On April 25, a 7.8 magnitude earthquake hit Nepal. Most rural health clinics were completely destroyed, and emergency teams are currently working out of makeshift structures without electricity; there is no power available to charge cell phones, let alone to treat patients.
In the aftermath, SunFarmer, a non-profit that has been focused on solar installations in Nepal for the last two years, is stepping up to the effort and providing electrical and solar water purification systems to hospitals, health clinics, and shelters.
SunFarmer needs your help to power Nepal’s recovery. Donate to their Earthquake Relief Fund today.
This cause is important to the Sol Systems team. Joe Song, Senior Director, is on the advisory board of SunFarmer, where he advises on the technical specifications of the non-profit’s solar installations. In 2013, Mr. Song visited Nepal with SunFarmer to vet solar installer partners and developers, recruit team members, investigate the local solar market, and visit hospitals. SunFarmer is a beneficiary of Sol Systems’ Giving that Matters program.
For more information on SunFarmer, visit www.sunfarmer.org.
ABOUT SOL SYSTEMS
Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 200MW solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management. Inc. Magazine named Sol Systems on its annual Inc. 500 list of the nation’s fastest-growing private companies for a second consecutive year, ranking it No. 6 in the nation’s top solar companies in 2014. For more information, please visit www.solsystems.com
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:
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.
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.
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.
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 email@example.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.
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?
Sol Systems Tops 360 Teams to Win 200 Mile Relay Race
On September 12-13, nine members of the Sol Systems team ran a 200 mile relay race stretching from Cumberland, MD to Washington, DC. Winding through hills and valleys, day and night, the team steadily made its way to the finish line, beating over 360 teams to take the first place title. With a final time of 25 hours and 35 minutes, the Sol Systems team finished a full hour faster than the second placed finishers.
The Ragnar Relay consists of 36 individual legs (3 per runner) ranging from 2 miles to 11.1 miles in length with varying difficulties in terrain. The logistics of the race involve two vans of six runners alternating every six legs, trading off at major exchange points at which runners can relax, meet other teams, and attempt to sleep.
The race started for the Sol Systems team (named the Fighting Gibsons after the company’s Chief Technical Officer, Mike Gibson) at 12:30 pm on Friday and continued until just after 2 pm on the following day. By the end of the race, most teammates had only slept for one or two hours.
As the final runner raced down the stretch, all 12 team members came together and crossed the finish line in unison. The team drew together in the face of the relay’s challenges, ultimately coming out stronger. See you next year, Ragnar DC.
On June 3 the New York Assembly Energy Committee approved the Shared Clean Energy Bill A9931/S7727, continuing the momentum that New York has built up in the solar industry. In late April, Governor Andrew Cuomo committed $1 billion in funding to continue the NY-Sun solar program, which aims to increase solar power tenfold in New York by 2023. New York solar power is expanding by enabling families, schools, businesses, and renters alike to come together and hold a share in local, community solar projects.
Sponsored by Energy Committee Chair and Assemblywoman Amy Paulin, the Shared Clean Energy Bill aims to open up renewable energy production on a community scale. Those normally prohibited from participating in solar production such would gain access to cleaner energy. What’s more, the health and environmental benefits come at an appropriate time, jibing well with Obama’s carbon emissions reduction law. There is no major opposition to this bill; the main obstacle appears to be time, as the legislative session closes today: June 19. Should the bill not make it to the floor of the Assembly and Senate today, the bill will be reintroduced at the start of the next session.
New York is in a solar state of mind. On the heels of the recent announcement to commit an additional $1B to New York solar incentives over the next decade, the New York State Energy Research and Development Authority (NYSERDA) unveiled the next anticipated funding program for large solar systems, over 200kW in size. This round of funding closely resembles previous offerings, and does not appear to be part of the “megawatt block” structure highlighted in the April announcement. PON 2956 (short for Program Opportunity Notice) went live this week, promising $60M in available incentives or more, to be awarded at NYSERDA’s discretion. Applications are due July 17th, 2014 and all systems must come online by April of 2016.
