The shortage of project finance is a limitation to the non-residential, commercial and industrial (C&I) sector of the solar market. Especially compared with other sectors of the market, C&I distributed generation solar is plagued with high transaction costs and a lack of standardization. Though there is no shortage of solar investors trying to break into the promising solar asset class, there is a true shortage of financeable, quality project pipeline. This lack of financeable deal flow is stifling the market and limiting the growth potential of the U.S. solar industry.
To help investors in the search of a “good” project – and to help developers increase the likelihood that a given project will attract third party investment, Sol Systems has developed the below infographic to serve as a guide to developing the perfect project.
Here are some key takeaways and observations:
- Hot markets – Not many surprises here. These “hot” market states represent geographies from which we have seen the most deal flow. Note emerging markets such as New York and Connecticut have promising incentive programs, and several SREC states remain hot. The West remains dominant because of the mature market, high solar irradiation, and high electricity prices.
- Risks – Offtakers with poor credit and projects with unproven technology will have difficulty attracting third party investment. In solar renewable energy credit (SREC) states, SRECs will be regarded as uncontracted revenue if an SREC strip has not been secured. Many investors also prefer to work with a developer who has an established track record in solar; it shows they will be able to get the deal done. Different investors value these risks differently, but in general, if a project displays too many of these risks, it may be a good idea to abandon it in favor of a more promising opportunity rather than devote so many costs to a risky project that may never come to fruition.
- PPA rates – Notice that PPA rates are lower in some of the SREC markets such as D.C., New Jersey, Massachusetts, and Maryland. That’s because SRECs create additional income from each project opportunity in these markets. Hawaii, of course, sticks out because of its high electricity prices.
- All-in prices – In the West, a mature market allows for a broad range of project sizes and lower EPC costs. In the Northeast, small projects are most viable because of the incentive structure in states like Connecticut and Rhode Island. Small projects, however, necessitate above market IRR’s.
- Investor Deal Size Preference – Investors generally tend to prefer larger projects. Smaller projects can still be profitable, especially when grouped into a portfolio that can lower transaction costs.
Please note that these numbers were taken from aggregate data from Sol Systems’ monthly project finance journal, as well as experiences working alongside corporate investors, utilities, banks, and family offices to place capital into the solar asset class.
About Sol Systems
Sol Systems is a boutique financial services firm that offers investor clients direct access to the solar 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 facilitated 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.