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“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”

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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

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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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Sol Systems Offers New SREC Contract. Meet Sol Combo

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Sol Systems offers four SREC monetization options: Sol Upfront, Sol Brokerage, Sol Annuity, and now, Sol Combo.

Solar Renewable Energy Credits (SRECs) are a confusing, yet critical, piece of solar finance for solar energy system owners and installers alike. To solve for this, Sol Systems offers four SREC monetization options: Sol Upfront, Sol Brokerage, Sol Annuity, and now, Sol Combo.

For many customers, deciding how to handle the solar renewable energy credits (SRECs) generated by their exciting new rooftop power plant can be tricky. Are they the kind of person who will lock in a price for the long term, saving themselves time and energy and adding greater certainty to their financial planning? If so, Sol Annuity is the best option.

Another type of customer is one who likes to play the volatile spot market and take some risks for the chance of scoring a higher short-term return. If so, Sol Brokerage is the best option.

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A Look Back at 2014: What Does a Shortage of Bankable Projects Mean for C&I Solar?

Solar project development is cyclical: more capital chases projects, oversupply of capital brings down yields, capital exits the space, more projects chase the money; rinse, lather, and repeat.

There is a shortage of bankable projects in C&I solar.

There is a shortage of bankable projects in C&I solar.

As we reflect on 2014, we will remember it as a year when an abundance of sponsor equity was met with a shortage of bankable project opportunities. Here’s why, along with our predictions for commercial and industrial (C&I) solar in 2015.

1. Transaction Costs Reinforce C&I Growing Pains

The culprit for C&I’s flat growth is once again the large transaction costs associated with relatively smaller project sizes (as opposed to multi-megawatt residential portfolios and utility-scale projects).  Since any number of issues can kill a project opportunity, we recommend working with a financing partner early on to help tackle issues with interconnection, host credit, property taxes – you name it.

 2. Diminished Incentive Regimes

With incentive programs drying up in several major markets (Gainesville, Indiana Power & Light, LIPA, NIPSCO, etc.), many developers are struggling to create bankable project opportunities.  Why not bank on the markets that work without incentives, and with just a moderate PPA (i.e. California, Arizona, and Hawaii)? Also, follow the opportunity: there are several underrated solar markets that aren’t seeing nearly the development activity that they should be (New Jersey, Maryland, and <650kW in Massachusetts).

3. Hungry, Hungry YieldCos

Yieldcos have eaten much of the larger, “middle of the fairway” bankable project pipeline, contributing to the shortage of financeable project opportunities that are left for investors. However, it is important to remember that generally it is only the most clear cut, “perfect” projects are being placed into YieldCos — generally, multi-megawatt ground mount projects with an investment-grade offtaker, likely a utility or publicly-rated corporate entity.

Because Yieldcos are not as flexible on size or credit, we anticipate them having issues “feeding the beast” in 2015 and beyond. Stay tuned; only time will tell.

Think Diligently in an Undersupplied Project Marketplace

You can count on tables to turn over the years.  Along with the ebb and flow of a maturing solar market itself, buying and selling power will fluctuate, making long-term relationships crucial to profitability.

In 2014, we still saw solar developers reject our initial bids because a bid from another investor was “too good to be true.” Turns out they mostly were, and the same deals resurfaced for our team later in the year.

This is why we advise solar developers to conduct diligence on their solar investors, just as they vet your company and project opportunities. Together, we can scale the C&I market.

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@solsystemscompany.com.

About Sol Systems

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 171MW distributed generation solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. It has over $550 million in assets under management as of September 2014.  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.solsystemscompany.com.

Financing Partnerships Drive North Carolina’s Solar Boom

Sol Systems, National Cooperative Bank, and Strata Solar Add Another 18MW of Solar

Sol Systems, National Cooperative Bank, and Strata Solar Add Another 18MW of Solar

Three new utility-scale solar farms have been added to North Carolina’s energy mix, propelled by a partnership between Washington, D.C.-based solar investment and financing firm Sol Systems, National Cooperative Bank, and Strata Solar. The projects are located on rural farmland in Erwin, Efland, and Hickory and total 18MW of solar capacity which equals the reduction of automobile travel by approximately 24 million miles.