Changes from Previous NYSERDA Large Solar Incentives
Unlike past PONs for large projects, all New York Independent System Operator (NYISO) load zones are in play. Several favorable tweaks to this year’s program, compared to earlier New York solar incentive rounds like PON 2860 and 2589 in the past, indicate a willingness on NYSERDA’s part to see this program drive more project development this year than ever before. In previous PONs for large projects, awardees received the full incentive amount in five payments – 30% at project completion paid out in two upfront installments, and 70% paid out as a PBI split between the first three years of production. PON 2956 will see that 30% upfront payment occur in one installment instead of two, and the remaining 70% condensed to only two years’ worth of production, paid at year’s end. The incentive for any project cannot exceed 50% of project installed costs.
Will New York join Massachusetts and California as an enduring solar state?
Last Thursday, New York Governor Andrew Cuomo announced an additional $1 billion in funding for the NY-Sun initiative, making good on his promise to extend the program through 2023. The funding announcement includes an overhaul of New York State Energy Research and Development Authority’s (NYSERDA) current incentive program, previously doled out through Program Opportunity Notices (PONs) with varying availability for different solar project sizes and geographies. The new program will take effect June 1st.
New York Solar Incentives Explained
The NY-Sun initiative, founded in 2011, coordinates solar programs between the Long Island Power Authority (LIPA, now PSEG Long Island), the New York Power Authority (NYPA), and NYSERDA. The new program, called “Megawatt Block”, will break out MW capacity allocations to specific regions of the state, and then further break down target capacities in each block. Solar incentives in New York will be awarded on a per watt basis for residential PV (up to 25 kW), small PV (non-residential up to 200 kW), and large PV (over 200 kW). Similar to the popular California Solar Initiative rebates, prices will step down as capacity blocks in each region and sector are filled, allowing the market to grow at a steady pace and eventually stand on its own. If the geographic preference follows the earlier program, we can expect to see preference given to areas downstate near New York City.
Sol Systems to Travel to San Francisco, Las Vegas, and New York for Upcoming Solar Project Finance Conferences
The Sol Systems team will attend the 2014 SEIA Tax and Finance Seminar this week in San Francisco at the W San Francisco Hotel. George Ashton, Sol Systems’ CFO, will be participating in a panel discussion on securitization and its role in the solar space. The discussion will focus on how securitization has worked in the past, and its prospects moving forward.
Next week, several members of the Sol Systems team will travel to New York Bloomberg’s Future of Energy Summit 2014. Sol Systems’ CEO, Yuri Horwitz, will travel to Las Vegas for the 29th Annual Platts Global Power Markets Conference.
Position: Solar Analyst Intern (position beginning in January 2014) targeted towards undergraduates
Description: The Solar Analyst Intern will assist with registration processes, administrative duties, and research tasks, and will be expected to provide clearly defined deliverables. The position will require attention to detail, excellent record keeping, and efficient allocation of time and resources.
Through this position, the Solar Analyst Intern will gain familiarity with solar legislation, solar finance mechanisms, industry news, and industry vocabulary, as well as new product development in a fast paced, start-up environment. This position provides a fantastic launching pad for a career in renewable energy.
Pursuant to Senate Bill 32 of 2009, the California Public Utilities Commission (CPUC) implemented the Renewable Market Adjusting Tariff (Re-MAT) program on July 24, 2013. The Re-MAT program is a Feed-in Tariff (FiT) through which customers can sell electricity produced by qualifying facilities* directly to the utility at a set rate for a term of 10, 15, or 20 years. The bill also raises state renewable energy targets from 500 MW to 750 MW, and increases the size cap on qualifying energy facilities from 1.5 MW AC to 3 MW AC. All investor owned utilities (IOUs) in California with more than 75,000 customers must participate in the program. Although all qualifying facilities are eligible to participate in the program, it is clear that solar will play a large role given the amount of attention the program has already gained with developers in the state.
The first round of solicitations for the Re-MAT program will begin on October 1, 2013, and will continue every two months thereafter until it is fully subscribed. The amount of time it takes for the program to become fully subscribed will depend on the ability for projects to be financed at the set energy price, which is one of the more unique aspects of the program. The base price is currently set at $89.23/MWh, pre-Time of Delivery (TOD) adjustments. This price is subject to adjustment after every solicitation depending on program participation.
