Since our first Project Finance Journals in 2012 (check out this throwback from October 2012), we have been gathering statistics on PPA rates in each state market, feed-in tariff programs, and all-in asking prices in three different project size tiers: <500kW, 500kW – 2MW, and >2MW. Why do we share these stats with the industry? We’ve found it helps our developer and investor clients understand what “market” is for a solar deal, plus it helps make commercial solar a little bit less like the Wild, Wild West.
Looking back at these statistics over the past year, one trend emerged above the rest: all-in prices for projects under 500kW are trending downward, meaning developers are asking for less on average for a deal. Why?
One correlation we can point to is falling incentives across the board. The California Solar Initiative (CSI) dried up for PV. SREC states such as New Jersey, Maryland, and D.C. are facing declining alternative compliance penalty (ACP) schedules which are accompanied by falling SREC prices. In other markets, many incentive regimes have changed from “what you see is what you get pricing to “how low can you go?” competitive bid programs. The Connecticut ZREC program, Rhode Island feed-in tariff, and LIPA are just a few examples. As falling incentives make projects in these markets less cash rich, the topline price for projects will decrease, regardless of what installed costs (e.g. module prices and BOS) are doing.
On top of that, the cost of capital for a sub-500kW deal has not declined in the same way that is has for the 500kW – 2MW+ space. A given developer has less bargaining power on these smaller deals with the exception of Massachusetts, where sub-650kW deals are prized for their high SREC factor.
In sum, margins are getting tighter and tighter for smaller deals. In response, developers are taking smaller development fees or cutting costs where they can. Given the smaller margins – and higher transaction costs – of sub-500kW deals, it’s best to close a deal quickly and pivot to the next opportunity. The sub-500kW space is a volume game, and the player who scores the most deals wins. The upside is that as costs continue to come down, soft costs will follow suit if developers scale through repeat transactions with trusted parties.
This is an excerpt from our May 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 firstname.lastname@example.org.
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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.