Downstream Solar Funds and Debt Finance Highlight Solar Funding Rebound

A surge in project development debt finance and investments in downstream residential and commercial solar PV funds highlighted a rebound in overall corporate renewable energy funding and mergers and acquisitions (M&A) activity in 2015’s first quarter, according to Mercom Capital’s “Solar Funding and M&A 2015 First Quarter” report.

Also fueling the rebound, solar and renewable energy yield companies, or “yieldcos,” are on the hunt for and increasing acquisitions of solar PV projects with high returns on investments (ROI) in anticipation of a ratcheting down of the federal solar investment tax credit (ITC). The federal solar ITC is scheduled to be reduced from a current 30 percent to 10 percent in 2016.

Solar energy market participants — residential and commercial solar PV finance-and-installation companies in particular — are increasingly able to access funds at lower costs of capital by taking advantage of financial instruments that for solar and renewable energy market participants are new, Mercom Capital Group co-founder and CEO Raj Prabhu noted in an interview. That’s good news for consumers, climate change mitigation plans and the environment, as well as renewable energy market participants and the sector as a whole.

Lower Costs of Capital for Solar Companies

While venture capital (VC) solar sector funding of residential and commercial solar PV funds dropped from $315 million across 16 transactions in Q4’14 to $189 million in 26 transactions in Q1’15, more mainstream investors poured a record amount of capital into downstream solar PV tax equity funds in Q1, according to Mercom’s latest quarterly report.

Solar project debt financing also rose sharply quarter-over-quarter, shooting up 233 percent. As compared to Q1’14’s 14 total of $1.5 billion, Q1’15 saw about $5 billion raised via project debt finance across 27 transactions.

“Overall, it was a pretty decent quarter, with about $6.4 billion raised via corporate funding,” Prabhu told REW. “VC (venture capital) funding was down a bit,” he pointed out, and “we didn’t see the same level of VC funding raised by third-party solar leasing companies, who received a lot [in the way of VC funding] over the past couple of years.” 

Mercom’s quarterly renewable energy and M&A reports encompasses corporate funding of solar energy from venture capital (VC), public markets and debt financing globally. 

Rather than relying on VC capital, leading solar energy market participants are turning to more mainstream investors — insurance and pension funds as well as private equity fund managers and individual investors. Looking to raise more capital to finance expansion plans and R&D, they’re using what for the solar sector are new financing vehicles — shares of yieldcos and to a lesser extent asset-backed securities (ABS) — to do so.

Yieldcos and “Downstream” Solar Funds

Turning in their best quarterly performance in the five years Mercom’s been tracking corporate renewable energy funding and M&A, residential and commercial solar energy funds raised nearly $2 billion in 10 deals in Q1’15. That’s nearly double that for Q4’14, in which they raised $1 billion across eight deals.

These funds package the federal investment tax credits they acquire in making residential and solar leases. These are then sold to corporations who are producing profits and looking to reduce their income taxes.

In addition, solar energy companies raised $1.26 billion across 10 public market transactions in 2015’s first quarter, according to Mercom. A major contributor, a growing number of leading solar energy companies are selling shares in yield companies, or “yieldcos” on public stock exchanges, not only here in the U.S. but in Europe as well, Prabhu pointed out.

Akin to the tax-advantaged master limited partnerships (MLPs) long used by oil and gas pipeline companies and real estate developers to raise less expensive capital, nearly all the income produced by solar and renewable energy projects placed in yieldcos flows directly through to investors who have bought shares in them.

Prabhu added that there are four yield-company IPOs pending SEC review at present. They include a joint yieldco IPO by market leaders First Solar and SunPower and a second yieldco IPO by SunEdison focused on financing its expansion in emerging markets.

Diversifying the renewable energy project portfolio of its first yieldco, Terraform, SunEdison on April 1 announced that the two publicly listed companies are acquiring 521 MW of wind power plants from Atlantic Power. Terraform trades on NASDAQ under the ticker symbol “TERP.”

Prabhu also highlighted the growing amount of funding going to finance off-grid solar projects, products and services in emerging markets, Africa in particular. Two such transactions made Mercom’s top 5 list of solar sector corporate VC equity funding for Q1’15.

A manufacturer of pay-as-you-go mobile payment-enabled solar charging systems to off-grid African communities, Fenix International, raised $12.6 million from GDF Suez, Schneider Electric, Orange France Telecom, clean tech entrepreneurs Tom Dinwoodie and Warner Philips, and other investors.

Similarly, M-KOPA Solar, an asset financing company that sells solar home systems to off-grid households on a mobile money payment plan in Kenya, Tanzania and Uganda, raised $12.45 million from LGT Venture Philanthropy, Lundin Foundation, Treehouse Investments and Blue Haven Initiative, Mercom reports.

Lead image: Green growth. Credit: Shutterstock.

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Andrew reports on renewable energy, clean technology and other issues and topics from posts abroad and here in the US.

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