Below are soundbites from speakers and panelists who spoke at Infocast’s Solar Power Finance & Investment Summit on March 22 and 23 in San Diego. It was Infocast’s best attended event ever, and the mood was relatively upbeat.
The soundbites are edited for clarity and are organized by topic, rather than in chronological order. They were prepared without the benefit of a transcript or recording.
Tax Equity Structures
“The tax equity flip [partnership structure] is more complicated, [than a sale-leaseback], in particularly if there is back leverage.” Director of Investing, Solar Company
“The optimal structure for C&I [for a partnership flip with back leverage] is 40 percent tax equity, 45 percent back leverage debt” and 15 percent sponsor equity. Director of Investing, Solar Company
“Last year it was almost universally inverted leases; this year mostly partnership flips.” Banker, Specialty Bank
“There is a more pronounced tension between back leverage and tax equity in an investment tax credit transaction, [than a production tax credit transaction,] because of the risk of recapture of the investment tax credit.” Managing Director, Tax Equity Investor
“There is increased tension between back leverage and tax equity, whether the stress is cash step ups for under performance or other matters. What we thought were normal structuring techniques the back leverage lenders take exception to.” Managing Director, Money Center Bank
Selecting a tax equity structure should be “all about velocity. Really, [the sale-leaseback] is what is easiest to do.” Managing Director, Regional Bank
“A cash strapped sponsor is not the best candidate for a partnership flip; they are better off with a sale-leaseback.” Executive Director, Non-Traditional Tax Equity Investor
“Some tax equity ask us to lend at the project level – senior secured – for capital account reasons. But by the time you negotiate the forbearance and related debt/equity terms, you might as well be back leverage.” Group Head, Regional Bank’s Capital Markets
“We only consider project level debt as a lender. We have negotiated dozens of forbearance agreements with tax equity.” Banker, Specialty Bank
State of the Tax Equity Market
“There is enough [supply of] tax equity for 2017 [projects]. We are seeing some 2018 transactions being pushed by developers into 2017.” Advisor, Boutique Accounting Firm
“We like to take our limited [annual] tax capacity and spread it over a greater volume of deals, so we prefer wind” which has a ten year production tax credit, rather than a 30 percent investment tax credit in the first year. Managing Director, Consumer Finance Bank
“In wind, you [(i.e., the tax equity investor)] are a bigger piece of the capital stack. In solar, it is smaller piece because the investment tax credit is all up front. [The sponsor] wants to minimize the tax equity to maximize the back leverage, which is cheaper capital.” Advisor, Boutique Accounting Firm
Tax Equity Investment Minimum Investment Size
“We are doing $5 million tax equity deals in solar C&I all the time.” Executive Director, Non-Traditional Tax Equity Investor
“A $5 million transaction in isolation would be extremely difficult. [Each C&I project] is an individual transactions has to be due diligenced.” Managing Director, Money Center Bank
“We can accommodate smaller projects as a sale-leaseback, rather than a partnership flip.” Managing Director, Consumer Finance Bank
Tax Risk Insurance
“We put in place a tax basis insurance policy [(i.e., it insured the amount of the investment tax credits] that helped us get comfortable with a newer sponsor who had an origination engine that we believed in. It was a first line of defense [to a potential IRS audit].” Executive Director, Non-Traditional Tax Equity Investor
“Tax risk insurance is really there for the protection of the lenders.” Managing Director, Consumer Finance Bank
[Explained: Tax risk insurance in solar transaction was originally required by back leverage lenders who were concerned that a tax indemnity claim would result in the tax equity investor sweeping cash that the back leverage lenders had anticipated would be used to pay debt service to them. Therefore, the tax risk insurance policies were written to be payable to the lenders or to the tax equity partnership.]
“We are starting to see [tax risk insurance policies written], so any payout would be to the tax equity investor and not the partnership or the lenders.” Managing Director, Money Center Bank
Tax Reform
“The tax rate drop means the value drops around 10 percent in the year of [the commercial operation date] (COD), but if it happens the year after COD, the value goes up.” Finance Executive, Solar Manufacturer
“More folks take bonus depreciation: Monetize 60 percent upfront. Some investors ask for equity hold-back or a true-up payment. Or a sweep to make whole which affects ability to finance the rest.” VP Global Capital Markets, Residential and Commercial Solar Provider
[Explained: This allows the tax equity investor to be sure it can monetize the majority of the depreciation in 2017, when the tax rate is certain to be 35 percent.]