This second deployment for the partners follows on the heels of another 18.2 MW earlier this year. Sol Systems managed the investment on behalf of an international bank as part of the firm’s tax equity initiative to produce secure, sustainable solar investments for banks, insurance companies, utilities, and Fortune 100 clients. Strata Solar developed the project opportunities provided EPC services, and National Cooperative Bank served as the lender in the transactions.

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If C&I Solar Projects Were Thanksgiving Dinner

Thanksgiving_Dinner_Alc2

With a little bit of digging (and an active imagination), we found plenty of parallels between a commercial and industrial (C&I) solar project and Thursday’s familiar feast.

A well-executed solar project can be almost as satisfying as Thanksgiving dinner; the only difference is that you are still left hungry for more.

With a little bit of digging (and an active imagination), we found plenty of parallels between a commercial and industrial (C&I) solar project and Thursday’s familiar feast.

  1. Deal Structure: Good meals start with a great recipe. Whether you’re taking on a project with a PPA, lease, or cash purchase will affect every other piece of the deal. When developing a project, we encourage our partners to think ahead and select off-takers and materials with the deal structure in mind.
  2. Modules: Obviously, the center of the meal is the turkey. Just as the turkey is the centerpiece of the meal, modules drive the project’s value in producing clean, secure solar energy. While there remain alternative brands in the space, we typically recommend sticking to a familiar brand in order to avoid additional steps of diligence (the blog author has a personal aversion to tofurkey as well…). Tier 1 turkey, anyone?
  3. Inverters: Just like with mashed potatoes, the question with inverters is how to distribute them. If placed correctly, they boost the performance of all other components.
  4. Mounting Type: The variation in racking is reminiscent of stuffing/dressing. There are a lot of options here—numerous manufacturers combined with options for tracking, carports, etc. mirror the countless ways that your Thanksgiving chef can stuff their bird.
  5. Contracted Revenue: Let’s be honest with ourselves: the entire Thanksgiving meal is essentially a carrier for the gravy. Investors are flocking to the solar space for the long-term cash flows that solar project assets deliver. The value statement for solar remains stronger than ever.

In sum, Thanksgiving is much like a C&I solar deal: they both require careful preparation, essential ingredients, special knowledge, and hard work. The comparisons between solar projects and Thanksgiving dinner are as endless as our appetites. However, getting a project built is not as easy as pumpkin pie, particularly in under-served market segments.

As 2014 comes to a close, it’s a good time to reflect on what’s gone well this year and how we’ll add to it in 2015 (or hustle to finish projects by the end of the year). Only a few weeks are left in what’s been an incredible year for the solar industry—let’s bring it home strong!

About Sol Systems

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 171MW distributed generation solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. It has over $550 million in assets under management as of October 2014.  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.solsystemscompany.com.

What Game Theory Can Tell Us about Middle Market, C&I Solar

The decisions made along the path of solar project finance and development have major implications for the growth –or stagnation—of the commercial and industrial solar market.  How does a developer choose the right financier for their project, or an investor decide to interact during contract negotiations? Together, what impacts do these decisions have on the value chain?

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Extra Credit for Getting C&I Credit Right

C&I solar credit

Commercial and industrial (C&I) credit is incredibly complex – and can often be a deal breaker in middle market deals. Here’s how to get it right.

Unlike residential, which has standardized credit scores, or utility-scale, which generally has utility off-takers, commercial and industrial (C&I) credit is incredibly complex – and can often be a deal breaker in middle market deals (which we generally categorize as 200kW – 5MW).

Why is credit such a deal breaker in C&I as opposed to other market sectors? To start, very few facilities are owner-occupied, and it is hard to guarantee that the same tenant will buy the electricity for the length of a 20 or even 15-year PPA. Think of your own booming solar business. As your company expands, you will need more office space. Can you guarantee to a solar developer (and thus, the end buyer: an investor) that you will be there to buy the electricity when your lease is up in five years? If you leave the building, can you ensure another reliable, rent-paying tenant will take your place, or that the owner of the building will be able to quickly find someone who will use electricity and take your place? No? Hence the issue…

C&I solar deals often die when the developer realizes all too late that the host has poor credit. How could that happen? For one, it is inherently uncomfortable for a developer to ask a host to turn over their audited financials, and developers sometimes have a hard time choosing how and when to fit “the talk” into the courting discussion. As a result, C&I developers often rely on the host’s word, rather than financial statements, to ensure creditworthiness (or worse, some subjective indicator – suit or haircut quality, a spic and span facility, etc.). Then, when it gets time to sell the project to an investor and further credit analysis reveals an issue, they realize the project cannot move forward. All of that development time (and money) wasted.

