RPS does not need to be met with solar.

Navigate the changing development landscape with a trusted financing partner. Contact us at finance@solsystems.com or 888-235-1538 x2 to discuss your financing needs with our team.

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for over 400MW of 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, project acquisition 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.

Will the Clean Energy Jobs Bill Stabilize the Maryland Solar Market?

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If market conditions stabilize in Maryland, solar employment will increase another 8.5% by the end of 2016

According to the latest Solar Jobs Census, Maryland ranks #12 in solar jobs nationally, with nearly 4,300 solar workers cross the state. 40,485 homes were powered by solar as of The Solar Foundation’s latest report.

The growth of the Maryland solar market is largely due to the state’s renewable portfolio standard (RPS), which has created a strong, stable market for solar renewable energy credits (SRECs). Unlike other SREC markets – such as Pennsylvania and New Jersey – which have been volatile, boom, and bust, Maryland has benefitted from consistent growth year-over-year and a stable market for SRECs. Moreover, high incentive levels in other “flashier” East Coast solar markets (e.g. Massachusetts, where we are offering $280/SREC for 5-year contracts in SREC I, $200 in SREC II) have historically led to relatively less representation by commercial and utility-scale solar developers in the state, again leading to a relatively stable supply-demand balance.

Maryland RPS = GOOD

The Maryland RPS has lived up to its promises. More than 1,000 solar jobs were added in Maryland last year alone. If market conditions stabilize (more on that below), solar employment will increase another 8.5% by the end of 2016, according to The Solar Foundation.

In addition to employment and solar deployment numbers that have come out of the Maryland RPS, it’s becoming increasingly easier and more affordable for utilities and energy suppliers to meet solar requirements set forth by the RPS. That’s because SREC prices, which utilities and energy suppliers must procure year-over-year to comply with the RPS, have steadily been declining.

The declining value of solar renewable energy credits makes it easier for utilities and energy suppliers to meet Maryland’s renewable energy goals.

The declining value of solar renewable energy credits makes it easier for utilities and energy suppliers to meet Maryland’s renewable energy goals.

The Maryland Solar Market is at Risk

Unfortunately, however, this stable growth is at risk. Since the start of 2016, SREC prices in Maryland have taken a nose dive from $160/SREC and are now approaching the sub-$100. Price declines will continue, as previously unattainable utility-scale projects – which had a December 31, 2016 deadline before the extension of the solar investment tax credit (ITC) – will now move forward, disrupting the SREC market’s supply and demand balance. Moreover, the cost of solar has plummeted dramatically since the original passage of the RPS in 2004, and costs have continued to decline since its subsequent amendments. In fact, since 2010, the cost of a solar electric system has gone down by 70% according to the Sunshot Initiative. As costs of solar have come down, these goals need to be reevaluated to better reflect the growing demand for solar in the state.

Introducing the Maryland Clean Energy Jobs Bill

Currently, legislative action is pending to increase the Maryland RPS. HB 1106, also known as the Maryland Clean Energy Jobs Bill, calls for a modest increase in the solar carve-out provision with the RPS, pushing it from 2% by 2020 to 2.5% by 2020, and pushing the overall renewables requirement to 25% of electricity by 2025. This will essentially require more than 500MWdc of solar. This is an attainable RPS goal that the solar industry is expected to meet with ease. This slight increase in near-term demand for solar is offset by reduced Solar Alternative Compliance Payments (SACPs), which essentially act as a price ceiling for the SREC market. Moreover, this increase is modest in comparison to other states such as Oregon and California which recently passed 50% RPS bills. Maryland’s neighbor, D.C., also proposed a 50% RPS last week.

Moreover, the Clean Energy Jobs Act of 2016 will support pre-apprenticeship, apprenticeship, and other workforce programs to establish career pathways within the renewable energy industry. (As a company that’s been hiring constantly over the last several years, we’d appreciate being able to find more local talent with ease.)

Will the Clean Energy Jobs Bill Affect SREC Prices?

While the Clean Energy Jobs bill will not have a dramatic upward push on SREC prices, the bill’s successful passage could possibly bring SREC prices back to where they were, closer to $120 for 2017, and to $85 for 2018. HB 1106 was heard in the Maryland House Economic Matters Committee on 3/3. Its corresponding bill in the Senate will be heard in committee today, Tuesday, March 8. Tell your state legislators that you want to see more solar in Maryland by doing by clicking on MDV-SEIA’s Action Alert, or by calling your state legislator.