Sol Systems CFO and co-founder, George Ashton, will be attending SOLAR 2013, an annual conference held by the American Solar Energy Society. This is the 42nd installment of the event, and will be held April 16-20 at the Baltimore Convention Center. George will be participating in a 90-minute panel discussion titled “Financing DG Projects,” where he will speak alongside Rich Deutschmann of Ameresco, Chris Lord of Capiron, and Steve Remen of GroSolar. The panel will be held on Wednesday, April 17th, from 1 PM until 2:30 PM and will focus on funding distributed generation installations.
New temporary rules will place restrictions on the ability of developers in Hawaii to claim the 35% state tax credit. The new rules, issued by the Department of Taxation in November of 2012, will be in effect for no longer than 18 months, starting for systems installed on January 1st, 2013 and after. The Hawaiian House of Representatives also recently moved HB 497 to the Senate, a proposal to permanently decrease the tax credit level given to renewable energy developers.
The new structure, under the temporary rules, places a minimum on kilowatt output of PV systems, referred to in the legislation as “other solar systems” or those projects neither for solar thermal nor from wind energy. Single-family residential properties have a minimum of 5 KW per system, multi-family residential properties have a minimum of .360 KW per unit per system, and commercial properties’ systems must have a capacity of 1MW in order to receive the current 35% of costs income tax credit. There is also a cap of $5,000 of credit for residences and $500,000 for commercial enterprises.
On January 11th, the Los Angeles Department of Water and Power (LADWP) Board of Commissioners voted to approve the first 100MW of a 150MW solar feed-in tariff program, designed to help Los Angeles achieve its renewable energy goals through 2016. The program could be open for applications as soon as February 1st, and will be released in 20MW increments every six months with reserves for smaller project sizes (30kW to 150kW). The maximum project size is 3MW. The last 50MW will come before the Board for a vote in March, once the program is up and running.
Previously, LADWP launched a modest pilot program in spring of 2012 for 10 MW of capacity, only 3.7 MW of which will receive contracts at an average weighted price of $0.175/kWh. This average weighted price influenced the pricing for the larger procurement program which now has a set price of $0.17/kWh for 20 years. That pricing will gradually decrease for each 20MW of capacity contracted for under the feed-in tariff, eventually dropping down cent by cent to $0.13/kWh by the end of the program. 20MW increments will open for applications every six months. Ideally, the procurement program will gradually bring solar in Los Angeles in line with the average cost for other energy sources, program administrators hope, by the time the 30% investment tax credit (ITC) falls to 10% in 2016.
Not all feed-in tariff programs in California have found similar success. For instance, the city of Palo Alto released a small $0.14/kWh program in 2012 that failed to receive any applications, presumably because the set price offered was too low to lead to viable solar projects. While $0.17/kWh is above the current avoided cost for LADWP, officials decided to launch the program at higher-than-average prices in order to meet upcoming renewable energy targets. LADWP aims to get 25% of its energy from renewable sources by 2016 and 33% by 2020.
Because most of the capacity in this program will likely be sited on rooftops, site selection plays an important role in keeping costs reasonable and ensuring that the project is financeable. Sol Systems will be tracking the LADWP feed-in tariff closely as additional program materials are released. Should you have a project that you are bidding into the LADWP Program or have questions about financing for other California projects please contact firstname.lastname@example.org. Our team would be happy to discuss your project with you and assess financing opportunities.
About Sol Systems
Sol Systems is a solar finance firm and a leader in financial innovation in the renewable energy industry. Since its inception in 2008, Sol Systems has partnered with 350 solar installers and developers to bring over 3,000 solar projects from conception to completion by offering innovative financing solutions for residential, commercial, and utility-scale projects.
Sol Systems’ financing programs catalyze investments for a broad set of solar projects by simplifying their origination, diligence, and financing processes. Developers seeking financing for solar projects can access over $2.5 billion in capital through the Sol Systems investor network.
In addition to providing financing, Sol Systems also offers project due diligence, deal structuring, and asset management services – all designed to reduce overhead and transaction costs and quicken project development timelines.
For more information, please visit www.solsystemscompany.com.