“No one knows what they are going to get in 2018 [due to tax reform], so they have to prepare for the worst.” Energy Financial Advisor
[Comment: Questions were asked about the tax rate used for sensitivity analysis and the consensus was a 20 to 25 percent federal corporate income tax rate.]
“The hardest part is the uncertainty. The more time that passes the less likely it is to happen, but we will be able to manage it.” CFO, Large Developer, Owner/Operator.
“Assuming you still have dollar-for-dollar investment tax credit (ITC), tax reform is not a big deal [for solar]. You just need to know what the rules are, so you can structure around it.” Advisor, Boutique Accounting Firm
As a construction lender, you want to “make sure that tax reform does not mean that the tax equity investor can just walk away [from its obligation to fund its equity contribution, rather what should happen is] only an adjustment to the model” [(i.e., a re-sizing of how much the tax equity investor must fund). Team Lead, Bank’s Energy Group
“There will be a negotiation between the construction lender and the tax equity investor as to who will take tax rate change risk [(i.e., the risk that a tax rate change during construction results in the tax equity investor wanting to fund less to maintain its expected after-tax yield)]. The construction lender will end up bearing at least half of that risk.” Group Head, Regional Bank’s Capital Markets
[Comment: However, if the construction loan is not appropriately satisfied, the construction lender would still have a senior security interest in the project. Therefore, it could foreclose and sell the project to recover the balance of its construction loan.]
“Our bank is not taking any tax rate change risk. So the risk gets pushed back to the sponsor. We require a guarantee or a letter of credit for the difference between our construction loan and the amount the tax equity fund in worst tax rate change scenario.” Managing Director, Project Finance Bank
“Construction lenders that rely on tax equity take out are looking at mezz debt to take some of the risk off their shoulders of tax reform and the tax equity not funding.” Principal, Alternative Asset Manager
Traditional Debt Market
“Borrowers are more interested in fixing rates because rates have been so low. Renewables has been enticing fixed income investors, as returns are better than in the bond market.” Principal, Alternative Asset Manager
“If a portfolio of projects is levered at 80 to 90 percent loan to value and interest rates rise three to four percent then the debt balance may be 110 percent of the value of portfolio. We walk away from [lending opportunities] with those risks.” Principal, Alternative Asset Manager
“[R]isk spreads are historically low. Plain vanilla utility [we priced as low as] LIBOR plus 175.” Team Lead, Bank’s Energy Group
“Wide range of rates for utility scale . One hundred fifty [bps] for tier one long term, but when you add complexity it goes up to 275.” Group Head, Regional Bank’s Capital Markets
“Loans are good and belong in the market like in the auto market. Not better or worse. It’s just the sign of a more mature industry.” Managing Director, Investment Bank.
Sponsor Capital for Operating Projects
“Institutional investors want to put capital [to work] in this space. They don’t lack for dollars; they lack for projects [to invest in].” Boutique Investment Banker
“Discount rates have steadily declined. As investors get more efficient in the space, the return [requirements] come down. The highest quality projects trade at very attractive rates. The weighted average cost of capital [for utility scale solar] has come down over the last few years.” Boutique Investment Banker
“You are going to see people [(e.g., pension funds)] with longer investment horizons come into the market.” Managing Director, Specialty Investment Bank
Sale-Leasebacks for Project Land
[Background: If the project owner owns the land a project is sited on, that land can serve as source of financing for the project. The project owner sells the land to a lessor and leases it back. That provides capital for construction and in some circumstances can have favorable income tax ramifications.]
