The World's #1 Renewable Energy Network for News, Information, and Companies.
Untitled Document

Are Solar Developer Fees Declining?

"Treasury has consistently been racheting fees down" said John Marciano, Chadbourne Parke transactional attorney regarding U.S. Treasury evaluation of developer fees as part of solar energy system costs under its 1603 Grant Program.

The venue was the Novogradac  Financing Renewable Energy Conference held in Washington, D.C. on November 8th and 9th. Sponsored by Novogradac, the San Francisco-based boutique tax credit accountancy and Grateful Dead of RE Finance conferences, brought together CPAs, tax attorneys, investors, lenders and developers in its tax credit and finance road show.

Developer fees are profit margin and part of soft costs as reported recently in REW citing a soon-to-be-released NREL report. According to the report, soft costs make up between 41 and 44 percent of a commercial system and “Reducing soft costs is a major goal for the solar industry because it ultimately wants solar energy to price comparably with electricity from fossil fuel power plants.”

And while solar modules have declined in price by over 70 percent between 2005 and 2012, solar developers are sometimes left in the dark, trying to determine whether their profits should be reduced proportionately.

“An appropriate level of development fees  from what we’ve seen might be 15 percent with a range of 10 to 20 percent” commented Tony Grappone, Novogradac CPA partner in the Boston office referencing solar transactions he had advised on.

Treasury Benchmarks – A Clue

Despite dramatic reductions in hard costs, principally solar modules, solar energy remains in a pre-commercialization stage of its life cycle – not yet able to reach grid parity with traditional energy fossil fuels – and dependent on the federal 30 percent Investment Tax Credit and the 1603 Treasury Grant.

The 1603 Treasury Grant expired at the end of 2011, but projects that met Treasury’s ‘Beginning Construction’ test prior to year-end, have until January 1, 2017, the credit termination date, to be placed in service.

Because solar developers remain reliant on those federal subsidies, they are looking for rules of thumb on how to price in their profit  margins. In July 2011, the U.S. Treasury released 1603 grant cost basis benchmarks, included more broadly in its Treasury guidance,  explaining evaluation of cost basis in determining grant awards.

 

Residential/Small Commercial

Commercial

Large Commercial/Utility

Size Range

10 – 100 kW

100 – 1000 kW

>  1 MW

Turnkey Price per Watt

+/- $6

+/- $5

+/- $4

Although the 1603 has expired, hundreds of U.S. solar projects that safe-harbored solar equipment, are under Treasury scrutiny during evaluation of project cost basis and developer fees that are baked in. Given the choice, most developers opted for the 1603 Grant over the ITC to increase project cash flow for investors rather than seek out those with tax appetite for a diminishing number of tax equity investors.

Because the 1603 is a grant, rather than a tax credit, panelists felt that developer fees may be under more scrutiny on the front end through Treasury evaluations, rather than what would be a potential future audit under the IRS evaluation of the tax credit.

Avoiding Developer Brain Damage

Treasury benchmarks were issued as of Q1 2011, and while solar installation cost per watt, the industry metric, has declined over the last eighteen months, those benchmarks have not been updated.

Solar developers are pulling their hair out – known in the finance world as ‘brain damage’ – over how to appropriately price in their fees.

During the closing conference session titled "Moving Forward – Leveraging Lessons," one developer asked about how market pricing should determine his fees, giving an example of a typical 1 MW project that had declined in price from $4.00/W in 2011 to $2.00W in 2012.

 

2011

2012

System Size

1MW

1MW

Cost/Watt

$4.00

$2.00

Total System Cost

$4,000,000

$2,000,000

Developer Fee %

10%

10%

Developer Fee

$400,000

$200,000

As the table above shows,  if priced on a percentage basis, developer fees would be halved.  Reductions in developer soft costs – installation labor, customer acquisition, marketing costs, permitting fees, design – along with a project mark-up – have not declined as rapidly as hard costs, reducing developer profits on what were already “skinny deals.”

“Developers might consider a fixed dollar amount, rather than a percentage fee, to bake in, to get around this problem and avoid brain damage,” Grappone added in his closing remarks.

Chris Cather is founder of bluecrab solar, a developer and industry advocate based in Annapolis, Maryland. For advisory services,  project origination, diligence, financing, proposal  writing or 1603 and Maryland state grant filings, contact bluecrab solar through Chris Cather at ChrisCather@gmail.com.

Lead image: Frustrated Man via Shutterstock

Untitled Document

RELATED ARTICLES

Floridians Seek To Let the Sunshine In Via Solar Power PPAs

Mike Antheil Florida, the Sunshine State, is infamously unfriendly to the solar market. Despite the abundance of prime sunshine, which ranks the state third in the nation for solar potential, less that 1/10th of 1 percent of Florida’s e...

Welspun Commissions 52-MW Solar Power Plant in India

Vince Font Leading Indian solar developer Welspun Renewables has commissioned the construction of a massive solar plant in the state of Maharashtra. The planned 52-megawatt (MW) solar plant will be located in the city of Baramati. The...

Regional News from the July/August 2015 Digital Edition of Renewable Energy World

Renewable Energy World Editors EcoFasten Solar announced that it launched a new mounting "Rock-It System" that it would be displaying during Intersolar. Product compliance was determined through testing per UL Subject 2703, which reviews integr...

SkyPower Inks $2.2 Billion Deal for Massive Solar Power Plant in Kenya

Eric Ombok, Bloomberg Kenya’s Energy Ministry and SkyPower Global Ltd. will sign a $2.2 billion agreement on Sunday that paves the way for the Canadian company to develop a 1-gigawatt solar project in East Africa’s biggest economy. The solar pro...
Chris Cather is founder of bluecrab solar, a commercial developer and industry advocate based in Annapolis, Maryland. He is currently evangelizing innovative new sources of financing in the solar energy industry by frequently contributing to the o...

CURRENT MAGAZINE ISSUE

Volume 18, Issue 4
1507REW_C11

STAY CONNECTED

To register for our free
e-Newsletters, subscribe today:

SOCIAL ACTIVITY

Tweet the Editors! @megcichon @jennrunyon

FEATURED PARTNERS



EVENTS

2015 AREDAY Summit

The 12th Annual AREDAY Summit, August 8-13th in Snowmass Colorado. Engag...

Presenting at Infocast's Utility Scale Solar Summit 2015

Oct. 21, 2015 4:30-5:15pm Albie Fong, National Director, Solar Frontier ...

Utility Scale Solar Summit 2015

Oct. 21, 2015 4:30-5:15pm Albie Fong, National Director, Solar Frontier ...

COMPANY BLOGS

Behind Every Good Decision

When something about your business isn’t working, you set out to c...

Clean Energy Patents Maintain High Levels in First Quarter, Solar L...

U.S. patents for Clean Energy technologies from the first quarter of 201...

An Overwhelming Paradox

I’m sure we’re all very familiar with the feeling of being o...

NEWSLETTERS

Renewable Energy: Subscribe Now

Solar Energy: Subscribe Now

Wind Energy: Subscribe Now

Geothermal Energy: Subscribe Now

Bioenergy: Subscribe Now  

 

FEATURED PARTNERS