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Property Taxes: Still Taxing

Property taxes can make or break a solar deal.

Property taxes can make or break a solar deal.

Increases in project costs due to property taxes and/or a developer’s inability to secure a payment in lieu of taxes (PILOT) can make or break the economics of commercial and small utility-scale projects. According to a report written by Sunshot, Meister Consultants, and the North Carolina Solar Center, property taxes can add anywhere from $1/MWh to $120/MWh to PV system project costs. These added costs are especially critical in emerging or “almost there” markets, as well as more mature markets with dwindling incentive programs.

According to SEIA, 38 states offer property tax exemptions for renewable energy. Some states such as California, New York, and New Jersey outright exempt most renewable energy facilities from property taxes. Others, such as North Carolina and Maryland, offer property tax reductions.

State law exempting solar from property taxes is not always straightforward. This is because the interpretation of these laws is left to local assessors who have a vested interest in sourcing revenue, and understandably so. Property taxes are one of the most significant sources of local government revenue, sometimes amounting to 50% of local collections that fund schools, parks, and other government services.

Recognizing the importance of property taxes to solar project economics – and that solar panels will not be dialing 911, sending its children to school, or calling animal control – solar advocates are bringing property tax issues to the state house. On August 30, primary voters in Florida will vote on a ballot initiative that will authorize its legislators to vote to extend property tax exemptions to solar energy on commercial and industrial properties. If the process sounds complicated, that’s because it is complicated.

In Rhode Island, legislation signed into law by Governor Raimondo on July 7 will expand property tax exemptions for solar and require that the Office of Energy Resources and Division of Taxation work together toward “consistent and foreseeable tax treatment of renewable energy.” The new rules must be adopted by November 30.

Other states have not been so lucky. A property tax exemption bill in the Palmetto State was killed by a last-minute “poison pill” amendment after passing unanimously in the South Carolina Senate and House. The legislature will reconvene in January 2017. In the meantime, South Carolina developers must negotiate a fee in lieu of taxes (FILOT) and apply for a special source revenue credit (SSRC). Despite this discouraging news, we still see South Carolina as a top market in 2017 for large-scale projects.

Property tax issues will become less important for certain market sectors – especially utility-scale solar – as costs continue to fall. As a reminder, here are strategies that developers may employ to manage property tax uncertainty:

  1. Leverage your local relationships and knowledge of regional politics and policies to get a high degree of certainty on how property taxes will be assessed before locking in your financing. For example, in Massachusetts, some jurisdictions only approve PILOTs at biannual meetings.
  2. If you expect to get a property tax exemption, make sure it is legitimized and documented as early as possible, so that investors do not have good reason to assume the worst case scenarios.
  3. State realistic assumptions for property tax treatment(s) in your financial model.  Then, contract with the investor to receive a portion of the upside if the project receives a more favorable property tax treatment.

Developers interested in learning more about property tax treatments and valuations for a given project may contact the Sol Systems team via e-mail at finance@solsystems.com.

This is an excerpt from the July edition of SOURCE: the Sol Project Finance Journal, a monthly electronic newsletter analyzing the solar industry’s latest trends based on our unique position in the solar financing space. To view the full Journal or subscribe, please e-mail pr@solsystems.com.

ABOUT SOL SYSTEMS

Sol Systems is a 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.

New Jersey’s Energy Storage Incentive

NJ_Capitol

The Renewable Electric Storage Incentive appeared successful but because of some misunderstandings, 9 of the 13 approved projects have pulled out.

Last year, New Jersey, in an attempt to improve the resiliency of their electricity infrastructure as well as for load shifting and frequency regulation, sought to incentivize behind the meter energy storage. The initial program, The Renewable Electric Storage Incentive, was aimed primarily at solar + storage installments and allotted $3 million to 13 separate projects throughout the state.

The program appeared successful, but because of some misunderstandings with PJM about the ability to combine PJM grid incentives with the New Jersey energy storage incentive, 9 of the 13 approved projects have pulled out. The good news with this, however, is that the unused funds will be recycled back into the program for future use.

Upcoming March 1st 2016 Application Deadline

Starting on March 1st, New Jersey will offer its second machination of its energy storage incentive and begin accepting applications. Round 2 has doubled the size of the program to $6 million and will distribute the funds in two separate allocations.  The first $3 million will be offered in an open enrollment format, and the 2nd will come later in 2016 in a competitive solicitation dictated by research currently being conducted by the Rutgers Laboratory for Energy Smart Systems (LESS).

To be eligible, projects must be connected to a class 1 renewable resource and have a minimum capacity of 50kW, which can be aggregated over multiple sites. The incentive is set at $300 per kWh of energy capacity, with a per-project ceiling of $300,000 or 30% of the total project cost. A single owner or developer can qualify for multiple projects up to a per-entity incentive cap of $500,000. For full list of requirements or to apply click here.

What Does This Mean for Solar Developers?

Driven by the combination of incentives like the New Jersey rebate program and improving system economics, the distributed storage market is growing and creating real opportunities for developers.

The upcoming open enrollment for New Jersey presents a particularly attractive opportunity. Todd Olinsky-Paul of the Clean Energy group writes:

An open enrollment rebate is much more reliable, and bankable, than a competitive solicitation, which may or may not result in a grant; this also happens to be the first dedicated energy storage rebate program in the country, which means the results should be of great interest to energy agencies in other states.