The following is a mutli-part series on the Cash Grant and the Road Ahead. It is part of Sol Systems‘ continuing efforts to provide the industry with the information and ideas (where we can) that we believe it needs to continue to succeed. For additional resources on project development, we recommend you join the SolMarket community, which provides a number of informational resources and the SolSmart suite of legal documents.
In February of 2009, the federal government passed ARRA, and the 1603 Investment Tax Credit (ITC) Cash Grant program with it. The Program effectively transformed what was traditionally an investment tax credit into a cash grant, awarded by the treasury, within 60 days of commercial operation. It was perhaps the single most important piece of legislation for solar in recent history, spurring huge growth in the sector, recently estimated to be 69% year over year. In January of 2012 the 1603 ITC Cash Grant will expire, and with it the ability for developers and investors to secure the cash grant in lieu of a tax credit.
So what’s next? Well, let’s take a look.
Part I: Looking Back
Under the Emergency Economic Stabilization Act of 2008, a 30% tax investment credit for qualifying renewable energy projects was extended through 2016, allowing owners of solar projects to offset 30% of a solar system’s cost through tax credits. So long as a system owner had enough tax liability over the course of 5 years, he or she would be able to deduct 30% of the system’s gross cost from their federal taxes.
Because most solar project companies or developers working on commercial and utility-size PV projects do not generate enough taxable profit on their balance sheets to utilize the 30% tax investment credit (ITC), they had to seek a financial intermediary with the necessary tax liability to buy a stake in the project company and monetize these tax credits, what is commonly referred to as “tax equity investors”. Tax equity investors are effectively companies with large balance sheets, traditionally banks and more recently larger corporations, which purchase tax credits to shelter otherwise taxable income, while also providing an essential financing tool for large renewable projects.
In 2007, the Solar Energy Industries Association (SEIA) estimated there were up to 28 tax equity investors, primarily financial institutions led Morgan Stanley, JP Morgan and others. However, the collapse of Lehman Brothers and the financial crisis of 2008 effectively ended most of these companies participation in the tax equity market for renewables. Several companies, such as AIG and Prudential, departed the tax equity market entirely because of bankruptcy or uncertainty about whether they would have sufficient taxable income.
II. The 1603 Program
In response, President Obama approved the Section 1603 Cash Grant Program (as part of the American Recovery and Reinvestment Act of 2009), to effectively stabilize renewable energy market by providing $1.9 billion of cash grants in lieu of tax credits. Under the 1603 Program, owners of a renewable energy system could simply apply for a cash grant to cover 30% of the system’s cost, regardless of their tax liability.
The 1603 Program catalyzed the solar market, with approximately 80% of solar projects opting for the cash grant, driving growth of 104% between 2009 and 2010 in the United States. As of mid-August 2011, 87% (2,095) of the 2,410 cash grants awarded under the 1603 program were provided to solar energy projects (although only 27% of the nominal value if these grants). Since October of 2010, the federal government has invested over a billion dollars in solar projects through the 1603 Grant Program.
Unfortunately for the solar industry, the Section 1603 Program is set to expire at the end of this year, and it appears highly unlikely that it will be renewed again. With the expiration, interested parties without the necessary tax liability will again have to rely on tax equity investors to fully monetize the ITC. The problem is twofold: (i) the tax equity market has not yet fully recovered and there are only an estimated 10 to 15 investors looking for tax equity deals and (ii) integrating tax equity into deal structures will significantly increase transaction costs, raise the costs of development, and potentially limit smaller deal sizes.
The result will be a bottleneck in 2012-13, where a substantial number of solar developers and other interested parties look to construct or own commercial-sized solar system, but only a select few can secure the requisite tax equity financing. This will mean a number of projects will not be developed, and those projects that do secure tax equity will see increased yields. Some projects are likely to seek safe harbor under the 1603 Program by securing 5% of the total costs of the system, but this strategy brings with it its own challenges.
So now, as we look towards the horizon, what’s next? What will happen to this 80% of the industry opting for the cash grant? Companies like Sungevity, Sanyo and Vivent are quickly lining up tax equity for the upcoming year, and some believe market growth will slow by up to 50% in the second half of 2012. Might these challenges be mitigated by solar modules priced below $1.10/watt? What creative solutions will our industry implement to meet these financing challenges?
