What will solar energy finance in the U.S. look like in 2013?
While the global market forecast for solar is shaping up nicely, the US market is faced with a series of fiscal cliffs, declining natural gas prices, and a post-1603 world with diminishing tax appetite.
Not good news for financing commercial solar projects.
But Yuri Horwitz, founder and CEO of Sol Systems, for one, is optimistic. Yuri is frequently on the speaking circuit at renewable energy finance conferences evangelizing new sources of solar finance in the post-1603 landscape or raising project finance, educating corporate investors on tax investment structures.
We caught up with him in January after seeing him speak at both the MD-DC-VA SEIA annual conference and the Novogradac Financing Renewable Energy conference in Washington, D.C. in November of last year. We sat down with Yuri at his Sol Systems office in Washington, D.C. to ask him how he sees 2013 shaping up.
What do you see as the state of tax equity as we begin 2013?
Three to four billion dollars in third party tax equity will be needed in 2013 to finance solar projects. The traditional tax equity investors, banks like Wells Fargo, Bank of America, PNC, and De Lage Landen are a small group that has been reduced dramatically since the credit crisis of 2008. They will continue to play a critical role in the industry, but new sources of capital are needed. Raising tax equity, what we term tax-advantaged capital, is difficult. What we see changing in 2013–2014 are new corporate investors coming into the space. They would fit into the non-traditional TE investor group that has tax liabilities.
Well the good news is, and this was a surprise, the 50% first year bonus depreciation was extended for another year for properties PIS in 2013 as part of the American Taxpayer Relief Act of 2012. So that should be an additional selling point to investors, or, at least those who can monetize the depreciation.
What we found interesting is that, yes, that’s true on a project finance, stand-alone basis, it does improve the return. But when that depreciation shows up on corporate income statements, it affects GAAP earnings, which Wall Street doesn’t love, if we’re talking about the Fortune 100 companies we typically approach. It doesn’t hurt EBITDA, the proxy for cash flow that The Street uses though, so that’s good. We still bake that depreciation into our models.
In one of your blogs on the Sol Systems site you say “tax appetite is the limiting factor for solar project development.” Could you elaborate on that?
There is a shortage of TE out there, especially for projects that aren’t your standard 10-MW ground-mount project. In terms of the needed sources of capital for expanding the industry, including construction debt, term debt, sponsor equity, and tax equity, there simply is not enough tax equity given how important it is, and just as importantly, there are not enough “flavors” of tax equity out there. The options are extremely limited and it’s limiting the growth of our industry.
Are you assuming that the ownership structure on projects over, say, 500 kW, are PPAs, rather than owned by the offtaker? What do you think is the percentage split on ownership/PPAs?
Probably something like 60–70 percent of commercial projects are PPAs. Why? Because it’s easier than buying the system outright for the owner-offtaker and it’s typically easier to sell for the solar developer. Now there are exceptions, like WalMart, who will buy a system outright, because they have the tax appetite, and in addition they are willing to dig into the economics and they have additional positive externalities, like shareholder and consumer goodwill, for investing in the environment.
Interestingly, while the PPA structure is generally easier for the offtaker, it may be harder for the developer. Here’s why: The A developer who locks in a PPA, and does not have financial backing, must secure a third-party investor. So suddenly the developer now has two customers, not just one: the offtaker and the investor. That’s where we see our value at Sol Systems. We help developers structure their deals so that they can ultimately secure financing, and when the time is right, actually help facilitate and optimize this financing with our investor clients so the developer doesn’t have to go through all the brain damage.
One of your co-panelists at the November MDV-SEIA conference in November of last year, Jim Duffy, transactional attorney at Nixon Peabody said, “there is a TE shortage in the short-term, one out of seven deals get funded.” What do you think about that?
Duffy knows as much about this space as anyone. And what he’s said is probably true not only because there is a TE shortage, but also because developers are trying to secure funding for deals that aren’t bankable – those that don’t meet anyone’s investor criteria. That’s what we see as our role, we work with our developers partners to structure projects that will pencil for investors and help them screen out those that will not.
So, let’s take that one step further. At one of the conferences I attended in Washington in the fall, both representatives of the financing arm of Washington Gas Energy Services, the Washington, D.C- based energy supplier, and Standard Solar, the Maryland-based developer were panelists. Standard had acted as EPC with WGES financing under a partnership arrangement on several projects. In this case, Standard, as the developer, would almost reverse-engineer projects they originated. In other words, they made the project fit the investor, rather than the investor fit the project. Would that be fair to say?