Solar

SunPower Taps a $100 Million Sale-leaseback Financing Program

Issue 1 and Volume 2.

Wells Fargo and SunPower Corp. completed financing in December for a 1 MW solar power system that entered service in November on the campus of the University of California, Merced. SunPower financed the system with Wells Fargo through a $100 million sale leaseback program announced by the two companies in June 2009.

“We see increasing opportunities to support renewable energy markets over the next several years,” said Barry E. Neal, senior vice president and head of Wells Fargo’s Environmental Finance Group, who developed the financial vehicle. “By teaming up with SunPower, we intend to support growth in the solar energy market by making it easier and more affordable for businesses and public entities to benefit from solar electricity today.”

The first projects financed under the program include the Merced project and a 1 MW system for the Western Riverside County Regional Wastewater Authority, also in California.

As designed by the financing program, SunPower enters into power purchase agreements with qualified customers and Wells Fargo finances the solar power systems that SunPower designs, builds, operates and maintains. Host customers buy the electricity from SunPower at prices that are competitive with retail rates, which provides them with a long-term hedge against rising power prices along with the ability to take advantage of solar power’s environmental and financial benefits with no initial capital investment.

The $100 million investment fund is part of a broader program Wells Fargo set up in 2005 to invest primarily in the renewable energy sector. Neal was hired to run the program, having working more than 20 years n the energy sector both in private equity and as a project developer.

“Wells felt the renewable energy sector was ripe for growth,” Neal said. The bank saw as fundamental drivers favoring the sector’s continued growth volatile and steadily rising energy prices, a largely fossil-fired capacity base, growing attention to climate change issues and the related value from developing non-greenhouse gas-emitting energy sources. The bank focuses its program investments on the commercial-scale photovoltaics market, among other renewable technologies.

As a large taxpayer, Wells Fargo already had a history of taking part in taxable structures. Investing in solar projects leveraged that experience and offered the bank an opportunity to take part in the federal investor tax credit program, which returns 30 percent of a project’s capital cost to the investor as a tax credit.

Before expanding into solar energy investment, Wells Fargo had already made significant tax equity investments in wind energy projects. Its portfolio includes 27 utility-scale wind projects representing a $1.3 billion investment.

Unlike wind farms, much of the recent growth in solar energy has focused on commercial-scale, distributed projects.

“It’s a different play, a different economic animal,” said Neal. Specifically, most of the projects to benefit from the Wells Fargo arrangement with SunPower will be behind the meter. That means an off-taker–be it a big-box retailer, government facility or university campus–uses electricity generated by a PV solar array to displace some of the power it normally would buy from the local utility.

“The distributed generation market has grown dramatically over the last three years or so,” Neal said. Wells Fargo has invested in projects with SunPower, Renewable Ventures and SunEdison, among others; altogether it has participated in close to 200 community-scale solar projects as a tax equity investor.

From SunPower’s perspective, the Wells Fargo financial arrangement allows it to balance its portfolio better. that’s because under its business model, SunPower owns some projects but sells others to the likes of GE Financial Services and Morgan Stanley. In addition to providing design and construction services, SunPower includes operations and maintenance in most of these deals.

“In general, SunPower has trended toward being a seller and not a long-term owner,” said Mac Irvin, managing director of SunPower’s structured finance group. The $100 million sale-leaseback facility with Wells Fargo means the company’s blend of revenue “is just that, a blend,” he said.

A second driver for SunPower is deal velocity. A larger number of potential deals can be considered since the developer and the financier work closely to identify projects they want to pursue. When evaluating a project, perhaps the biggest consideration is the project host’s creditworthiness, Irvin said. After that hurdle is cleared, consideration is then given to whether or not the development site is in a market that offers sufficient incentives. California and New Jersey are two states where favorable incentives exist. Project sweet spots are between 1 MW and 4 MW and Irvin agreed that the fund’s primary focus is to develop projects behind the meter.

“Net metering is well understood, well proven and adds transparency” to a transaction, Irvin said.

The system installed at UC Merced is expected to produce two-thirds of the campus’s electricity on summer afternoons and 20 percent of its annual electricity needs. Under terms of the power purchase agreement, UC Merced is entitled to claim all environmental attributes and reporting rights associated with the system.

The system uses SunPower solar panels with the SunPower T20 Tracker system. SunPower has more than 550 large public and commercial solar power systems installed or under contract, representing more than 450 MW of capacity.

“I am a big believer in the power of precedent,” Irvin said of his company’s growing installed capacity portfolio. “It’s no slam to say that banks are not eager to take silly risks.” The two partners offer one another a significant portfolio of previous project experience. In addition to SunPower’s record, Wells Fargo has provided more than $1.75 billion in financing for renewable energy projects since 2006. That includes funding for 27 wind projects, about 200 commercial-scale solar projects and one utility-scale solar thermal project, the 64 MW Nevada Solar One project developed by Acciona.

One important consideration in setting up such a fund is understanding where transactional risks lie and then assessing them to the party best able to shoulder them. For example, a lender wants assurances that a project is built properly. “That’s what we do,” Irvin said. But expecting a developer such as SunPower to take on the risk for something outside of its sphere of expertise is not reasonable. “That’s the value of working with an existing financier” such as Wells Fargo, he said. “They’ve been at this a very long time.”