Please join us(and others) next week for Part II of this Series: “Life After the 1603 Grant: Looking Ahead”
America has traditionally been seen as lagging behind in the renewable energy race. European and Asian markets have consistently outstripped the US when it comes to alternative energy. Western Europe has had stricter regulation towards efficiency standards and renewable resources than the US for years, and China is proving to be a solar powerhouse, seeing huge growth in the manufacturing of solar modules.
Nevertheless, American companies have begun to step up their game when it comes to solar modules. Electronic giant GE recently announced that they
would be throwing their hat into the solar ring by opening a new solar manufacturing facility in Aurora, Colorado. This new plant will be used to design and build new cadmium telluride thin-film solar panels for primarily large-scale commercial use. GE expects that the panels should meet or exceed the capabilities of comparable Chinese models, and sales are expected to begin in 2013.
Additionally, US solar manufactures have recently banded together to prevent Chinese solar panels from flooding the American market. The coalition, comprised of seven American solar manufacturers, is working to impose stiff duties on Chinese modules, which they claim will undercut prices and destroy American jobs. Led by the US arm of Solarworld AG, a German solar manufacturer, these companies are sending a stiff message to overseas corporations. The Chinese, have advised the US government not to “politicize” what they consider to be economic issues. With the US posed to become the largest consumer of solar in the next few years, disputes and expansion in the solar industry will become more and more common.
As always, Sol Systems is excited about the future of the solar industry, and looks forward to seeing how industry will respond to these new updates.
Next week, the Sol Systems team will be traveling to Dallas, Texas to attend the Solar Power International conference. SPI is the largest solar power and trade show in North America, and with over 24,000 professionals attending, the conference represents an exciting networking opportunity for the solar industry. With the first convention occurring in 2006, SPI has quickly become one of the most important and comprehensive events of its kind.
On Tuesday morning, Sol Systems’ CEO, Yuri Horwitz, will be moderating a panel called “Outlook on SREC markets.” The panel will discuss the successes and failures of the SREC market and offer insight into future trends and prices. As an expert on all things SREC, Yuri will be sure to lead a thought provoking discussion.
The panel, Outlook on SRECs, will meet at 10:30 am on Tuesday, Oct 18 in room C140 of the Dallas Convention Center.
About Sol Systems
Sol Systems is a solar energy finance and development firm that was built on the principle that solar energy should be an economically viable energy solution. With thousands of customers and hundreds of partners throughout the United States, Sol Systems is the largest and oldest SREC aggregator. We provide homeowners, businesses, solar installers, and developers with sophisticated financing solutions that help make solar energy more affordable. Sol Systems also helps energy suppliers and utilities manage and meet their solar RPS requirements efficiently by providing them with access to diverse portfolios of SRECs. For more information, please visit http://www.solsystemscompany.com.
Hope Shines Through Bankruptcy Clouds for US Solar Sector
All Eyes East
Competition has intensified for solar panel manufacturers as cheaper Chinese modules have become more widely available. Manufacturing costs are lower in China, due in large part to relatively cheap labor and low-cost loans from China’s state-dominated banking system.
Another factor that has driven down costs is a reduction of feed-in tariffs in some European countries, according to Gilligan.
“The demand they thought was going to be there in Europe for solar has drastically been reduced in 2011,” he said.
Solar manufacturer and project developer SunPower‘s investments in Italy were hit when the government reduced feed-in tariffs in response to debt crisis, according to project development analyst Brian Bailey.
“SunPower basically lost a major market, and we’ve been moving modules to other markets and trying to fill the gap,” Bailey said at the conference.
The Problem With Policy
SunPower’s experience in Italy also highlights the importance of policy risk in the solar industry, as firms are still working towards lower costs that would allow them to compete without government incentives.
Q-Cells is employing innovative means of raising project funds, such as going through a traditional project finance route but “wrapping” it in an insurance policy, according to director of new market development Nick Chaset. A wrap provides a guarantee against potential losses.
