Year after year, we see similar trends in Q4 as developers and EPCs rush to complete deals to meet investors’ and various incentives’ end-of-year deadlines. Q4 is typically the biggest quarter of the year for installs, and 2016 may be the biggest surge of them all. This means that next year will carry a sense of urgency much higher than in previous years.
In a normal year, an investor has an interest in closing and placing a deal in service by the end of the calendar year in order to claim the tax credits as quickly as possible. Many investors (tax equity investors, among others) calibrate their tax liability dedicated to solar investment tax credits (ITCs) carefully each year and care very much about the delivery date of those credits. If a deal slips into the following year, the developer and EPC will likely be penalized in the form of downward capital adjusters or liquidated damages to reflect the lost value to the investor who is unable to claim the credits in the current year. Nevertheless, the actual value of the ITC isn’t changing – the project has the same number of credits regardless if it’s placed into service 12/31/15 or 1/1/16. So while an investor may grumble and reduce their pricing, they will still move forward with the investment.
With the looming drop in ITC from 30% to 10% approaching, the difference between a placed-in-service date of 12/31/16 and 1/1/17 will be much more than a few percentage points off the investment amount. Completion in Q4 is absolutely essential to closing the deal. Unless an extension of the investment tax credit and/or commence construction language passes Congress, project execution will be a massive risk for developers, EPCs, and investors alike. Projects slated for 2016 that slip into 2017 will either not move forward or face significant liquidated damages to account for the lost value of the tax credit – likely eroding any profit margin for the developer or EPC. And any additional execution risk, already unwelcome in any normal year, will not be tolerated by any rational investor.
With execution risk in mind, 2016 will be the year of “get it done” – and fast. Every protracted negotiation (e.g. a months-long PPA negotiation with a host customer) and each additional risk factor added to a deal increases the possibility that the project will not place in service in 2016. In development, it is important to spend less time focusing on maximizing every single deal term, and more time crafting a strategy to meet a December 31, 2016 placed-in-service deadline. As they say, “done is better than perfect.”
Developers who are most prepared for 2016 are already assembling their deals teams for their 2016 pipeline. Their equipment is secured, and the O&M, third-party engineers, and EPCs are on-call. Same goes with their financiers. 2016 is not the year to reinvent the wheel. Work with partners with surety to execute or with whom you have worked with before; each party will be familiar with the other’s documents, negotiations will be faster, and teams are more likely to meet a year-end placed in service date.
Even if you’ve done all these things, remember: sometimes development timelines can be out of your hands. You may be waiting for a report from your third-party engineer. Or, maybe the utility is the hold-up, and your interconnection takes longer than expected to go through. To win the race to 2017, it’s best to plan ahead and leave plenty of buffer.
It is possible that the ITC will be extended, and also that commence construction language will be adopted. And, at Sol Systems, we’re working hard to advocate to make that happen (we hope that you are too). But if the ITC bumps down to 10% in 2017 and we are left without commence construction, will your pipeline be left stranded?
This is an excerpt from our November 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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