To address this growing opportunity, Sol Systems is developing a solution to offer storage that can be paired with solar installations. For more information, contact Ben Margolis at ben.margolis@solsystemscompany.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.

Massachusetts’ SREC II Program: A New Hope?

1500px-Flag_of_Massachusetts.svg

As of February 18th, 67MW still remains under the program cap for projects under 25kW

For anyone interested in the solar energy industry, lately Massachusetts is synonymous with hitting solar energy caps. We have discussed the Commonwealth’s net metering caps at length, and have reported as the cap for the Solar Carve-Out II Program (SREC II) has neared.  With another update from the Massachusetts Department of Energy Resources (DOER) last week, here’s the latest on the SREC II program.

Still Space for Systems under 25kW

First and foremost, some good news. According to an email update from the Massachusetts Department of Energy Resources (DOER) on Thursday, February 18th, 67MW still remains under the program cap for projects under 25kW. So, if you are planning to install a project under 25kW, there is indeed still space for your project, and DOER has posted clarification for procedures and required documentation needed for projects to obtain an Assurance of Qualification. Keep in mind, the remaining 67MW* of available capacity under the program cap may run out quickly; we recommend applying as soon as you’re able.

Remember: if you partner with Sol Systems, we will complete the SREC certification process on behalf of your customers. Contact info@solsystems.com so we can help.

What about Systems over 25kW? Hasn’t the Cap Already Been Hit?

The second part of DOER’s announcement dealt with projects over 25kW. As we have already reported, the cap was met nearly two weeks ago, but not all of the applications submitted may be real contenders. The most recent update by DOER also hints to this possibility.

As it stands, the initial review of applications larger than 25kW is still ongoing. However, an initial review of a significant number of applications has been completed. All incomplete applications have been returned with a description of what needs to be done to fix the issues discovered in the initial review. These developers have until Thursday, February 25th, to resubmit applications for their projects, and if the applications still are not complete then, they will be rejected. For anyone on the waiting list who has been nervously biting their nails and sitting on the edge of their seatwaiting to see if they will have a chance to be considered, Thursday marks the first chance for moving off or up the list. After Thursday, the DOER will review all resubmitted applications and then provide an update regarding the SREC II Program’s Cap.  Stay tuned to our blog for updates.

What Does It All Mean?

In early February, we predicted this “Churn #1” of incomplete applications that were rushed through, but would soon be eliminated. While the exact numbers of this churn will come in after this Thursday, we expect the number of rejected applications to bring the program from drastically “oversubscribed” to nearly “fully subscribed.”

After that first churn, there is potential for a second churn to come in the form of unfinished projects currently holding an Assurance of Qualification under the “pending” category. This means that although they have received an Assurance of Qualification, they may not yet be operating and generating SRECs, so they have not received a State of Qualification. These projects are under a 9-month deadline to reach mechanical completion, and there is a chance not all of them will make it.

In sum, there is still a glimmer of hope for installers and developers:

  • Sitting on the >25kW waiting list with a complete application
  • Installing solar projects under 25kW or less… What are you waiting for? There are still 67MW that are yours for the taking.

Sol Systems will continue to follow SREC II developments on our blog. Stay tuned for our next write-up, which we’ll put out shortly after DOER’s next announcement.

*Note: Since the publication of this article, 15MW remain for solar projects under 25kW

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.

Virginia’s Solar Legislation: Will It Live to See Another Day?

2015_Virginia_State_House_-_Richmond,_Virginia_02

Virginia ranks 32nd in the country with only 18MW of solar energy installed

For a brief period at the beginning of 2016, Virginia’s legislature looked like it might have been gearing up to strap down and improve the solar market in the state. Such legislation is necessary, as Virginia ranks 32nd in the country with only 18MW of solar energy installed according to the Solar Energy Industries Association (SEIA).

Furthermore, as we have previously discussed, Virginia came in with a “C” in the solar net metering class of 2015. Its neighbor, Maryland, on the other hand, came in with an “A” and is 12th in the nation with 321MW of solar energy, 4,300 people employed in the sector, and a 95% increase in solar investment over 2014. Virginia has less than half of the solar jobs in Maryland, coming in with under 2,000 solar workers.

It is about time that Virginia stepped up, and legislation this session offered a glint of hope that it just might. However, despite a valiant effort by MDV-SEIA, a collection of pro-solar legislation was tabled in Richmond last week after a heavy showing from opposition.

So, which bills are amongst the dearly departed? Here are a few highlights.

This Session’s Obituaries: Will They Live to See another Day?

HB 1050 and SB142 – this team of bills sought to establish a 30 percent state tax credit for solar thermal systems (though not their solar PV companion).

HB 1285 – would have authorized community energy programs, which allow multiple customers to subscribe to clean energy from an offsite location. It is an idea that is catching on across the country to provide more equitable access to clean energy, and this bill was solar advocates’ push to have community solar programs enter the Virginia market.