“We’ll provide a parental guarantee as a publicly traded company or we’ll go through a third party like [insurance company] Zurich,” Chaset said.
SunPower is continuing to fund projects using power purchase agreements, as well as lease financing, according to Bailey. The company’s creditworthiness benefits from French oil major Total‘s decision, announced in April, to buy 60% of the solar firm’s shares and provide $1 billion in credit support over five years.
“We have one of the strongest balance sheets in the world behind us”, Bailey said.
And the companies’ solid track records give them a leg up over less established firms.
“Big investment banks, financial institutions aren’t interested in taking risks on a new developer,” said Gilligan.
Two Certainties: Natural Gas And Taxes
But the US solar industry may face additional challenges in the coming years. One of the primary drivers behind a recent boom in solar projects is the option for solar developers to receive a 30% investment tax credit in the form of a cash grant, according to Gilligan. He does not expect the cash grant option to be renewed next year, which would force solar project developers to seek tax equity financing, which may not be as readily available.
And if the price of US natural gas fails to rise, it could act as a barrier to development of all renewable fuel generation sources.
“As long as this natural gas price stays around $4…it’s so cheap that it’s not going to be a good financial decision to build big wind and solar farms,” Gilligan said.
Competition is stiff in the solar manufacturing industry, with companies like Evergreen announcing their departure from the United States to China in order to reduce costs. Enormous global module supply has come online in the last two years to help fuel the rapid build-out in Europe, China and elsewhere, resulting in dramatic declines in solar module pricing. Some, like Gleacher and Company, are modeling module prices at around $1.30/watt right now. Others are actually predicting wholesale module costs at $1.10 in the next few weeks.
The result is a strange dichotomy of a manufacturing industry undergoing rapid growth and simultaneously undergoing a stressful reallocation of resources and a fairly pessimistic outlook on Wall Street. The WilderHill Clean Energy Index, which includes solar and other alternative-energy stocks, fell 5.3 percent last year, compared with a 12.8 percent rise in the Standard & Poor’s 500 index. Companies like SunPower, Yingli, JA Solar, Trina, Canadian Solar, MEMC, Suntech and others all produced significant negative returns, some upward of negative 20 percent.
This fall in module prices, and the corresponding difficulties for module manufacturers, will likely continue through 2011 as the world’s top solar market, Germany, further cuts its solar subsidies and a growing supply of photovoltaic modules outstrips demand, putting pressure on prices and producers’ profits. As others have noted, a weak euro will compound the problem for Chinese and U.S. manufacturers. Last year, Germany, Spain, France, Italy and Czech Republic all cut back their solar subsidies. Further cuts are expected in Germany and France in the first half of 2011 and in Italy in the second half. Those three markets account for around 70 percent of the global market, according to Bank of America Merrill Lynch. Next year may be the first year in which more solar is built in the United States than in Germany.
For the solar installer and developer community this is presumably welcome news (ignoring the risks, of course, that similar reductions in incentives may take place here). As solar module costs decline, so are total system costs since modules compose a significant portion of the overall costs of a solar system.
However, cost reductions do not uniformly impact the solar community. Because of economies of scale, module costs account for a much larger portion of commercial-sized solar system’s costs than residential. The impact is still more powerful with regard to utility sized projects. As a result, falling module costs disproportionately benefit larger systems, as illustrated the figure below (care of SEIA).
Not only are commercial and utility costs already significantly lower than residential costs, they are also falling more rapidly. Indeed, utility projects are falling in price at three times the rate that residential projects are. This is an interesting window into the solar industry in the United States, which is that solar systems will undoubtedly get BIGGER.
To compound this trend, as states drastically reduce or altogether cut their rebate and grant programs for residential and small commercial systems, the economics that once favored smaller projects are starting to disappear. States like New Jersey, California, Maryland, Pennsylvania, Ohio and many others have all gutted their tax-funded rebate or grant programs. American Recovery and Reinvestment monies that flowed through the states in much of 2009 and 2010 are nearing their ends. Although module costs are falling significantly, they are not falling (nor could they) by two to three dollars a watt , which was often the size of grant and rebate monies. The result is a further shift upward in size. In Massachusetts, for example, given the emphasis on a solar renewable energy credit (SREC) market, many developers are starting to focus exclusively on commercial and utility scale projects.
