Below, we have included excerpts from Sol Systems’ January 2014 Project Finance Journal, which is a monthly email newsletter that our project finance team distributes to our network of clients and solar stakeholders. Our newsletter contains solar statistics from current real-life solar projects, trends and observations gained through monthly interviews with our solar project finance team, and it incorporates news from a variety of solar industry resources.
If you would like to receive our Solar Project Finance Journal via email every month, please email firstname.lastname@example.org with a request to be added to our Project Finance Journal distribution list.
Project Finance Statistics
The following statistics represent some “hot,” high-quality solar projects and portfolios that we are actively reviewing on behalf of our investor clients. Because the statistics below represent projects with the strongest financial profiles, developer asking prices may be “above market.”
Please note that we have intentionally excluded select projects that have particularly “outlier” pricing, including a California portfolio with single-axis trackers, projects in Hawaii, and certain projects located in utility territories with high rebate programs.
Capacity: 250 kW – 12 MW
Average Capacity: 2.57 MW
Developer all-in (asking) prices**:
- <500 kW: $2.50-3.30/Watt
- 500 kW – 2 MW: $2.20-2.65/Watt
- >2 MW: $2.00-2.37/Watt
PPA rates & escalators (20-year terms, unless noted):
- AZ: 12.0 cents/kWh with 2.0% escalator
- CA: 12.0 – 12.5 cents/kWh with 2.0% escalator
- CT: 8.5 -15.0 cents/kWh with 1.0% escalator
- MD: 9.0 cents/kWh with 2.0% escalator
- NJ: 9.6 – 11.8 cents/kWh with 2.0% escalator
Recent Feed-in Tariff Rates (20-year terms unless noted):
- CA: 12.3 cents/kWh with no escalator (CREST)
- CA: 16.1 cents/kWh with no escalator (LADWP I)
- HI: 23.8 cents/kWh with no escalator (HECO)
- NY: 22.0 cents/kWh with no escalator (LIPA I)
- OR: 19.3 cents/kWh with no escalator (PGE)
Maryland: The state of “Strong Deeds and Gentle Words” has been showing some strong projects lately. However, the market is still reliant on SREC values, and a “good” project can quickly become unfinanceable if the SREC assumptions are no longer valid. A safe bet is to lock in an SREC strip contract as early as possible. The good news is that multi-year SREC contracts are more available than they once were. Contact our team if you need a fixed price strip for your Maryland solar projects; we’d be happy to help.
Massachusetts: The MA SREC-II regulation rulemaking process has begun. The official draft regulation is set to be published in the Massachusetts Register on January 17, but an unofficial version is available on the website for the Massachusetts Department of Energy Resources (DOER). Written public comments will be accepted through January 29, and a public hearing will be held on January 24. Following this public comment period, the draft regulation will go through two more rounds of reviews by the Joint Committee on Telecommunications, Utilities, and Energy, and finally the DOER, which means that SREC II will hopefully launch in the spring.
Minnesota: An administrative law judge recommended the Xcel procure energy from solar instead of natural gas plants. Xcel Energy will purchase about 1/3 of its solar energy requirements from Geronimo Energy, and Geronimo is planning 100 MW of distributed generation solar across 20-25 sites in 18 counties. Each project will range from 2-10 MW in size. The Minnesota Public Utilities Commission is expected to issue its final ruling in March. Minnesota’s Renewable Energy Standard mandates that utilities must provide 25% of their electrical generation from renewables by 2025, and that Xcel add an additional 550 megawatts of new electricity generation by 2020 to meet a predicted energy demands.
New York: The solicitation for the LIPA II program will close on January 31, and we would advise developers to model lease costs carefully. In the past, we have conducted diligence on a number of LIPA I projects that were unattractive to financiers due to unreasonable lease costs and high roof replacement costs. Meanwhile, the decrease in NYSERDA’s PON 2112 rebate is making it more difficult to finance commercial and industrial systems smaller than 200 kW. The rebate was previously $1.15/Watt for the first 50 kW and $0.75/Watt for the remaining 150 kW, but the rebate has dropped to $1/Watt and $0.60/Watt, respectively.
Rhode Island: The winning projects in the last round of the Rhode Island distributed generation solicitation have been announced. Six contracts were signed for a total capacity of 2.996 MW. It was a competitive solicitation, and the awarded feed-in tariff prices were bid down, meaning that the newest projects must lower overall costs to be financeable. High lease costs especially make projects unattractive to financiers.
Trends & Observations
Where Will System Cost Decreases Come From? – Solar panel prices have stabilized for the moment, or at least seem unlikely to fall further…for now. In fact, BNEF analysts predict that polysilicon prices are expected to rise in 2014 due to increased global demand. Solar experts agree that future solar energy system price decreases are most likely to happen with balance of system costs (such as racking) and soft costs (such as customer acquisition, financing, and permitting). According to Herman Trabish of Greentech Media (GTM), there is still a cost difference of approximately 50 percent related to racking equipment and hardware between the U.S. and Germany, which suggests one promising area for improvement. And according to GTM’s Stephen Lacey, “leading solar companies are developing new project management tools, crafting new sales strategies, and buying up lead generation companies” to address customer acquisition costs which currently hover around “$0.49 per watt, or about 10 percent of the total cost of an installation.”
