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.
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 firstname.lastname@example.org.
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.