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

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

RELATED ARTICLES

Renewable Energy Finance

Clean Energy ETFs Are on a Tear

Eric Balchunas, Bloomberg Green investing used to be synonymous with losing money. But while the S&P 500 Index is up 2 percent this year, and the MSCI All-Country World Index is up 5 percent, clean energy ETFs have double-digit re...

Wheels, Towers and Trees: Unconventional Renewable Energy Technologies in the Pipeline

Andrew Williams, International Correspondent A number of companies around the world are developing novel technologies in an effort to grab a slice of the global renewable energy market.  Although many of these technologies are simple incremental improvements to e...
UK Parliament Clean Energy Leaders

UK Government Names Clean Energy Cabinet Members

David Appleyard, Contributing Editor With the UK general election now over and a majority Conservative Party government in place, the re-elected Prime Minister David Cameron has now named key members of the government charged with steering the UK’s clean energ...
Microgrids

Coast to Coast and Across the Electric System, Microgrids Provide Benefits to All

Dick Munson, Environmental Defense Fund At the most obvious level, microgrids could disrupt today’s utilities and their regulated-monopoly business model, because they challenge the centralized paradigm. In a nutshell, microgrids are localized power grids that ha...
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

03/01/2015
Volume 18, Issue 3
file

STAY CONNECTED

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

SOCIAL ACTIVITY

Tweet the Editors! @megcichon @jennrunyon

FEATURED PARTNERS



EVENTS

EU PVSEC 2015 (European PV Solar Energy Conference and Exhibition)

The EU PVSEC is the largest international Conference for Photovoltaic re...

CA Wine Industry's 2015 Solar Update- WEBINAR

Proceeds from event registration will go to the CA Sustainable Win...

Energy Security: Opportunity Power with the Sunny Boy Secure Power ...

Wouldn’t it be great to have a grid-tied inverter that could still...

COMPANY BLOGS

EU PVSEC 2014: Call for Papers Receives Great Response

More than 1,500 contributions apply for presentation in AmsterdamScienti...

EU PVSEC 2014 extends its Scope

Added focus on application and policy topicsAbstracts for conference con...

Solar Impulse Flying From China to Hawaii

The team behind Solar Impulse, the solar-powered airplane, is prepa...

NEWSLETTERS

Renewable Energy: Subscribe Now

Solar Energy: Subscribe Now

Wind Energy: Subscribe Now

Geothermal Energy: Subscribe Now

Bioenergy: Subscribe Now  

 

FEATURED PARTNERS