HB 1286 – like 1285, was a darling child of solar advocates across the state. It was an all-encompassing piece of legislation providing for the allowance of third party financing through power purchase agreements, lifting the one percent cap on net metering, and authorizing community and “agricultural” net metering programs. Over half of U.S. states and the District of Columbia allow for third party financing, but not Virginia, which has made solar’s cost prohibitive for its citizens.

HB 480 – sought to establish a tax credit equal to 35 percent of installed renewable energy and define the aggregate amount of credit allowed to each person for placing into service renewable energy during the taxable year.

Virginia’s neighbor to the South, North Carolina, had a 35 percent tax credit until recently, which according to data from the N.C. Department of Revenue generated the state $717 million in spending and capital investment in 2014, with only $126 million claimed. North Carolina also ranks 4th in the country for solar capacity with 6,000 solar jobs. You snooze, you lose, Virginia.

SB 761 – looked to establish a mandatory Renewable Portfolio Standard (RPS) in Virginia, which would have required 25 percent of generated power to come from renewable energy by 2025. The current RPS in Virginia is voluntary, and as such, symbolic in nature. Hence one of the many reasons for little solar growth in the state.

SB 779 – was a bill that survived past the others. It was poised to be a weaker version of HB 1286, which still would have been major progress for the state. However, this bill was also tabled…for now.

The Last Bill Standing

HB 1305- is the only solar bill still standing in Virginia’s legislature. It provides a tax exemption worth 100 percent of the solar energy systems value for projects 5MW and under, and for projects from 6MW-20MW that file for interconnection before December 31, 2018. It also drops the tax exemption to 80 percent for projects above 20MW starting January 1, 2017.

The Living Dead: Summing it Up

Clearly, some of these bills were stronger than others in regards to promoting clean energy, but all of the above were kept from moving forward in this legislative session. So, the question is

Will There be a Resurrection?

Fingers crossed, yes. As the discussions stand these bills have been “carried over,” and will be discussed again at special subcommittee this upcoming summer.

So, if you are a Virginia customer do not lose hope, but do not just sit tight. Reach out, speak out, and ask for solar because maybe the umpteenth time Virginia discusses solar energy might just be the charm! As for the solar industry, with such a large laundry list of requests, it is time to rally around the priority bill that has the biggest likelihood of passing and allowing the local renewable energy economy to flourish.

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.

Does Bonus Depreciation Matter? Yes and No.

bonus depreciation

How much does bonus depreciation really impact an individual solar deal?

The December 2015 omnibus bill extended 50% bonus depreciation through 2017, declining to 40% in 2018, and then 30% in 2019. As a result, some developers are expecting better pricing for their solar deals. But how much does bonus depreciation really impact an individual solar deal? Unfortunately for developers, the answer may be less than you think – or not at all.

Investors must elect whether or not to factor bonus depreciation into their investments. For a pure play tax equity investor, that’s a toss-up depending on their investment criteria. Taking early losses matters less when the investment tenor is 5-6 years, and the investor’s ability to absorb losses and depreciation may be limited regardless by the structure of the fund.

The answer could be different for other tax efficient sources of capital, such as an unregulated arm of a utility that purchases a solar asset and holds it for 20-30 years. At this time, investors are still debating whether or not to elect bonus depreciation for their solar assets at all. For those that do elect to take it, this will also reduce their tax appetite, thus putting a smaller limit on the number of projects that they can own before they need to bring in third party tax equity.

Why the debate over whether to elect bonus depreciation? While bonus depreciation boosts project returns by a handful of basis points, it greatly reduces an investor’s short-term tax appetite. Solar investments are tax driven, and investors typically make decisions about tax planning well in advance. Some institutional investors in solar assets are prioritizing stability and deciding not to elect bonus depreciation to avoid spikes in short-term losses followed by taxable income in years with fewer or no losses. Reduced short-term tax appetite due to bonus depreciation can also limit investors’ flexibility to act on future opportunities.

Let’s also not forget that bonus depreciation does not solely apply to solar or renewable energy assets. Non-renewable investments can be included as well, such as infrastructure investments (e.g. electric transmission, pipelines, etc.). If an investor will be making investments in another qualified “property,” that could mean less tax appetite to go around for solar. This is concerning for an industry where tax equity is already a limiting nutrient, especially after the extension of the solar investment tax credit (ITC).

The takeaway? If some solar investors do ultimately decide to elect bonus depreciation, developers could receive a small boost to project economics. However, that could be cancelled out by a higher cost of capital given a shortage of tax equity in the market.

This is an excerpt from our February 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 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.

How Real is the MA SREC II Crunch?

You’ve all heard about the rush for allocations in the Massachusetts SREC-II market.  The outstanding question is just how real the project queue is. We feel there are two categories of projects likely to churn out of the program, creating an initial source of massive churn in the next few weeks and an ongoing source of more limited churn for what could be as much as a year.  Projects that are, in fact, holding on to a quality interconnection agreement and ready for near-term construction start have more than a glimmer of hope for successful SREC-II qualification.

Churn #1 – The Unbaked

As we discussed in our previous blog entry on this subject, there’s been a massive rush of applications over the last 4 weeks:

1.    On Tuesday, January 5th, the Massachusetts Department of Energy Resources (DOER) announced that 120MW would be set aside in the SREC-II program for projects under 25kW. This left a little over 250MW for those greater than 25kW.