Winds of Change with Solar Project Returns – As we noted in last month’s journal in Rising Interest Rates and Project Returns, and as Deutsche Bank and Nat Kreamer, CEO of Clean Power Finance, stated more recently, anticipated rise in interest rates will put pressure on solar developers to improve their project returns in order to attract investors. While there is good reason to believe that financing transaction costs will decrease as the industry matures (thanks to template legal docs and streamlined processes), there is little reason to believe that investors’ actual project return requirements will move in a downward direction. This is particularly true for the majority of solar developers who can’t obtain funds from the public markets via securitized portfolios and instead obtain financing from investors that expect infrastructure investment-like returns. In fact, for these developers, return requirements may easily go up depending on the overall investing and return atmosphere, as in the example of an increase in interest rates.
In addition to ensuring projects have 8-10%+ returns, which realistically account for lease costs, permitting, and roof upgrades, there are some more subtle points that developers should take away: each financier has dynamic return requirements that are may move upward or downward depending on financial conditions and unique risk appetites. Financial firms like Sol Systems that interact frequently with a variety of investors are positioned to have a pulse on market conditions and can advise both developers and investors on fair, market-based project prices and returns.
Net Metering Fight Moves to Colorado – The debates about net metering are only just beginning. Utility commissions in Arizona and California have already started to issue judgments on net metering questions, and Colorado’s Public Utility Commission will review Xcel Energy’s compliance plan this February. Xcel is Colorado’s largest publicly owned utility, and they have claimed that the 2014 avoided cost for solar capacity is 4.6 cents/kWh, but that solar owners are receiving 10.5 cents/ kWh through net metering. Instead of asking for a change to the net metering rate, or a new fee for solar customers, Xcel has asked that the difference be covered through the state’s Renewable Energy Standard Adjustment (RESA) charge. The RESA charge appears on customer’s utility bills and covers the utility’s incremental cost of compliance with Colorado’s Renewable Energy Standard (RES). Rick Gilliam of Vote Solar stated that after proposed NEM rollbacks failed in Arizona, Xcel seems to have “decided to try something more subtle and creative.” Although it does not look like there will be any significant cost impacts to the solar industry from net metering in 2014, the debate over net metering will continue. These debates will be increasingly important to the industry as costs come down, economics get thinner for projects, and the ITC steps down to 10% in 2017.
- Developers can control the speed and efficiency of the closing process by being extremely organized in their documentation and due diligence. Often, delays in reaching financial close are due to developer’s self-inflicted wounds, like procuring the wrong permits, underestimating roofing or interconnection costs, or using versions of legal documents that have never been third-party verified and financed. On the contrary, when developers are extremely organized, as we saw with a recent portfolio in Connecticut, the financing process can be very efficient.
- Some commercial project developers, particularly those relying on competitive RFPs, are struggling to compete with developers who have a lower cost of capital and access to public money. CFO of SolarCity, Robert Kelly, recently stated that “Losing more money means we’re investing more capital and creating more value.” This kind of attitude puts developers without deep pockets in a tough position and makes it more important than ever for all types of developers to ensure broad access to the best financing sources.
- Q3 of 2013 was the second-largest quarter for solar installations in U.S. history. GTM analysts believe that 2013 may be the first year in more than a decade in which more solar is installed in the U.S. than in Germany.
- Prospective solar hosts are getting wiser on solar procurement. A Maryland RFP recently provided a plug-in SREC assumption in order to stabilize bids among competitors. Additionally, one of our Hawaii developer clients keeps the host involved in the development process, informing hosts in advance that they may need to adjust PPA price, EPC cost, and interconnection costs to get the project done.
- It is important that developers refrain from reinventing the wheel, especially when seeking tax equity. A new technology, unproven sponsor equity provider, or other risk factor in a project will likely make a potential tax equity investor pass on the deal. A good tax equity portfolio has minimal complexity.
- A simple and cheap technology breakthrough by our friends at North Carolina State University may increase solar cell efficiently by more than 30%. It will be interesting to see if and how the improvement will come to market.
Our SREC portfolio managers are seeing both strong SREC prices and high volume activity in the MA, MD, and NJ SREC markets. Specifically, prices in NJ and MA are starting to hit the thresholds that financiers demand for their investments. Perhaps more importantly, we are seeing increased availability of 3 and 5-year SREC strips for commercial projects thanks to improved price stability and the current supply outlook. Developers or investors with SREC producing assets, regardless of the geography, should contact our SREC team at email@example.com or (202) 588-6454. We would be happy to discuss SREC contract options for all available state markets.
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.