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Just Say No: When to Walk Away from a Solar Deal

Sometimes the key to success is knowing when to walk away from a bad deal.

Sometimes the key to success is knowing when to walk away from a bad deal.

Solar developers and investors alike often ask us the same question: what is the secret to making middle market solar projects work? Often, the key is knowing when to walk away before the transaction costs become too much to bear.

In other words, a project can seldom overcome serious obstacles facing two or more critical financeability metrics, such as:

  • Project Size – A one-off 1MW+ project is almost always more attractive than a one-off 200kW project. Bundle that 200kW into a 1MW+ portfolio with different off-takers, and it is still less attractive to an investor than the one-off 1MW+ project with a single off-taker.
  • State Market – Certain solar markets are more attractive than others to investors. Flip through the “markets” section of past Project Finance Journals, and you will see what those markets are
    and what incentives they offer, though some should be obvious (DC, CA, & MA are generally more attractive than IN, PA, OH).
  • Host / Off-taker Credit – Municipalities, universities, schools, and hospitals (MUSH) hosts with investment grade credit are the most attractive, and unrated credit is the least attractive. Perhaps counterintuitively, unrated credit with three years of audited financials falls somewhere in the middle, very much depending on a real read of the customer’s situation.
  • Project Development Status – Projects with an executed PPA, site control, interconnection, approval, and completed permitting are most attractive to investors. Earlier stage projects will have a hard time securing financing until they have reached these milestones.

Though there are exceptions to every rule, the further your project is from these desired characteristics, the least likely they are to receive financing. And, the further that projects are from this spectrum, the more costly the complexities are.

At this stage in the evolution of our industry, if you haven’t seen your proposed financing model “in the wild,” it’s not because no one else has thought of it; it’s because it is unlikely to work. The reality is if your creative project development idea sounds too creative to be true, it probably is; complexities don’t add, they multiply. Or, as one of us here is fond of saying, “every minute of explanation on top of the base deal is another basis point on the returns.” In a market sector where transaction costs weigh down relatively smaller project opportunities, it is better to walk away before you burn too much time on a deal that won’t make it. Your time is much better spent on a cleaner project.

The above 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@solsystemscompany.com.

About Sol Systems

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 171MW distributed generation solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. It has over $550 million in assets under management as of September 2014.  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.solsystemscompany.com

The Road to Interconnection May Be Rocky

The road to interconnection can be rocky, but it doesn't have to be.

The road to interconnection can be rocky, but it doesn’t have to be.

Uncertainty in interconnection timelines is nothing new, but it nonetheless remains an issue in a number of solar markets. When looking to complete projects within an investor’s target commercial operation date (COD), often the biggest unknown is how long it will take the utility to enable a successful interconnection, which may include utility provide equipment, testing and commissioning, and issuance of approval notices.   In the worst case, you might be waiting for someone to handcraft a transformer for you, or take care of some vegetation management.

Timelines and processes vary utility by utility. But ultimately, this uncertainty hurts the EPC who will face damages if the project is not done on time. This issue is especially relevant now as end-of-year deadlines approach.

In addition to timeline sensitivities, another issue lies in interconnection costs. If you go through the entire development process and then realize that interconnection costs make the deal challenging to finance, the deal may not fully materialize without additional solutions.

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Sol Systems Speaks at Minnesota Solar Conference

Members of the Sol Systems Project Finance Team will be in attendance at the MnSEIA hosted conference.

Members of the Sol Systems Project Finance Team were in attendance at the MnSEIA hosted conference.

Several members of the Sol Systems project finance team attended the Midwest Gateway to Solar conference, hosted by the Minnesota chapter of SEIA, on November 4th and 5th. On Tuesday, Sol Director of Project Finance, Ben Margolis spoke among other subject matter experts on Developing Solar Finance for Minnesota.