2.    On Monday, January 25th, that 250 became 100.

3.    On Monday, February 1st, that 100 became 22.

4.    On Monday, February 8th, that 22 will become 0. And so begins the wait list.

So: about 450MW of applications in a month. These all could be legitimate and headed for ultimate approval! But that would be unusual.

Take a look at this graph below. On the far left, applications “under review”, with no qualification date. Next to them, “pending” applications of greater and greater age. (Unlike the slug of January applications currently piled up at DOER, pending applications have passed at least initial review, have an interconnection agreement, and have received an Assurance of Qualification. They haven’t, however, gone online. You can see the approved portion of the rush of applications here in the 0 – 30 and 30 – 60 bins.)

GraphFinal1

The graph is sorted by 30 day bins of age.

Now, let’s look how quickly real, complete, projects go online in a typical Massachusetts month – backwards looking, over the last year, for systems bigger than 25kW. It looks like a typical month of C&I buildout in Massachusetts is in the neighborhood of 15 – 20MW.

GraphFinal2

Short version, in the most recent 60 days? Almost 450MW of applications hit the program when you’d expect to see about 40MW of ones that turn into real projects.

It seems unlikely that the number of fully-baked, ready-to-roll, shovel-ready, choose-your-metaphor-indicating-completeness projects has increased by a factor of 10 in the past few weeks.

You should probably assume a significant proportion of the unapproved applications are eliminated in just the next few weeks – a conservative guess would amount to wiping out today’s “negative” cap, but not taking many new applications off of the waiting list. For applicants as of perhaps right now, this “Churn #1” likely takes the program from “oversubscribed” to “fully subscribed.”

Churn #2 – The Unfinished.

Now, keep in mind that there are two ends of the approval process where a project can fail. Projects that do have a compliant and complete application are in the light blue bins above, aging away. Qualification starts a 9 month clock to completion, and we all know that not every solar project makes it. Though DOER has historically proven reasonable in offering extensions to projects that are very close to completion, you should anticipate that as projects march down this “conveyor belt” to the right, some will fall off for not being even close. Currently there’s 340MW on this part of the conveyor, and of them, 40MW are more than 270 days beyond their SQA date. We don’t know how many are subject to some modest extension, but not all of them will get these extensions, and this bin grows all the time as projects “move to the right” without “disappearing” due to completion.

In fact, you have to wonder how many projects in the 200MW that jammed in the SREC door in the last 60 days were hoping to not obtain their SQAs until later in the development process. These projects could have other critical pieces missing or delayed (e.g. PILOTs, permits, financing, or just as critical and limited net metering approvals), and had been hoping not to start that 9 month clock until their hand was forced. They’re probably more risky than the typical applicant.

All we can say is the 0 – 30 and 30 – 60 bins are each 100MW when again a typical number would be 20. That’s another 180MW of projects above the average we’d expect. Of course there will be some “pull through” that increases throughput above the average, and  no matter what we’ll only get to see these “freed up” as many as nine months from now.

The Takeaway

GraphFinal3

Massachusetts just saw a giant surge of SREC applications  - enough to cap out the program and start a 10 month waiting list beyond that .  However, interconnection agreement execution and other bottlenecks mean we don’t think that this correlates well to a giant surge of projects – and while applications take up room for a while, only real projects ultimately cap out the program.

Over the next 2 to 6 weeks, historical numbers would suggest that the industrious dairymaids at DOER churn the program down from the 190MW+ backlog to zero, and in fact better than zero – up to perhaps a few months of typical headroom (Up to 6 months if they’re all utterly noncompliant, but we have concerns that some may be “Hail Mary” applications with interconnection and key permits but not much else going for them). I’ve marked this as “Churn 1″.  Anticipate it to cut down in a big way – and soon – but not cashing in all the “excess” projects.

As that is being put to use, another few weeks of typical installation should be expected to free up in the next month or so as a subset of the oldest unbuilt approvals lose their status. Here, I’ve marked these “Churn 2”, with a total reprieve now expected through perhaps June.

Unfortunately, another ~6 months of program room will be occupied by the “Churn 3” projects, which will continue to take up room whether they are likely or not until perhaps October – and their owners will have little incentive to give up their spots.  Further, some “Churn 1” projects won’t be immediately released, but will stall here, again until the summer.

The real question will be how this intersects with Massachusetts’ legislative timeframes for a more permanent fix.  It could also be too optimistic if there’s major “pull-forward” and the state’s typically 15 – 20MW monthly C&I market surges forward.

*Note: This blog was initially published February 5 at 3pm. It was updated after a late Friday afternoon announcement from the Massachusetts DOER.

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.

Massachusetts SREC Program is Hitting its Cap…Again

Mad Rush

Bring on the mad rush to qualify for SREC II. Hurry up before it’s too late!

In case you haven’t heard, the Massachusetts SREC-II program is a mere 22MW away from reaching its cap.