“Land finance is very straight forward. It is quick to finance. The transaction time is four to six weeks. The main transaction cost is title work.” Managing Director, Infrastructure Fund
“Developers should hold land in a separate entity, not their project entity, to maintain flexibility for the long term.” Managing Director, Infrastructure Fund
Mezzanine Debt
For your borrower, “you need to find a good team with a good track record that have a relationship with tax equity.” Principal, Alternative Asset Manager
The interest rate for “mezz financing could be as low as LIBOR plus 500 bps, but it could be much higher.” Project Finance Lender
Development Capital
“Development capital is pre-notice to proceed (NTP) capital.” CFO, Renewables Independent Power Producer
“Development capital is used mostly for [interconnection queue and PPA] deposits. It doesn’t make sense to bring in development capital before that.” President, Development Capital Fund
“The community solar garden market, for reasons that are not unclear, requires these large refundable deposits.” President, Development Capital Fund
“Development capital requires internal rates of returns that in the double digits to teens.” CFO, Renewables Independent Power Producer
“High single digits to low to middle teens are the rates for development capital loans.” Managing Director, Development Lender
As a development capital high yield lender, “we are an alternative to selling your project or partnering with someone. You have to be confident you can develop the project yourself. We have to be comfortable the value will be there.” Managing Director, Development Lender
“More than half the time, developers are better served by just selling the project or partnering with a capital provider, rather than borrowing from us at high rates.” Managing Director, Development Lender
“The number one risk we say no to is a project that is too early stage and we just don’t see the value.” Managing Director, Development Lender
“We’re not equity. We’re debt. We don’t want binary risk. We’re going to make 12 percent; that sounds great, but it is for a short period of time.” Managing Director, Development Lender
“The deals we turn down are when there is binary risk. We can’t have it be only no value or tremendous value. If there is binary risk for your development lender, then development debt is not right route for you.” Managing Director, Development Lender
“We’ve done as short as two months or as long as two years in terms of providing debt for development.” Managing Director, Development Lender
“It is amazing how much asset capital is available and how little development capital is available.” CEO, Residential Solar Financier
“You are seeing some development capital from equipment providers and engineering, procurement construction (EPC) contractors. There has never been a lot, but there is some.” Corporate Development Officer of Solar Financier
“For us, [as a development capital provider] the bests model is to sell at NTP to a permanent equity provider.” President, Development Capital Fund
“Developers are constantly re-paying, which frees up capital for additional loans.” Managing Director, Development Lender
“There are a ton of really bad development assets out there.” President, Development Capital Fund
“The risk is not as great as it was once thought to be [for development capital] for contracted projects. I am surprised at the types of investors who are interested in that risk, such as pension funds.” CFO, Renewables Independent Power Producer
“Five years ago there was a major lack of money for pre-commercial operation date projects: financiers only wanted to invest once commercial operations were achieved. NTP projects no longer have a problem of a lack of capital.” Corporate Development Officer, Solar Financier
“We meet a lot of capital providers who are not experienced in the solar business. We used to spend time educating them. Now, we just don’t. We transact with capital providers that we know.” President, Development Capital Fund
“Development capital is moving towards complicated, large portfolios. It logistically isn’t feasible anymore for [construction or permanent lenders] to nitpick at the project documents that we put in place.” President, Development Capital Fund
Advice for Developers
“Everybody wants projects. There will always be a market for projects.” Senior Director, Turn-Key Solar Financing Solution Provider
“Developers now understand that ownership is overrated. Most projects change hands two, three, four times.” Senior Director, Turn-Key Solar Financing Solution Provider
“Developers need to not just offer PPAs. Provide EPC [services], long term [operations and maintenance] (O&M) . . . branch out and break up your services. The more utilities learn from you, the better.” Senior Director, Regulated Utility
Publicly Traded Solar Companies
“Solar now has a low cost advantage, but that is not reflected in the public equity capital markets. [It is not reflected] because the ‘good’ [publicly traded solar companies] sell is deflationary” (i.e., the price of electricity declines as more wind and solar are added and natural gas remains in expensive). CEO, Residential Solar Financier
There’s not enough earnings going to public equity investors, and there’s squabbles at the state level.” CEO, Residential Solar Financier
Solar Coaster
“Solar coaster – the debt crisis of 2008, massive consolidation in manufacturing. There will be pressure [on solar companies] [as] interest rates are higher and with tax reform. It will force solar financiers to have larger balance sheets.” CEO, Residential Solar Financier
“Consolidation in the solar space will follow the trajectory of consolidation in the wind space but probably a lot quicker.” Boutique Investment Banker
“2009 to 2016 were pioneering years. Over the next four to five year, the market could triple in size. But the amount of dollars per project will be much smaller.” Executive, Unregulated Arm of a Utility
Commercial and Industrial Solar
[Background: Members of the solar industry frequently comment that commercial and industrial (C&I) solar requires standardized power purchase agreements, site leases and other documentation to make the diligence process for financiers less time consuming and, accordingly, less expensive. Several panelists disagreed with this objective.]