For residential focused installers and developers, this may be an opportunity or a challenge. Presumably, those firms that can secure large economies of scale in purchasing power will better weather these changes than those that cannot. Additionally, because size matters, the industry may see consolidation. Hopefully, it will also see aggregation or collaborative models, where residential and small commercial installers work together to secure better financing opportunities and engineer more sophisticated acquisition models. This, of course, is a primary focus of financing firms like Sol Systems. Additionally, power purchase agreements and lease agreements may gain prominence if effective costs rise for residential customers in the absence of rebates.
For commercial and utility developers, a move upward in size means a necessary move towards more complex financing instruments. It becomes a bit more difficult to make a pure equity play on a multimegawatt project – a blended debt/tax equity/first loss equity product is typically required to reduce risks and bring down the costs of capital. To see this approach succeed, the capital markets will have to open further to solar projects. A lack of access to debt markets and tax equity was a big part of what has slowed the growth in wind and large-scale solar in the last few years. So this may be a challenge. On the other hand, Chinese banks continue to push into the US market to debt finance multi-megawatt portfolios, so it may not only be Chinese modules the US industry is using, it may also be Chinese money.
In sum, as the industry grows, there will be a continued movement towards larger projects. To succeed, players will have to become more sophisticated. This will favor players in the residential space who are able to collaboratively or individually leverage economies of scale and acquisition models and players in the commercial and utility space who are able to better secure complex financing instruments.
Governor O’Malley Appoints Leading Educator, Solar Innovator to Board of Maryland Clean Energy Center
January 6, 2011 – ANNAPOLIS, MD
Gov. Martin O’Malley has appointed a prominent academic researcher and a solar industry finance expert to fill two vacancies on the Board of Directors of the Maryland Clean Energy Center.
“We are privileged to have two such high-caliber and forceful clean energy advocates join us as we move into our second year of operation”
Eric Wachsman, PhD, Director of the University of Maryland’s Energy Research Center, will serve through June 2015. George Ashton, co-Founder and Chief Financial Officer of Sol Systems, LLC, a national leader in aggregating solar renewable energy credits, is fulfilling a term that runs through September 2012.
Wachsman and Ashton join existing members of the Center’s Board of Directors who oversee its mission of helping consumers, supporting businesses and advising lawmakers in Maryland as the state scales up its clean energy industries and energy efficiency initiatives. Other Board members include Jeremy Butz, Carol Collins, Ken Connolly, Jeff Eckel – who serves as the current Board Chairman – and Malcolm Woolf, Director of the Maryland Energy Administration.
“I am so proud to announce the appointment of two very talented individuals to the Board of the Maryland Clean Energy Center,” said Governor O’Malley. “As Maryland continues to emerge as a national leader in clean energy, their leadership will help us move toward a better and more sustainable future for our children. I’d like to thank them for their willingness to step up and serve the people of our State as we work to find innovative ways to reach our clean energy goals in the toughest of times.”
“We are privileged to have two such high-caliber and forceful clean energy advocates join us as we move into our second year of operation,” said I. Katherine Magruder, Executive Director of the Maryland Clean Energy Center. “They will help facilitate the adoption and generation of clean energy along with the new jobs, consumer savings and reduction of greenhouse gas emissions that come with it.”
In addition to his leadership of UM Energy Research Center, Wachsman holds the William L. Crentz Centennial Chair in Energy Research at the University of Maryland, College Park. Previously, Wachsman was Director of the Florida Institute for Sustainable Energy and a professor of materials science and engineer at the University of Florida in Gainesville. He has authored dozens of research papers since beginning his career as an engineer for chip-maker Intel. He earned his PhD and Masters of Science from Stanford University. Wachsman is filling out the remainder of the Board term served by Dan Goodman.
Ashton has been instrumental in growing Sol Systems into one of the country’s leading aggregators of solar renewable energy credits, or SRECs. Solar system owners earn 1 SREC for every 1,000 kilowatt hours of electricity their systems generate each year. Before Sol Systems, Ashton was a Senior Account Executive at Fannie Mae, a government-sponsored enterprise chartered by Congress chartered to provide liquidity and stability to the U.S. housing and mortgage markets. Ashton earned his MBA from the Robert H. Smith School of Business at the University Maryland in College Park.
