James Montgomery, Associate Editor, RenewableEnergyWorld.com
April 24, 2014 | 2 Comments
New Hampshire, USA -- Not all options are ready to step into the spotlight, though. Master limited partnerships (MLP) and real estate investment trusts (REIT) promise more attractive tax treatment than securitizations or yieldcos, but they require some heavy lifting and difficult decisions at the highest levels: MLPs need an act of Congress even for an infinitesimal language tweak to remove a legislative exclusion to solar and wind, while REITs involve a touchy reclassification of assets from the IRS that could have broader and undesirable tax consequences. Yet another model gaining traction is a more institutionalized version of crowdfunding, led by Mosaic (technically they call it "crowdsourcing"), but crowdfunding is awaiting more clarity from the Securities and Exchange Commission about what rules must apply.
And so, while patiently waiting for Paleozoic movement out of Washington, the industry is turning its attention and anticipation toward ushering in two other new financing models: securitizations (converting an asset into something that is tradable, i.e., a security) and “yieldcos" (publicly traded companies created specifically around energy operating assets to produce cash flow and income). Their build-up actually began last year: in the fall SolarCity finally launched the first securitization of distributed-generation solar energy assets, with a pledge to do more and significantly larger ones in the coming quarters, and throughout 2013 several companies (NRG, Pattern, Transalta, Hannon Armstrong) spun off yieldcos with varying levels of renewable energy assets in their portfolios.
Just weeks into 2014 we're already seeing an uptick in activity. While the industry awaits SolarCity's next securitization move, in the meantime the company has acquired Common Assets, which had been building up a Web-based platform for managing financial products (most especially renewable energy investments) for individual and institutional investors; the first SolarCity-backed products are expected to start rolling out by this summer. We're also hearing rumors of up to half a dozen other securitization deals working through the pipeline, referencing unidentified large players with long histories of building out projects — some names frequently invoked as potentially fitting those criteria include familiar residential-solar companies such as Vivint, Sunrun, Sungevity, and several others.
On the yieldco front, in mid-February SunEdison announced plans for its own "yieldco" IPO aimed at unlocking more value within its solar energy assets. Pricing wasn't announced at press time, but earlier reports suggested it could generate a $300 million payday. SunPower also recently has been talking about doing a yieldco in a 2015 timeframe, likely to feature its 135-MW Quinto project and possibly its 120-MW Henrietta project. Others reportedly eyeing the yieldco model include Canadian Solar, Jinko Solar, and First Solar.
What Capital Markets Can Do For Solar Companies
What's coming together to bring these two financial innovations into the arena right now? Put simply, it's the confluence of plunging PV prices and blistering installation growth which are achieving a scale and maturity that outstrips the capacity of traditional tax-equity sources -- but it also means they can now entertain large-scale financial instruments, explains Joshua M. Pearce, Associate Professor at the Michigan Technological University's Open Sustainability Technology Lab, who recently published a study of solar securitizations. Look at it from a macro level: even conservative growth estimates for U.S. solar energy capacity additions point to 20 GW coming online by the time the investment tax credit (ITC) is planned to run out in 2017, notes NREL energy analyst Travis Lowder, author of another recent report. At an average of $3/W that's $60 billion in assets, of which a third or even half could generate securitizable cash streams for solar developers. Spin that equation around: a single $100 million securitization deal could support 72 MW of residential solar assets, 100 MW of small commercial solar, or 133 MW of larger commercial/industrial projects.
Number of PV Systems (by Market Sector) Potentially Financeable Through a Single Securitization Transaction. Credit: NREL
What does that mean for individual companies? In its 3Q13 financial results SunEdison calculated its current business model of building and selling solar projects yields about $0.74/Watt, but those assets' true value could jump as high as $1.97/W if the company could find ways to lower its cost of capital, apply various underwriting assumptions, and factor in residual value in power purchase agreements. That's a startling 2.6x increase in potential value creation that SunEdison thinks it can unlock, by choosing to hang onto its projects vs. simply selling them off. In its mid-February quarterly financial update the company revealed more value-creation calculations: it captured an additional $158 million during 4Q13 through those retained assets, with a resulting metric of "retained value per watt" at $2.02/W. By applying most of the 127-MW on its balance sheet with an estimated $257 million in "retained value" to its proposed yieldco, the company says, it now has sufficient scale to unlock the true value of those solar assets.
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