You may be asking yourselves what happened. So were we… until we did some digging. Here’s how it happened:

  1. On Tuesday, January 5th, the Massachusetts Department of Energy Resources (DOER) announced that 120MW would be set aside in the SREC-II program for projects under 25kW. This left a little over 250MW for all other projects over 25kW before reaching former Governor Patrick’s goal (and the overall SREC program’s cap) of 1,600MW.
  2. On Monday, January 25th, the DOER released an updated Solar Carve-Out II Qualified Units list. Only a little over 100MW were left of the 250MW from two weeks earlier.
  3. On Monday, February 1st, the DOER again released its weekly Solar Carve-Out II Qualified list, sharing that only 22MW were left for projects over 25kW. Only slightly over 94MW of the 120MW remains for projects under 25kW in the small solar set aside.

Wow. That’s some drastic growth. The caps are filling up quickly, but how do we separate the “real” from the “aspirational” projects?

Qualifying Units List: Explained

In the DOER’s qualified units list, systems are separated out into three categories:

1)    Solar energy systems with a MA RPS ID# currently generating SRECs;

2)    Systems with a pending application status, meaning they have been awarded an Assurance of Qualification (AOQ) but have not received a State of Qualification (SOQ) because they are not yet operating and generating SRECs;

3)    Systems with an application under review, meaning an application has been submitted but the DOER has not completed its review.

Systems that are under review are waiting to be notified by the DOER of the application’s completeness. This generally happens within a few weeks of the application being submitted. If an application is incomplete, then the entity who filed the application will have two weeks to cure any deficiencies. If a deficiency is not cured within that period, then the application will be rejected. Keep in mind a complete application includes an executed interconnection agreement!

Any systems in the pending stage most likely have been granted a nine (9) month window to reach commercial operation (COD). If these projects are unable to be completed in that time, they may apply for an extension.

Will All Qualifying Units Make the Cut?

On the DOER’s most recent list from February 1st, 140MW of system applications were Under Review (63MW of which are in National Grid) and another 340MW of systems (of which 195MW are in National Grid) are categorized as having a Pending status.

In other words, not all of the projects currently in the Qualified Units list are necessarily qualified for the Massachusetts SREC II program.  Instead, developers operating in Massachusetts – a top 3 solar state in Q3 2015 and #6 in the country overall – noticed the limited capacity left in the SREC-II program and acted accordingly. They shuffled through their own “active projects” lists and submitted applications for any projects with a recently executed interconnection agreement  – or any projects with the hope of having an executed interconnection agreement within the next few weeks. A mad rush appears to be underway, similar to what the state saw as the SREC-I program – and net metering allocations – quickly reached their respective caps.

A small glimmer of hope may still exist for projects without SREC allocations. Given this information, we could see systems fall out of the list due to incomplete applications or due to their inability to reach their COD deadlines in time (think National Grid projects that have not secured a NEM cap allocation and are less likely to get an SREC allocation extension).

Still Reading? Stop Now, and Submit Your Application!

The magnitude of such circumstances is unclear, but what is obvious is the value in submitting an application now for any mature projects with the hopes that these projects will eventually move forward from the wait list that is expected to show up on future DOER weekly Solar Carve-Out II Qualified lists.

If you have a project that has received an AOQ or a project under review and don’t have financing, please reach out to our Project Finance team at finance@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 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

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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


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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.

Who Will Weather the Solar Finance Storm?

As YieldCos and solar stocks crumble, who will weather the storm?

Semper Paratus ad Expensis

It has been a stormy few weeks in the solar industry; stock market volatility has not been kind to some of the major sources of project finance. The beginnings of some uncertainty started at the end of October, and right now, we are hearing from individual developers that some of their once seemingly-certain sources of finance are becoming more equivocal or going silent or nearly so. As the waves mount up, we hear that some developers are having trouble raising their contacts on the radio.

Stability in the Storm

We’re pleased to report that Sol Systems’ primary sources of commercial and small utility-scale project financing have not been much in the news lately. We carry out the vast majority of our distributed generation financing with a small number of large, stable, publicly held companies who have weathered the last few weeks without a perceptible change in project pricing. We are ready and able to assist any projects who need a safe harbor, quickly.

Have a Plan and Stick to It

We suggest that you hold your financiers to specific timelines, and we would ask you to do the same to us. It is reasonable and necessary for a financier to require exclusivity over a given deal if they are to complete a transaction. It is similarly reasonable for such periods to be extended if additional specific work is required or obstacles are encountered.

However, it is critical that a developer keep an eye on the progress of the transaction within that period, and carefully consider whether they believe a timely close is likely.

If not, it may be best to explicitly wrap up exclusivity, bring the project back out to the market, and carefully consider execution risk just as you would pricing or any other aspect of the transaction. From our end, we find that responsiveness and specificity of communication is the best single indicator of a deal’s chances of success, and a project’s initial source is unlikely to prove its best intermediary.

Call for Help Early

Mariners in distress commonly use a “pan-pan” call to indicate when they have a serious problem with the functioning of their vessel but are not yet in the life-threatening distress that a “mayday” would indicate. It can be a very useful means of obtaining valuable advice or alerting necessary resources. Even if you are only beginning to lose confidence in your finance, and if you are free to speak to other finance, please do send us a note – finance@solsystemscompany.com – we’re always ready.

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for over 375MW 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.

Module Shortage Rumors Fly…Again

MODULE SHORTAGE

This panel shortage is similar to the same “shortage” we have seen the second half of every year

Last month, Intersolar North America was buzzing with word that tier 1 module suppliers were completely booked through the end of the year for 300 Watt plus modules. Is there any truth to this?