About Sol Systems:
Sol Systems is a solar energy finance firm. With thousands of customers and hundreds of partners throughout the United States, Sol Systems is the largest and oldest SREC aggregator. We provide homeowners, businesses, solar installers, and developers with sophisticated financing solutions that help make solar energy more affordable. Sol Systems also helps energy suppliers and utilities manage and meet their solar RPS requirements by providing access to diverse SREC portfolios. For more information, please visit www.solsystemscompany.com.
Many prospective solar energy owners are quick to notice that spot market rates for Solar Renewable Energy Credits (Solar RECs or “SRECs”) are typically higher than long-term SREC rates on the contract start date. For example, a person that owns a solar energy system in Delaware could sell a single SREC on the spot market for approximately $275 in December 2010, but if that same person wanted to lock-in at a 5 year SREC rate, she would only be able to get approximately $250 for each SREC produced between today and 2015.
This price difference sometimes leads solar owners to sell their SRECs on the spot market, particularly if they expect SREC prices to go up over time.
So, why would a solar owner choose to enter a long term SREC agreement?
The main reason a system owner would choose a long term contract is because they realize that spot market rates may not always stay high. These owners prefer to guarantee their SREC returns by locking into a fixed rate multi-year contract, which will give them long term security and a predictable source of income. If these system owners are correct, they will end up getting more income over time than they would have by selling their SRECs on the spot market.
But why are long term rates lower than current spot market prices?
There are a few reasons why multi-year contract rates are initially lower than spot market rates, and they relate to SREC buyers appetite to buy SRECs. Let’s start by considering the profile of an SREC buyer.
The ultimate SREC buyer is an energy supplier or utility that is subject to a state Renewable Portfolio Standard with a solar carve-out. These energy suppliers and utilities have the choice of:
(1) Building solar power plants and generating solar energy themselves
(2) Buying the environmental attributes of solar (SRECs) from independent solar energy system owners, or
(3) Paying an Alternative Compliance Payment (ACP) or a penalty fee for not meeting their legislative mandates
If these energy suppliers and utilities do not own operational solar power plants, they typically prefer to buy SRECs. If they want to buy SRECs they can do so by buying them on the spot market or they can enter multi-year agreements at a pre-determined price.
Most energy suppliers will hedge their bets by buying some SRECs on the spot market and some SRECs through multi-year agreements. However, in virtually all cases, these energy suppliers will contract for lower prices per SREC for multi-year agreements than they will pay on today’s spot market. There are a few reasons for this:
(1) They expect that they will not need to buy SRECs in the future. Why? They plan to build solar power plants and generate their own solar energy, so they won’t have to buy them from independent system owners.
(2) They expect that they can buy SRECs at lower costs in the future. Why? They anticipate that there will be more solar projects and that the increased SREC supply (http://www.solsystemscompany.com/faqs-recs-and-srecs) will lead to lower SREC prices.
(3) They want to wait and see what happens to requirements and prices in future years. Why? They expect that legislative changes may reduce or eliminate the requirement for them to buy SRECs.
In other words, energy suppliers themselves believe SREC prices will go down. Because of these expectations, energy suppliers are usually only willing to engage in multi-year agreements at reduced SREC prices. And these uncertainties are the very same risk factors that create SREC spot market volatility.
In summary, when choosing between the SREC spot market and a long term contract, a solar energy system owner should examine their appetite for risk and reward.
System owners who choose to sell their SRECs on the spot market get the reward of higher spot market prices today, but they are likely to face reduced or eliminated SREC values in future years. System owners who choose to sell their SRECs through long term contracts typically receive lower SREC rates today, but they get more certainty on their solar investment returns.
About Sol Systems:
As the largest and oldest SREC aggregator in the U.S., Sol Systems aggregates SRECs from independent solar energy system owners and sells them directly to energy suppliers and utilities through spot-market arrangements and multi-year contracts. Sol Systems operates in 13 states. For more information, please visit www.solsystemscompany.com.