A funny thing happened recently: We wrote an article suggesting that a lower cost of capital, driven by increased debt in project finance transactions, would help to mitigate some of the new risk the solar industry faces in 2017. We didn’t anticipate that this would be a particularly controversial viewpoint. After all, paying a lower cost of capital is like paying off old credit card debt. Who could disagree with that?
So we were surprised at some of the pushback. People from various functional backgrounds in solar argued that their area of expertise was the aspect of the market most in need of cost reductions. Marketers pushed for lower customer acquisition costs, operations managers pushed for more efficient fleet ops, and so on. None of these are wrong. Any opportunity to reduce solar’s costs should be explored. Our company is focused on the finance side of solar and so naturally, our view veers toward the costs associated with project finance.
The lower cost of capital argument reminds me a bit of the importance of sleep in our everyday lives. What do I mean by that?
Sleep impacts every aspect of our lives. Consistent, good sleep makes us more alert during the day. We are more productive in our jobs. It improves our memory, makes us more creative, and even helps us lose weight. In essence, sleep is a multiplier. We do not directly include it in our measurements of productivity, creativity, or health. But it is always there, impacting all of us in innumerable ways nevertheless.
Solar’s high cost of capital is similar. It will never be a specific line item in the installed cost per watt of a solar project. But it is always there, in the background, impacting every aspect of the solar value chain — from equipment to labor to marketing, and at every size — from utility-scale down to residential. For instance, consider a small installer in Vermont that uses a third-party financing service to offer a lease or PPA. That lease or PPA is more expensive because of the financing service’s higher cost of capital. Financing costs are hidden but significant.
Here’s a way to reduce this cost: Credit enhancements, such as insurance on the production of a solar asset, are increasingly available to project financiers today. These enhancements can improve the net present value of solar project finance transactions by 5-15 percent. Assuming an installed cost of $3/watt for a residential system, that’s as much as 15 to 45 cents of added value. With equipment prices plunging, this additional value is akin to completely eliminating the cost of a module.
As we have pointed out, replacing expensive equity with cheap debt changes solar’s equation for the better, for everyone in the industry. Because money is fungible, it ultimately doesn’t matter where cost is driven out of the price of an installed watt. Simply put: a dollar saved from lower acquisition costs is the same as a dollar saved from lower capital costs.
This is an important conversation for the industry to have, and it is particularly useful for solar professionals to get out of their silos and hear the views from other functional areas. I know this is an area where I can improve. I’ve been in solar for 10 years, yet I have blind spots that are obvious to an installer, a marketer, a technologist, or a policy maker.
So this is one of my professional resolutions for 2017—to get out of my solar finance comfort zone and learn more about other aspects of our industry. To make this easier, our team assembled a ‘Top 100’ list of Thought Leaders and is making the list publicly accessible at this link. By updating this list weekly, we hope to inspire dialogue across our industry. I look forward to learning more from all of you!