There could be. Big solar deals abroad are eating panel supplies of tier 1 suppliers. Domestically, U.S. solar developers are rushing to complete deals by the end of 2016. But more likely, this panel shortage is similar to the same “shortage” we have seen – and written about – the second half of every year. The cyclical nature of solar financing (many investors are not aware of their yearly tax appetite until Q2) makes solar development, and thus equipment procurement, cyclical as well.  As developers execute EPC agreements and rush to complete projects by investors’ end-of-year deadlines, this domino effect puts module manufacturers in the driver’s seat each calendar year.

That doesn’t make the shortage any less real for those who have yet to purchase modules, or for EPCs without a master supplier contract or close-knit manufacturer relationships. If panels become unavailable, swapping one tier 1 for another tier 1 is common. We have seen this happen with a couple deals so far this summer, and investors accept this swap without issue.

Still, deciding to make a switch should be done early, after consultation with the project’s investor. Purchase orders should be locked in as soon as possible to ensure you stick to your construction schedule and avoid damages. EPCs up against a quick timeline should assess the risk and purchase early, assuming their balance sheet can handle the purchase before milestone payments.

While exaggerated panic surrounds a module shortage each year, perhaps more pressing is a possible shortage of other electrical equipment. Medium voltage equipment or specialized interconnection facilities are crafted by a more meticulous process than modules which have a standardized manufacturing process that can be easily ramped up.

Solar development rewards those who are proactive rather than reactive. Plan ahead, and avoid any possible equipment shortages or future price gauges.

This is an excerpt from our 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 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.

Investors: Mitigate EPC Risk to Grow Your Commercial Portfolio

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Owners typically rely on a select list of preferred EPC partners to deliver the project to their standards.

When investing in solar assets, utilities and infrastructure owners typically rely on a select list of preferred Engineering, Procurement, and Construction (EPC) partners to deliver the project to their standards and avoid major issues. We understand why. Working with only a select few preferred EPC providers minimizes exposure, and reduces time spent reviewing and approving new providers. Plus, it provides a greater degree of comfort knowing the job will be done well when partners have an established working relationship and track record together.

Yet, in the fragmented commercial and small utility-scale market, many of the entities originating project opportunities often intend to serve as EPC provider to capture more value and margin in their solar projects. Enter the conundrum for solar investors: how can an investor expand their commercial solar portfolio if they’ll only work with a select number of EPC providers?

Of course, opportunities still remain for investors to purchase a project for a development fee and work with their EPC partner of choice. However, EPC monogamy can be limiting. As such, solar investors seeking to break into the commercial market and scale their portfolios would be well-advised to establish a structure and process that allows for new EPC providers to be considered. Getting this structure and process correct is key to minimizing exposure to critical risk factors during construction, and to achieving consistent quality assurance across projects.

With Sol Systems, investors can have their cake and eat it too. We can act as an EPC wrap for investors, meaning that we serve as the primary counterparty for our investor and take on the EPC provider’s obligations. Through this added layer of protection and standardization, Sol Systems is responsible for diligence on the contractor and relevant site or project information. It is also in our best interests to deliver the project to the contracted scope within budget by the target completion date. This wrap allows an investor to mitigate the risk of working with multiple partners by relying on one single partner they can trust, allowing them to scale within the commercial market.

This is an excerpt from our 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 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.

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.

“Commence Construction” Conjecture for the Solar Investment Tax Credit

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

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

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

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

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

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

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

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

ABOUT SOL SYSTEMS

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

Is DC’s Sustainable Energy Utility Sustainable?

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

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

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

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

Where does the DCSEU get its funding?

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

What’s the good news?

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

Making solar affordable for everybody

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

Looking to the future

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

ABOUT SOL SYSTEMS

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

SOURCE: The Sol Project Finance Journal, June 2015

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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 June 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.

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*Our all-in price statistics exclude projects from Ontario, Hawaii, the U.S. Virgin Islands, and Puerto Rico where all-in prices remain over $3.50/W.

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STATE MARKETS

California: Because you know it’s all about that rate, ‘bout that rate… The gold rush is here. Already, 184MW out of the eligible 400MW have been filled for Southern California Edison’s (SCE) Option R rate. Remember, Option R allows developers to better pitch ROI to hosts by focusing on Time of Use (TOU) rate charges instead of demand charges. Get it while you can; we expect the remaining 200MW+ to fill up quickly. Meanwhile, Pacific Gas and Electric’s (PG&E) Option R became available on June 1; look for that to open the market for commercial solar projects in PG&E territory. Unlike Option R in SCE territory, PG&E’s has no cap on the number of customers or megawatts.

New Jersey:  We are consistently surprised by the lack of commercial-scale pipeline coming out of New Jersey. Perhaps many hosts are opting for cash purchases instead of third-party financed deals. Or perhaps developers look at the $225 SREC prices of today and long for the $600/mWh pricing from yesteryear. Maybe more third-party financed deals going to leases? We’re stumped; you tell us. Meanwhile, the Garden State seems particularly primed for merchant opportunities.