“If you are a C&I customer signing a 20-year contract that you are being told will save you hundreds of thousands of dollars, it makes sense for you to negotiate that contract and not sign a pre-printed form.” Director of Investing, Solar Company
“C&I is that messy middle. It cannot afford transactions costs of utility scale solar or have standardized contracts like residential solar.” Executive, C&I Solar Company
“C&I is just not standardized and efficient. [C&I companies] need smart people who are empowered.” President, C&I Fund
“At least being able to redline NREL’s standard C&I contracts is big progress.” Executive, C&I Solar Company
“Putting a continuous funding process in place, like the resi market, was the key to unlock the C&I market for us.” President, C&I Fund
“Once I know the [C&I] customer’s credit rating, I know what our fund will buy the contract for. Our fund has a two year formal commitment [from its investors], so I can give a firm price” to C&I customers. President, C&I Fund
Residential Solar Market
“Ten to twelve percent growth rate [expected in the residential market] on a large number” (i.e., the investment in residential solar in 2016). Managing Director, Investment Bank
“Low risk in 2017 for residential.” VP, Global Capital Markets, Residential and Commercial Solar Provider
Corporate Offtakers
“The ‘RE100′ are large corporations that have pledged to be 100 percent renewable. You cannot do that with solar on just your own buildings.” Executive, C&I Solar Company
“The corporates’ [(e.g., Amazon)] as the offtaker of choice is quite exciting. Doing all the rooftops on your building is just the first ante. Then you do community solar and virtual PPAs.” Executive, C&I Solar Company
“Corporate PPAs are a hedge against inflation, interest rates and demand for the corporate buyer.” Managing Director of a REIT
The corporate PPA market is “very strong . . . basis risk is what makes it different from [the utility PPA market.]” Banker, Specialty Bank
Terms of Power Purchase Agreements (PPAs)
The typical term of a “behind the meter PPA is 20 to 25 years and ten to 15 years for corporate PPAs. We typically have site control for 40 to 45 years. So we work with investor on how to value the 20 to 25 years after the PPA term.” Director of Investing, Solar Company
“If my PPA goes away, I want the right to be there [(i.e., for the project to remain on the site)] for the next 25 years to sell power.” Head of Origination, Solar Investor
“We are seeing floating rate PPAs.” Head of Origination, Solar Investor
“Interest rates are going up. Project owners will need to take into account interest rate increases before PPA pricing is locked in. Otherwise, project owners may find their projects are not financeable.” MD, REIT
Projects’ Basis Risk from Hedges and Corporate PPAs
[Explanation: “Basis risk” in the context of a corporate PPA means that the project’s owner sells the power in at the price available at the node, but financially settles with the corporate “buyer” based on the price at the hub. For instance, the corporate PPA provides that the corporate buyer contracts for power at $30 a MWh, so if the price at the hub is less than $30 a MWh, the corporate pays the project owner the difference and if the price at the hub is more than $30 MWh the project owner pays the corporate the difference. What actually happens is the project owner sells the power for the spot price at the node.]
“Most [corporate utility PPAs] settle at the hub because it is too difficult to predict prices at every node, but you can do forward pricing at the various hubs.” Senior Manager, Transmission, Consulting Firm
“It depends on which market. We will take node risk in some markets.” Director, Energy Trader Affiliated with Major Bank
Basis risk is caused by “transmission loss component and [a] congestion problem, bottleneck is usually the problem – between the location of the project and the hub.” Senior Manager, Transmission, Consulting Firm
“Looking back is a good way to start looking at the diligence [with respect to basis risk]. Six to ten years back data is available. Forward assumptions about projects in the queue for the development.” Senior Manager, Transmission, Consulting Firm
Even if there will be a third party study . . . [we have] a robust internal team [and use various assumptions to] try to break the scenarios …. Caution to the smaller developer is to be careful about the location of your project if you do not have the resources for this and then want to sell in the future.” Director, Marketing, Large Renewable Energy Developer
“[A]lso what is happening with other resources will affect [basis risk] too.” Director, Energy Trader Affiliated with Major Bank
“The project bears the congestion risk for most cases.” Senior Manager, Transmission, Consulting Firm
[Comment: One large developer described using a structure where it took basis risk to a capped amount and any excess would be borne by the corporate offtaker.]