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for over 400MW of 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, project acquisition 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.

How Does the ITC Extension Affect SREC Pricing?

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February SREC prices

On December 18, 2015, the solar industry scored a landmark victory by winning a multi-year extension of the solar investment tax credit (ITC). The three-year 30% ITC extension – plus the subsequent 2-year ramp down – will provide the solar industry with a strong, stable investment climate for years to come. Analysts estimate that solar capacity may increase by 30-50% over the next five to seven years as a result of the ITC extension.

The strong, stable investment climate created by the ITC extension serves as a bridge to the Clean Power Plan, provides job security to the industry’s 200,000+ employees (and counting), allows for solar to prosper in new markets, and will improve the health of our planet. A sustained solar boom is a boon for our economy and our environment; but what does the expected growth in installations mean for the nation’s top solar renewable energy credit (SREC) markets?

Let’s Back up. What Creates an SREC Market?

SREC markets are driven by three factors:

  • Supply of solar, which means the amount of solar installations in a given state
  • Demand for solar, which is driven by each state’s renewable portfolio standard (RPS) and solar carve-out
  • The alternative compliance payment (ACP), or the penalty an electricity supplier must pay if they do not procure enough SRECs or build enough solar to comply with the RPS. In many ways, this acts as a price ceiling in the market.

Will Market Conditions Change in All SREC States?

The ITC extension is affecting some SREC markets more than others. With or without a 30% ITC, each market still has its own unique issues. In DC, solar will still be challenging to build given land constraints. Pennsylvania and Ohio, due to the ability to apply SRECs from adjacent states towards state compliance, have long been oversupplied. This has especially been felt in Ohio after Governor Kasich froze the RPS, triggering price declines in all bordering states, and even Virginia.

In the Northeast, analysts have long expected that Massachusetts, the nation’s #6 solar market (#3 in Q3 2015), would hit its cap for SREC II this year, with or without an ITC extension. As we reported earlier, that could happen as soon as this week. Last, New Jersey. After serving as the poster child for SREC market volatility, New Jersey has been facing its own comeback, which we suspect to sustain itself for the next several years.

But what about Maryland?

The Biggest Question Mark: Maryland

With the increase in supply made possible by the ITC extension, Maryland is the market that may experience the most downward pressure. Recently, prices have dipped from $160/SREC to $120/SREC, with further declines expected as costs continue to come down and utility-scale projects become easier to build, such as Great Bay, the 75MW project expected to hit the market in the next 12 months. On top of that, the solar requirement within the Renewable Portfolio Standard (RPS) is stagnant at 2% beginning in 2020 as the SREC market effectively begins to merge with the Tier 1 REC market. Depending on what percentage of PJM pipeline you view as likely to go online, and what the effect on residential uptake will be as REC prices decline, this combination could result in ample supply until 2020 and oversupply thereafter.

How to Mitigate SREC Risk

To protect yourself from SREC risk, Sol Systems offers long-term SREC contracts for as long as 15 years. Contact Kate Brandus at info@solsystems.com for information on pricing.

For the most updated SREC pricing in your state, see our latest clear prices for our Sol Brokerage clients.

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for over 400MW of 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 include tax structured investments, project acquisition, and SREC portfolio management. Inc. Magazine named Sol Systems on its annual Inc. 5000 list of the nation’s fastest-growing private companies for a third consecutive year. For more information, please visit www.solsystems.com.

SOURCE: The Sol Project Finance Journal, January 2016

2015-04-29-Sol-Cover-Banner2

SOURCE is a monthly solar project finance journal that our 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 industry resources.

Below, we have included excerpts from the January 2016 edition.  To receive future Journals, please email pr@solsystems.com.

PROJECT FINANCE STATISTICS

The following statistics represent some high-quality solar projects and portfolios that we are actively reviewing for investment.

Joined


PPA-RATE-Jan

STATE MARKETS

California – Prior to the holiday break, the California Public Utilities Commission issued the proposed decision to net energy metering (NEM) 2.0. The solar industry celebrated; with ITC extension, the Paris climate agreement, and full retail credit in California, how many times did you hear your industry colleagues say “Christmas came early?”

