Every month, Sol Systems distributes a newsletter, the Sol Systems Project Finance Journal, to our community of solar developers and investors. The journal features solar finance statistics, trends, industry news, and SREC market information. We gather this information from our relationships and experience aggregating SRECs and financing commercial and utility scale solar projects.
We have included excerpts from our August Project Finance Journal below. If you have any questions about this information, wish to receive our monthly newsletter via email, or have a solar project in need of financing, please contact our team at firstname.lastname@example.org. We would love to hear from you.
Project Finance Statistics
Characteristics of “Hot Projects”
The Sol Systems team is busy closing a number of 2013 projects and starting to work on 2014 projects. Below are some aggregated statistics on high-quality projects that are not yet contracted.
Capacity: 300 kW – 28 MW
Average Capacity: 3,389 kW
Developer all-in (asking) prices**:
- <500 kW: $2.50-3.03/Watt
- 500 kW – 2 MW: $2.12-$2.60/Watt
- >2 MW: $2.20-2.58/Watt
**Does not include utility-scale Caribbean projects where competitive prices currently average $3.50/Watt. Also, does not include 3 operational portfolios.
Average PPA rates (20 year terms unless noted):
- AZ: 7 cents/kWh with 2% escalator
- CA: 13 cents/kWh with no escalator
- CT: 15 cents/kWh with 1.5% escalator
- MA: 10 cents/kWh with no escalator
- NM: 8 cents/kWh with 1.75% escalator (25 years)
- NJ: 11 cents/kWh with 2% escalator
- TN: 11 cents/kWh with CPI as escalator
- Puerto Rico: 19 cents/kWh with 1% escalator
Average Feed-in Tariff Rates:
- CA: 17 cents/kWh with 0% escalator (LADWP)
- IN: 20/26 cents/kWh with 0/2% escalator (IPL/NIPSCO, 15 years)
- FL: 15 cents/kWh with 0% escalator(GRU)
- NY: 22 cents/kWh with 0% escalator (LIPA)
- RI: 28 cents/kWh with 0% escalator (NG, 15 years)
Please let us know if you have any late-stage 2013 projects that have run into financing hurdles, or if you are looking to sell any operational solar assets. We would love to help you with your solar financing needs.
Trends & Observations
What To Know About A YieldCo
A few weeks ago, NRG Energy Inc. launched the solar industry’s first “YieldCo.” NRG’s YieldCo, NYLD, is not purely solar, but it includes 2 distributed generation solar portfolios, along with 11 utility-scale solar, wind, and natural gas power plants. The IPO brought in $431 million – more than announced expectations. By spinning off some of its generation assets, NRG has raised capital that it can use for other projects.
If the solar industry is to continue its growth curve, cheaper sources of capital will be needed (not to mention new sources of tax equity), so the YieldCo IPO success is interesting for a few reasons. First, it sets a precedent and paves a path for more renewable energy YieldCos to follow. More importantly, it shows that investors are becoming more comfortable with renewable energy as an asset class.
Sometimes the term “YieldCo” is used as a catch-all term for yield-oriented investments including MLPs and REITs, and sometimes YieldCos are specifically meant to be only “C” corporations designed to pass through dividends. In NRG’s case, it is a C corporation that allows developers to put their renewable generation into a dividend-oriented company in which shareholders receive dividend payments. This YieldCo is not bound by the investment and income rules of MLPs or REITs – and it did not require any new governmental actions (which must still be worked through for solar MLPs and REITs).
If a YieldCo has a tax bill, it can take tax benefits such as MACRS depreciation, ITC, and PTC – and carry them forward. Monetizing the tax benefits would be a challenge for a solar-only portfolio, however, the NYLD portfolio includes fossil fuel assets, which carry tax liabilities. Future solar YieldCos may be able to use a mix of older solar assets (that have utilized tax benefits) with newer solar assets.
While the average solar developer is not well equipped to create their own YieldCo and benefit from the lower sponsor equity costs, they may be able to sell their nearly or fully operational assets to a well-capitalized company that is looking to create a YieldCo.
Here is a brief update of the latest solar market news, according to our project finance team:
- California: Commercial and utility scale markets remain very strong and the residential market has been experiencing record growth. In some utility territories, systems are economical with no additional incentives beyond the 30% ITC.
- Connecticut – The second solicitation of Connecticut’s ZREC program awarded contracts to winning bidders a couple of weeks ago. Despite decreased ZREC award pricing, developers have succeeded in negotiating some high PPA rates. CT has some of the highest electricity rates in the country, resulting in some profitable project opportunities in the state. More on our blog.