“Congestion risk can be significant in California due to penetration and can be harder to predict over the long-term.” Director, Marketing, Large Renewable Energy Developer
[Comment: It was noted that transmission upgrades help, but as more solar is integrated oversubscription is expected in ERCOT West.]
Electricity Markets
“The biggest opportunity [for electricity providers] is the electrification of the transportation system.” – Advocate for Transmission Reform
“We are looking at either curtailing solar [in the summer] or paying other states to take it.” Executive, West Coast Utility
“Curtailment of renewables is not the right answer.” Executive, West Coast Utility
“The entire transmission system was built based on peaks at different times of year. Now, we have peaks at different times of day.” Executive, West Coast Utility
“Consumers are part of the problem because they participate in the duck curve: consumers [with solar on their homes] are contributing power during the day and are not contributing to meet the evening peak [in demand]. Executive, Solar Manufacturer
“Consumers are part of the problem and can be part of the solution.” Executive, Solar Manufacturer
“Traditionally we relied on utilities to meet demand. Now we are driven toward a system more driven behind the meter [which means] we need to find some way to get customers to change their habits so that excess solar either gets stored and delivered back to the grid in the evening hours or used more during the day.” Executive, Solar Manufacturer
“[P]ricing needs to match value. . . . Customers do not want to know about energy efficiency. [This means] an opportunity for aggregators to take on this role for consumers.” CFO, Utility Scale Developer.
“I do not see any technology out there that will take consumers completely off the grid. We [as a utility] are primarily a wires company.” Executive, West Coast Utility
On grid integration, “it will take a while and it should. The cause of the energy crisis was that deregulation caused things to move too quickly.” Advocate for Transmission Reform.
“There is a really valuable place for the grid.” CEO, Residential Solar Financier
“Independent power producing is not dead, but it will have to evolve.” Executive, Solar Manufacturer
The future of energy market will be solar, wind, and natural gas; with the balance being “decided by resource availability and public policy. . . . Cost used to be the driver.” Executive, Solar Manufacturer
Net Metering
“The fight over net metering is a symptom of a broken business model.” CEO, Residential Solar Financier
“If you can own a monopoly[, like an electric utility,] and the regulator gives you a 10.5 percent return on equity, then you [(i.e., the utility)] defend it at all cost.” CEO, Residential Solar Financier
“If [solar has] a low cost advantage and can be paired with storage, you need to start talking about open markets [for residential]. Have it look like ERCOT or New York REV.” CEO, Residential Solar Financier
“Saying I need the public utility commission to protect [the residential solar business] is giving away your winning hand.” CEO, Residential Solar Financier
“Solar should be for competition and open market.” CEO, Residential Solar Financier
Storage
“We forced utilities to dial generation up and down to whatever demand is out there. We are driving towards reliance on these two big energy sources – solar and wind – that are intermittent. We need utilities to send price signals to consumers to meet demand peaks by storing energy or to otherwise manage their energy.” Executive, Solar Manufacturer
“The idea of 10,000 to 15,000 MW of batteries is probably not the right answer.” Executive, West Coast Utility
“[B]atteries are incredibly interesting to the resi market. Lots of innovation not previously available. More real time pricing from utilities which will change things a lot for customers – this is the future.” Chief Marketing Officer, Residential Solar Provider
“Storage is the next opportunity. Not today, but I want to go into it. I just do not want to be the first because I don’t understand it well enough.” Senior Director, Regulated Utility
PACE
“PACE is an elegant way to provide long-term financing for solar and energy efficiency. It is a simple framework for multiple locations. I see a lot more of that come for the next several years.” Managing Director, REIT
[Explanation: For an explanation of “PACE”, see https://www.taxequitytimes.com/2017/03/pace-residential-commercial-renewable-energy-projects/]
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