Rhode Island: Unfazed after falling slightly short of its goal to procure 40MW of renewable energy by 2014, the Ocean State upped the ante with an even more ambitious goal: 25MW of renewable energy for 2015, increasing to 40MW each year for 2016-2018. Applications for small-scale solar (<25kW) opened up on June 15, while applications for projects 26kW – 5MW will be accepted between August 3 and 14. Take note, highly creditworthy utility off-take and above-market rates in this state will continue to appeal to investors. We strongly suggest this market for Northeastern developers, especially as Massachusetts remains stalled, and New York has fallen short of expectations. There’s much to consider for this state that runs only 48 miles long and 37 miles wide.

SOLAR CHATTER

  • Ready, set, go! Bids for 15-year Connecticut ZREC contracts are due on June 18th at 1pm. We expect for LREC and ZREC pricing to ultimately get closer to the price of Class I RECs.
  • Residual value is a hot topic among financiers who realize that they must take into account the value of the asset once the PPA expires in order to maintain their competitive edge over the other sources of capital flooding the space. How does Emilio Estevez feel about this?
  • This is your monthly reminder that Maryland is the best market where nobody else is doing business. Hint, hint.
  • Watch for the Illinois solar market to pop now that its first SREC procurement deadline has passed. Subsequent rounds will take place in November 2015 and March 2016. Meanwhile, pending legislation pushes for a longer term, more robust solar market in the Land of Lincoln.
  • Vermont has been gaining traction among developers for its high electricity prices, SPEED program, and Green Mountain Power’s solar adder for projects under 500kW AC. The challenge with the Green Mountain Power program, however, is that its floating rate PPA structure spells out risk to many investors. To increase the likelihood that these deals are financed, put a floor in the PPA to make the investor more comfortable with underwriting the deal.
  • The latest Solar Market Insight report showed that residential and utility-scale solar each added more capacity than the natural gas industry brought online in Q1 2015.
  • The verdict is still out on Massachusetts net metering, though many in the industry are cautiously optimistic that a solution will be put in place to keep the industry going until the end of 2016. Support is strong in the state senate, while the support from state house of representatives is questionable. In the meantime, developers should look into NSTAR territory.
  • According to the International Monetary Fund (IMF), 6.5% of 2015 global GDP – or approximately $5.3 trillion – will subsidize fossil fuel use. Hopefully that will put the solar-haters to rest.
  • Got a project in PJM territory that wouldn’t mind a little cash flow boost? Sol Systems is offering compelling SREC contract to projects in PJM territory; some North Carolina, Illinois, Indiana, and even Virginia projects are eligible. Contact srecs@solsystems.com for more information.

ABOUT SOL SYSTEMS

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

Ripe and Riddled: Is Commercial Really “the next big, emerging, growing sector” in Solar?

The Williams Building in downtown Boston, MA now has a 3 kW DC, 28 kW AC, PV system integrated into the roof consisting of 372 panels; Boston, Massachusetts;  General Services Administration Building; 408 Atlantic Ave.

Glowing optimism about commercial-scale solar at Sol Systems is backed by our nearly 200MW of financing arranged for commercial and small utility scale projects ranging primarily from 200kW – 5MW (sometimes up to 10MW).

Commercial-scale solar is the new media darling these days. Industry and mainstream news media have reported projections of a sector “ready to rebound” and “cleared for take-off.” Some outlets have quoted industry executives saying things like “our next big growth area” and “this investment reflects growing optimism about the C&I sector.”

Glowing optimism about commercial-scale solar at Sol Systems is backed by our nearly 200MW of financing arranged for commercial and small utility scale projects ranging primarily from 200kW – 5MW (sometimes up to 10MW). We are hearing from more and more investors who are ready to explore this asset class, and are interested in our track record of aggregating, investing in, and financing this market segment.

We believe our days of blogging about how underserved this sector of the market is (despite its promise) could be numbered now. But, what exactly is that potential?

To answer that question, Sol Systems dove deep into research from industry sources including Bloomberg New Energy Finance (BNEF), Greentech Media Research (GTM) and Solar Energy Industries Association (SEIA). We compared projections and historical cost estimates from all sources to Sol Systems’ own pipeline.

The answer? We estimate, conservatively, that the commercial and small-utility sector of the market will grow to $4.9 billion by the end of 2015, and $5.7 billion in 2016. But, you won’t get it handed to you on a silver plate. This sector is ripe with opportunity and equally riddled with challenges. Let’s crack the code together.

This is an excerpt from our June edition of SOURCE: the Sol Project Finance Journal, a monthly electronic newsletter analyzing the solar industry’s latest trends based on our unique position in the solar financing space. To view the full Journal or subscribe, please e-mail pr@solsystems.com.

ABOUT SOL SYSTEMS

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

Maryland Passes Community Solar Bill

MD state legislature has passed HB 1087.

Will Maryland be the next big market for community solar development?

It’s official: the Maryland state legislature has passed HB 1087, titled “Electricity – Community Solar Energy Generating System Program,” bringing MD one step closer to community solar. If you’re not familiar with community solar, check out our write-up on the Maryland community solar legislation and the challenges faced by these programs.