The Sol Systems team is actively reviewing solar project investments in the Minnesota solar market. As we discussed in our October Solar Project Finance Journal, we especially see possibility in the state’s community solar program. We are also interested in 400kW+ portfolios of <40kW projects that have been awarded Made in Minnesota grants and will be keeping an eye on the Value of Solar Tariff, which we expect to be active in 2015.

To learn more about financing for Minnesota solar projects, please contact our team at finance@solsystemscompany.com.

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Go Ahead, Wake the Sleeping Giant: Why C&I Solar is Poised for Growth

While residential solar installers battle for market share and YieldCos gobble up utility scale projects, the commercial and industrial (C&I) solar space has been relatively quiet. Broadly defined as behind-the-meter projects between 50kW and 5MW, the middle market remains untapped due to market fragmentation and complexity associated with relatively smaller deal sizes. In fact, the number of middle market solar projects interconnected in Q1, 2014 was down 12% from the same quarter in 2013, according to Greentech Media (GTM) and SEIA’s Solar Market Insight Report. Additionally, Q1, 2014 marked the first quarter that residential solar MW installed exceeded those installed in the C&I niche since 2002.

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Come on & Feel the Illi-Noise: Why 2015 Will be a Big Year for Illinois Solar

Chicago

On September 29, the Illinois Power Agency released its draft 2015 Procurement Plan and a “Supplemental” Procurement Plan for Solar PV

Prepared in collaboration with Sol Systems Intern Mark Noll

On September 29, the Illinois Power Agency released its draft 2015 Procurement Plan regarding renewable portfolio standard (RPS) compliance for the state’s two regulated utilities, ComEd and Ameren – and then, on the very same day, decided to release a second “Supplemental” Procurement Plan for solar PV. The two plans both share great intentions for the best of interventions – and could bring projects with the right entrepreneurial conditions to glory.

Both plans call for the Illinois Power Authority to procure solar renewable energy credits (SRECs), but that’s where the similarities end. They differ with regard to funding, project eligibility, contract lengths, system requirements, and other factors. Sound confusing? It’s OK. We’re here to clear up the confusion.

The First Illinois Plan: Of the Four Procurements, Only Three Matter

The first, “regular” plan sets out the IPA’s 2015 plan for procuring power from renewables for those customers of the state’s two main utilities who have not “shopped” for electricity (most of Illinois’ residents actually have shopped for energy on their own, thanks to electricity market deregulation, and rely on their retail electricity suppliers for compliance). In addition, the IPA has set up a procedure for spending the hourly “alternative compliance payments” (ACPs) the agency has collected from retail suppliers. This is because unlike in many states, some amount of these ACPs are collected each year whether or not the suppliers are otherwise in compliance. It proposes to use ~ $13M of this funding to procure ~80,000 SRECs in one-year contracts.

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Ohio Opposition to Renewables & Solar Energy Mounts

Proposed fee could cost AEP customers $2.00 on their electricity bill.

Proposed fee could cost AEP customers $2.00 on their electricity bill.

Sacrificing renewables promised reduced prices for customers; but now could end up raising the bill for Ohioans.

Ohio’s electrical market structure has long been based on market forces such as varying supply and demand, rather than by political regulation. But recently, moving away from an economy driven, market based structure, to one driven by political whims, has not benefited OH ratepayers.  The result of this style of decision making has caused a change of heart on a previously supported energy initiative. Ohio’s recently elected conservative Senate, along with Gov. John Kasich, agree that renewables are too expensive to continue funding.

On June 13, the Senate passed Senate Bill 310 and effectively froze Ohio’s Renewable Portfolio Standard (RPS) and immediately halted all projects that solar developers and investors were working on. Not only did the construction of solar arrays freeze, but the prices of Solar Renewable Energy Credits (SRECs) associated with solar electricity production also plunged. Prices went from a prosperous and positive-trending $70/SREC to $30/SREC, and have not rebounded since. The SREC market in Ohio was not the sole victim of a market freeze; it also knocked the value of surrounding States’ (Indiana, Kentucky, West Virginia, Virginia and Michigan) market prices.

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Massachusetts Updates 2016 Managed Growth Allocation, Developers Still on Edge

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

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

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

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

What is Managed Growth in Massachusetts?

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

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