But, hold on. Non-bypassable charges (NBCs) technically mean solar consumers will not receive full retail credit. NBCs would be imposed on solar consumers to cover a utility’s costs of programs; they are not charged to solar consumers under NEM 1.0. Since NBCs would be charged to solar customers on every kWh drawn from the grid, effectively, an additional ~2-5 cents/kWh will be discounted from solar exported to the grid.

With this change, look for the market to move more toward smaller systems and self-consumption. This will also encourage the growth of storage, especially with the lucrative Self-Generation Incentive Program (SGIP) rebate. The final decision is scheduled for January 28, though a surprise public meeting last week has advocates thinking that the path to approval will not be so simple.

In related news, follow CALSEIA for the discussion over Time of Use (TOU) rates, which will have a major impact on project development in 2018 and beyond.

Florida – PPA authorization in the Sunshine State hit a snag after Floridians for Solar Choice, a solar advocate-backed organization, failed to gather enough votes to qualify for a November ballot initiative. Instead, Consumers for Smart Solar (CSS), a utility-funded political action committee, may have their own constitutional amendment make the ballot – pending Supreme Court review. The existence of the conflicting organizations – and their similar-sounding names – has been confusing for consumers. Alas, hope is not lost. Vote Solar, SEIA, and partners are working on another campaign to finally bring more solar to the Sunshine State. Companies interested in getting involved should contact scott@votesolar.org.

Massachusetts – The Massachusetts Department of Energy Resources (DOER) sent notification that 567.7MW of solar energy systems have been qualified or accepted into the SREC II program, or about 60% of the program capacity cap. DOER will set aside about 120MW for smaller scale projects under 25kW. That leaves about 250MW for SREC II, whose cap may be hit as soon as Q3 of this year. Meanwhile, all eyes are still on the Commonwealth’s net metering standstill. Most project development we’re seeing is in NSTAR and WMECO territory – or with municipalities. We are seeing little development within National Grid – even for behind the meter projects. At press time, 85.2MW remain on National Grid’s net metering allocation waiting list.

SOLAR CHATTER

  • The December 18 omnibus bill reinstated bonus depreciation, providing for 50% bonus depreciation through 2017, declining to 40% in 2018 and 30% thereafter. While this is positive news – remember that bonus depreciation is, as the name suggests, only a bonus. Adding bonus depreciation back into the mix will not significantly alter pricing for a given deal, and some investors do not even value it at all.
  • Pricing for the latest Connecticut small ZREC solicitation (<100kW) came in around ~$80/ZREC. If the schedule for medium and large solicitations is to follow years past, bids for medium and large ZRECs will be due in June and announced in July. Meanwhile, several projects that won ZREC projects last summer remain stranded until the state’s municipal virtual net metering cap is lifted.
  • At the end of last year, developers were rushing to lock in equipment orders to avoid 2017 shortages. Will the ITC extension trigger a 2016 oversupply? No way, say analysts.
  • Vermont could become a hot utility-scale market for solar. A new transmission line from Canada – slated to be complete in 2019 – may also mean that the Green Mountain State will get more of its electricity from hydro and wind.
  • Move over, California. Oregon may be the next state to incorporate a 50% renewable portfolio standard. If passed, legislation would also create a community solar program

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for over 400MW of  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.

2016: Rush Hour is Over, But…

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Since the ITC extension passed, developers and host customers alike have stopped to ponder: “Why the rush?”

Q4 is always the most intense part of the year for the solar industry, as developers and EPCs rush to complete year-end deadlines. This Q4 was no different. In fact, it was even more so. Financiers all rushed to close 2015 deals. Developers rushed to lock in 2016 pipeline. MUSH hosts were rushing to issue RFPs for projects that could be built by the December 31, 2016 ITC placed in service deadline. Rush, rush, rush.

But then, everything changed.

Since the ITC extension passed, developers and host customers alike have stopped to ponder: “Why the rush?” End users that issued RFPs are asking: “Maybe I should put this project on hold and see if costs come down over the next couple years.” More often than not, we’re seeing these potential solar customers as the ones putting the brakes on a deal to retool it, or even re-shop it.

As for developers, some are noticing that in the mad rush to lock in 2016 pipeline by year-end, key diligence items were overlooked.  If you have a contract for a 2016 project and missed a key item in diligence (“Shoot, how am I interconnecting this thing again?”), by all means, use this short reprieve to take a step back and get your ducks in a row before shopping your project to a financier. But, don’t wait too long. Contracts expire, SREC values decline, and pricing may change as a result. With much delay, lenders may reallocate funds.