The bill, which enjoyed bipartisan support passed 46-0 in the Senate and 111-29 in the House. However, there are still a few steps that must be taken before Maryland residents will be able to participate in community solar programs through this law.  First, Maryland’s new governor Larry Hogan has to sign the bill into law. Once the bill becomes law, it is up to the MD Public Service Commission (PSC) to adopt regulations in order to implement the bill. This will be a critical point, as other community solar legislation has been slowed down at this stage. (DC for example has not yet implemented their community solar program despite legislation passed in 2013; Maryland’s bill gives the PSC a generous full year to determine relevant rates, etc.)

HB 1087 establishes a pilot period, extending three years after the beginning of the program, which is denoted by the first submission of a petition from a subscriber organization, or six months after the PSC adopts the required regulations. Establishing a strong and fair set of regulations is imperative to the permanent success of community solar in Maryland, as the PSC will convene a stakeholder working group following the termination of the pilot program to study the feasibility of establishing a permanent program. The listed deadline for the recommendation from this study is July 1, 2019.

Of course, and unlike in other jurisdictions where community solar has been adopted, the fundamental legal requirements to carry out this business model are already in place – see our Remote Solar blog for more information; however, this legislation may reduce some of the financial risk and regulatory barriers to entry associated with creating such projects.

Community solar fulfills all three pillars of sustainability: the environment, economy, and social equity. The third pillar, social equity is often overlooked with typical solar projects. Marylanders will not be excluded from access to solar energy because they rent their living space, or live in an area not physically suited for their own solar array. About 32.4% of Americans do not own their homes, so there is certainly a sizable market of Marylanders who have not yet had access to solar. Additionally, lower-income residents will be more able to access solar, as more low-income residents rent, rather than own their properties. As the solar industry continues to grow, it is important to reduce barriers for those who are actively interested in solar, as they will continue to drive the growth of the industry.

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 180MW 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.

Prepaid PPAs: Nice, but “Nichey”

April _ prepaid PPA _ pic

Are prepaid PPAs a unicorn idea, or something that will drive the commercial solar market?

For commercial and small utility-scale solar, the prepaid PPA is a great idea… in theory. By prepaying for expected generation over the contract term, the long term price that the offtaker pays for electricity can be much lower. Assuming the offtaker can find the cash to handle the large prepayment, these deals can increase IRR, lower an offtaker’s levelized cost of energy (LCOE), and also lower the potential cost of a solar energy system. Because of these potential upsides, developers are increasingly turning to us to see if these deals are financeable.

The short answer is yes, prepaid PPAs can be financeable. But, because of the complexity of these transactions associated with invoicing, having to “true-up” generation, bifurcating green attributes, complicating tax payments (carrying a contra asset) etc., we recommend them only in rare situations, namely when:

  1. The host “speaks” kWh. Developers, picture yourselves explaining invoicing, one of the most complex portions of a prepaid PPA, to a typical facility manager at a commercial and industrial (C&I) host site.

    These kilowatt hours over here have already been paid for, these have not. Well, even though you paid upfront for an 8 cent PPA, you actually have a 10 cent PPA. Oh, what’s that? That’s the portion of the electricity that is bifurcated for green attributes. Get it? No?  Do you have a whiteboard?

    It’s not an easy discussion to have, and if the facility manager just doesn’t “get” it, it will make for a long, complicated, and costly negotiation process. For this reason, it’s best to work with a clean energy authority, muni, or another utility-like host that really understands the complexities of their electric bill, and “speaks” kilowatt hours.

  1. Project sizes exceed 5MW. The bigger the project, the better. These deals are costly to set-up, and because of that, it’s better to pursue them only for larger deals that can absorb the transaction costs.

  1. Cheap money at the host. Generally, a for-profit host in anything other than the most mature industry will have a weighted average cost of capital greater than a PPA financier – turning the value of a prepay upside-down.  Prepays find their best value with a public or pseudo-public entity that brings very low borrowing or opportunity costs, but has no way to recognize the relevant tax benefits.

  1. Dealing with the residential sector. Some residential companies have been very successful with prepaid PPAs, but residential is not commercial. If you’re a resi player moving into commercial, scaling your prepaid offering up for commercial is not recommended if it does not follow the above conditions.

In sum, prepaid PPAs can work for commercial and small-utility scale solar, but because of added complexities of negotiating these deals, we see them as more of a niche idea than something that will become mainstream for commercial any time soon. Still, when they work, they can be a creative way to get projects to pencil.

This is an excerpt from our Solar 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 180MW 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.

Illinois Solar Gets Closer to Game Time

20140823_xl_solaranlage-zw-ruedersdorf-fredersdorf8534

The Illinois Commerce Commission released a draft Proposed Order earlier this month on the Illinois Power Agency’s (IPA) Supplemental Procurement Plan, solidifying noteworthy changes for the Illinois solar market.

The Illinois solar market is marching ahead to an eventful 2015.  Recent action on the Supplemental Procurement Plan means solar energy system owners should look for the Illinois SREC market to come to fruition very soon.

Earlier this month, the Illinois Commerce Commission released a draft Proposed Order on the Illinois Power Agency’s (IPA) Supplemental Procurement Plan. In the draft Proposed Order, the Commission reviews objections and comments submitted to them regarding the IPA’s plan and makes rulings on each issue. Many of the rulings solidified changes we examined in past articles on the Illinois solar market[s1] . The following conclusions are particularly noteworthy for current or prospective solar system owners in Illinois:

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