- New York: New York’s Public Service Commission has authorized modifications to the state’s renewable program. This will allow NYSERDA to revise the design of the NY RPS, offer direct incentives for systems between 50-200 KW, and raise the minimum size of the competitive bid program. Despite the positive legislative news, projects in upstate New York will need a high incentive to make projects pencil, and deals in upstate New York, where energy prices are low, will be at a distinct disadvantage. One of our investor clients is actively seeking investment opportunities in projects under 500 kW. Developers should be able to demonstrate a clean, straightforward opportunity with project returns above 11-12% on an after-tax unlevered basis (these are generally good principles for smaller projects).Rhode Island: This relatively small FIT program’s 3rd enrollment of the year will open in September. This round will be conducted as a competitive solicitation for all projects, even systems under 500 kW, that previously had been able to lock into a fixed rate. Developers in this market should negotiate site leases at market-based prices with hosts and take measures to ensure that their commercial-scale projects can be grouped into portfolios with other projects that have similar host credit quality and standardized legal documents. Tennessee: Recently in Tennessee, we have seen incentive awards from the Tennessee Valley Authority, including an RSO of a 4 cent base price combined with a floating electricity rate, and the SSI of a fixed 8 cent PBI for 10 years. While these incentives may increase development for a specific project opportunity, we have noted that project economics tend to be very tight, and developers will have to manage costs adeptly in order to make economics work for potential investors.
- Rhode Island: This relatively small FIT program’s 3rd enrollment of the year will open in September. This round will be conducted as a competitive solicitation for all projects, even systems under 500 kW, that previously had been able to lock into a fixed rate. Developers in this market should negotiate site leases at market-based prices with hosts and take measures to ensure that their commercial-scale projects can be grouped into portfolios with other projects that have similar host credit quality and standardized legal documents.
- Tennessee: Recently in Tennessee, we have seen incentive awards from the Tennessee Valley Authority, including an RSO of a 4 cent base price combined with a floating electricity rate, and the SSI of a fixed 8 cent PBI for 10 years. While these incentives may increase development for a specific project opportunity, we have noted that project economics tend to be very tight, and developers will have to manage costs adeptly in order to make economics work for potential investors.
Are Investors Depreciating the Value of Depreciation?
While the topic of depreciation is admittedly boring to many, it is an important consideration when it comes to solar project valuation. One of the financial benefits of solar projects is MACRS (the Modified Accelerated Cost Recovery System), which allows solar assets to be depreciated for tax purposes over five years, instead of the 20-year book life of the system. In addition, any project built in 2013 qualifies for bonus depreciation, meaning that 50% of the asset can be depreciated in Year 1. MACRS and bonus depreciation certainly provide value to investors, but we have seen that some of our investor clients attribute more value to bonus depreciation than others, and we have heard that other investors in the market are not valuing bonus depreciation at all. The difference in the valuation may be attributed to the investors’ tax strategy, their current and future year tax liabilities, and their desire to include the depreciation expense on their income statement. As for the investors that claim that bonus depreciation has no value — perhaps it is one lever in their negotiating strategy.
Massachusetts Clearinghouse Results: It’s Good to be in SREC I
The results are in for SREC I. The 2012 Massachusetts Clearinghouse Auction cleared only 3 of the 38,866 SRECs deposited into the auction. However, in a surprise move, the DOER proved its commitment to its auction mechanism and announced it will buy all remaining Clearinghouse SRECs at the $285 price. The announcement led to a jump in future year MA SREC values, with 2013 SRECs bid at $245 and 2014-2015 strips bid at $260.
How will next year’s Clearinghouse perform? It is impossible to know, but there is an expected SREC undersupply in 2015, and compliance buyers will feel increased pressure to hedge against paying the alternative compliance penalty (ACP) of $550.
If you have projects in the SREC I program, we can help manage the complexity of monetizing SRECs, and we may also provide you with financing options for commercial-scale or virtual net-metered projects. We offer SREC spot market solutions, as well as 3, 5, and 10-year fixed price contracts to systems accepted into SREC I.
As for SREC II, the DOER is working diligently to design a second Solar Carve-Out Program. The most recent proposed details for the SREC II program were announced in a Solar Stakeholder meeting held on Monday, August 12th, and the presentation has been made available on the DOER website.
Sol Systems is currently offering Sol Brokerage to any projects in SREC II. Our fixed pricing will be announced after the DOER releases the structure for the SREC II program. Read our full analysis on the Massachusetts Clearinghouse.
Pricing for three and five-year fixed rate SREC contracts remains consistent in all markets this month thanks to relatively stable market conditions.
In Massachusetts, we continue to offer 3, 5, and 10-year annuity SREC contracts for SREC I projects. We are also proud to offer a Brokerage solution for projects that will be in SREC II.
In addition to helping clients secure SREC contracts for their solar projects, we also offer SREC portfolio management services to developers and investors who own SREC-producing solar assets but may not have the expertise or resources to manage them on a daily basis. We work with these clients to create and execute a customized step-by-step strategy to maximize the profitability of their SREC portfolio.
To learn about our SREC services, please contact us at email@example.com or 888-235-1538 x 1.
About Sol Systems
Sol Systems is a boutique financial services firm that offers investor clients direct access to the renewable energy asset class and provides developers with sophisticated project financing solutions. Founded in 2008, Sol Systems focuses on meeting the most critical needs of the industry, including SREC monetization, capital placement, tax equity, and New Market Tax Credits. To date, the company has facilitated financing for thousands of projects and hundreds of millions in investment on behalf of Fortune 100 companies, private equity, family offices and individuals. For more information, please visit www.solsystemscompany.com.