Similarly, if the end user is asking for more time to see where the market goes, tell them there is no time like the present. Since 2010, the cost of a solar electric system has gone down by 70% according to Sunshot. Moving forward, the most potential for dramatic costs declines will come from soft cost reductions (permitting, financing, O&M, customer acquisition, etc.) that are challenging to predict.  Moreover, who ​knows if the cost of capital will continue to drop or begin to climb as interest rates rise and YieldCos pause many of their actions in the market.

Solar has some great momentum right now, but remember: there are many unknowns. As the saying goes, a bird in the hand is better than two in the bush. Rush hour is over, but don’t get left behind.

This is an excerpt from our January 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 410MW of 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.

Hungry, Hungry Yieldcos Hit a Snag

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Now that YieldCos have hit a snag, where will all of the projects go?

Unless you are living under a rock, you may have seen the news that YieldCos, the most hyped financing vehicle of the past several years, have run into a few snags. Cost of capital has increased for many, and their already tight standards for projects have in some cases gotten even tighter.

We work with YieldCos for some of our largest projects. They are a useful and incredibly powerful tool, but not the all-encompassing, all-purpose tool that some in the media originally made them out to be.  A large and well-made socket wrench, but not a Leatherman, if you will.  We have written about some of their shortcomings before and predicted that a snag would occur in 2015.  The New York Times also had a sold write-up last week for those who want a more thorough read. But, from the perspective of developers that we work with, one downside of selling projects into YieldCos has been the waiting period as investors assemble a portfolio of individual projects, together with, upon NTP, the layers upon layers of approvals a project must go through before any individual payment is made. This can make directing cash flow to construction a slower process, and one in which developers must keep hosts waiting and placated until given hurdles are cleared.

One potential limitation for YieldCos – and developers who work with them– is the tight “credit box” they require. This means that projects on schools, religious institutions, non-profits, small businesses, and others often do not qualify.

What do these snags mean for the solar industry? For one, developers that had previously been selling their projects more or less exclusively to YieldCos are reconsidering tax efficient capital as a means to finance their deals. Instead of waiting for YieldCos to reprice their deals under new market conditions, the YieldCo train has left the station for some developers, and developers are rebooking their projects elsewhere.

Got a stranded project? Contact our team at finance@solsystems.com, and we’ll take a look.

This is an excerpt from our October 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 333MW of 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.

SOURCE: The Sol Project Finance Journal, September 2015

2015-04-29-Sol-Cover-Banner2

SOURCE is a monthly solar project finance journal that our 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 industry resources.

Below, we have included excerpts from the September 2015 edition.  To receive future Journals, please email pr@solsystems.com.

PROJECT FINANCE STATISTICS

The following statistics represent some high-quality solar projects and portfolios that we are actively reviewing for investment.

Screen Shot 2015-09-24 at 9.16.14 AM



PPA-RATE-Sept

 

 

STATE MARKETS

California – Massachusetts is not the only state that’s hit its net metering caps. In California, solar’s #1 market, San Diego Gas and Electric has only 147MW remaining, which some have predicted will only last for another six months. Sage Renew predicts that Pacific Gas and Electric (PG&E) will hit its cap in late Q3 2016, and Southern California Edison will hit its cap in Q1 2017. Some have called the report pessimistic, but with the ITC project rush, it’s anyone’s guess. In brighter news, California passed legislation to increase the state’s renewable portfolio standard (RPS) to 50% by 2030. Distributed generation does not count toward the mandatory component of the RPS.

New York– Poor economics means that Megawatt Block’s Commercial and Industrial (C&I) block is still stalled for takeoff, with only 1.8MW submitted in Con Edison territory out of 15MW. (Someone dropped out; last month we counted 4MW submitted). In the rest of the state, 98MW remains. For those of you who have reached out to us thinking that you’ve seen more development than that, the bar graphs do not lie. Unfortunately, the development you may have been seeing for commercial scale has been for virtually net metered (VNM) deals that were allowed to proceed before VNM was limited in the state. Thankfully, a movement is brewing to correct the Megawatt Block incentive levels for C&I. And, Sol’s very own Anna Noucas was recently elected to NYSEIA and will be fighting the C&I fight on behalf of Sol Systems and our partners.

North Carolina – RIP, North Carolina state tax credit. As part of a budget compromise, the 35% tax credit in the country’s #4 solar market will die at the end of this year. Projects that are already 80% finished when the year ends, but are not completed until early 2016, will still qualify for the credit under the “soft landing” provision from earlier this year. Applications for soft landing are quickly approaching; read up on our past article to see if you qualify. Unfortunately, many projects do not qualify and that will not be built by end of this year may never be built at all. Deals that do make it to the December 31 finish line must be aggressively structured to meet investors’ return hurdles in light of changing market conditions. Sol Systems will continue to operate in this market.

SOLAR CHATTER

  • Cue the Lego Movie soundtrack. Everything is Awesome in the solar industry…for now. One theme rang consistent at almost all of our SPI meetings: things are going well, business is booming, but 2017 is looming. Developers and investors alike are beginning to devise their ITC strategies, and how to survive in a post-ITC world. Here’s a refresher on our market forecasts after December 31, 2016
  • Cost of capital is more important to growing the solar industry than technology-based cost improvements according to a recent study by the European Photovoltaic Technology Platform (EUPVTP).
  • Time to #ActonClimate? CitiBank thinks so. A report from America’s third largest bank, says the world will save $1.8 trillion dollars by acting on climate. That means inaction is a $1.8 trillion mistake.
  • Thanks to the hard work of the Clean Energy States Alliance (CESA), a new IRS ruling is paving the way for community solar to take advantage of the federal investment tax credit (ITC).
  • SPI was abuzz with excitement over merchant deals. Remote and merchant offtake projects are actually selling…and in real volume.
  • And the acquisitions keep on rollin’. Locus Energy, the remote monitoring software and O&M provider, was acquired by GenScape. Draker was acquired by BlueNRGY Group.
  • Net metering caps are looming. Is your state next? Check out recent analysis from EQ Research, which also includes an interactive map of each state’s available net metering allocation.
  • More from the SPI rumor mill… There have been some complaints that certain investor counterparties are closing deals, but have not been able to pay on time. In many cases, we spoke to developers who are awaiting payment for closed projects as the investor waits for the funds to come in.

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 333MW of 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: To Tip Your Cap or Remove it Altogether?

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It’s time to remove our (net metering) caps and get back to work.

Etiquette dictates that a man tips his cap by raising it slightly above his head to signify recognition, greetings or a simple salutation. However, once a man enters a building to settle down for work, he removes his cap. The greetings and formalities in the solar industry are finished, and it’s time to remove our caps and get back to work.

In the solar industry, net metering caps are limits placed on how much solar capacity is eligible for Net Energy Metering, or the ability to sell excess generation back to the grid. Caps are usually set per utility service area and are a percentage of that area’s peak historical maximum load. Unfortunately, once these caps are filled, solar facilities may not be able to sell excess generation at a fair rate. After hitting its net metering cap earlier this year and putting much of its solar development on hold as a result, Massachusetts is considering options to raise its caps and allow its solar market to flourish once again.

In July, the Massachusetts State Senator Downing introduced legislation to lift the state’s net metering caps. In response to the Senate bill, Governor Baker has introduced his own legislation. While the Senate bill changes the cap from a percentage of demand to a capacity cap of 1600MW, which is the state’s goal for solar,  Baker’s version sticks with a demand percentage, only expanding the current caps by only 2%, or about 445MW. Under both versions, Class I systems, or systems under 10kW on a single-phase circuit and 25kW on a three-phase circuit, are exempt from the net metering caps.

On the one hand, it is promising that Governor Baker is showing support for at least a version of raising the caps, because he had previously opposed an increase in the caps – and a general opposition to solar “subsidies.” Unfortunately for the solar industry, however, the bill hopes to replace net metering with an avoided cost rate after the 1600MW goal is met; this could be a potential game changer for the Commonwealth’s solar industry, and not in a good way. A comparison of Governor Baker’s bill and the original legislation from State Senator Downing can be found below.

Baker’s Bill

  • Net metering caps are raised 2% for private and public utilities.
  • When 1600MW DC state-wide goal is met, net metering is replaced by avoided cost (ISO rate).
  • Projects approved before 1600MW goal will be given 20 years of net-metering credit.
  • MA DOER is tasked with establishing new incentive program after 1600MW goal. This may be different from the current SREC program, but will be defined by the DOER.

Downing’s Bill

  • Eliminates net metering caps except for cap of 10MW for municipal or government entities.
  • Net Metering credit would be the full credit for excess kWh, not just ISO rate.
  • Also calls for DOER to create a new incentive program after reaching 1600MW to accommodate the changing solar market.

The differences between Downing and Bakers’ bills reflect the mixed opinions presented by the Massachusetts Net Metering and Solar Task Force, which was released a report in April. National Grid opposed Baker’s small increase to the caps, claiming that it would still cost non-participating ratepayers significantly. Mary-Leah Assad, a National Grid spokeswoman also added that a 2% raise would likely by filled by October. Thus, if Baker’s version of the bill passes, the solar industry may race ahead to yet another abrupt standstill. Without a long-term solution in place, the future of the country’s number #4 solar market remains uncertain.

Still need help navigating the Commonwealth’s complicated regulatory landscape? Call our finance line (888) 235-1538 x2 or drop us a note at finance@solsystems.com. We look forward to hearing from you.

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 262MW of 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.

Why Asset Management is Critical to the Solar Industry: Part One

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What value does asset management add to a company?

As a solar company grows, it often seems like a no-brainer to build out the business development and origination teams. With more team members working on deals, there is more opportunity for new business; the value of new revenue is well understood, and the return on investment is seen as a clear win-win.  Asset management, on the other hand, has a tendency to be a cost center rather than a profit center. Given that companies spend resources on asset management without related revenue, it begs the questions, what value does asset management add to a company?  Over the course of a few blogs, we will explore this question.

The answer, though, is straightforward in one sense and as complicated as a tax equity structure in another.  As companies keep investing in new solar projects and closing deals, the end results are increasingly large portfolios of projects that must be monitored. When a deal closes – whether in solar, other renewable energy, or the traditional energy space – the project continues as a living, breathing entity.  In many cases, that means there are annual operating budgets to review, monthly and quarterly metrics to track, risks to monitor, and amendments or waivers to effectuate.  Those tasks, and the associated portfolio risk analysis or any changes from closing, are not the responsibility of the origination team, but that of the asset management team.

In this sense, the revenue ascribed to origination teams depends, in large part, on a robust asset management team.

Why Data Management Matters

Given the responsibilities outlined above, the building block of any successful asset management team is, necessarily, rigorous data management. To this end, project and site level data is collected in several ways: covenant deliverables such as production reports and financial statements, on-site monitoring systems, and interaction with the project developers and operators.  A list of some technical and financial metrics used on solar projects is below. Note: this is a small sample of the data collected for solar projects that we have closed.

Production Cash Flow Lease Service Were cash traps triggered? Distribution Amounts
Solar Resource Revenue Internal Rate of Return Was a prepayment triggered? Payment of fees
Inverter Availability Operating Expenses Return on Investment Milestone Dates Tax Rates
Performance Ratio Operating Income/Deficits Debt Service Coverage Ratio Liquidated Damages Warranty
Production Availability Debt Service Lease Service Coverage Ratio Contribution Amounts Tax Credits

In asset management, we rely on this quantitative data to monitor and analyze trends, deviations, or gaps—be they technical or financial.  The primary data from the project is analyzed to determine how the project or portfolio is performing against the benchmarks agreed upon at closing and against the budgeted figures for that period.  Therefore, it is imperative to have a high level of data integrity.  Data validation processes, quality control and utilizing a data management system and/or a workflow management system contribute to clean and useful data as the project changes throughout its useful life.  Asset management software should be able to store and report out on financial, technical and profile data of a project as well as compliance deliverables.

This quantitative analysis, though, can only tell one part of the story.  The asset manager’s responsibility is to blend quantitative reporting with qualitative information to best understand the projects, determine patterns (good or bad), and identify any risks to which the project and investment are exposed.

Once this analysis is done, the asset manager’s role is to leverage the information and work to mitigate those risks to protect the investment.  All of these functions described above are completed for each project within a portfolio multiple times a year. The Sol Systems asset management group works hard to see the success of our investors’ solar portfolios; your investment in the solar asset class is safe with us.

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 262MW of 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.

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.

6_percent_cost_of_capital_solar

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.