US Solar Financing on the Brink of Transformation
Financing of US solar projects is in the midst of a transformation, with new business models, new investors, and new financing vehicles gaining sway, according to new research by specialist research firm Bloomberg New Energy Finance commissioned by Reznick Group.
US solar projects have historically been bankrolled by some combination of energy sector players, banks, and the federal government, but the landscape is rapidly changing. New business models are emerging with an emphasis on third-party financing. New investors, including institutional players, are entering. And new financing vehicles such as project bonds and other securities are being assembled to tap the broader capital markets.
Bloomberg New Energy Finance, the leading provider of news, data, and analysis on clean energy, water, power, and the carbon markets, has worked with Reznick Group, a national accounting, tax, and business advisory firm, to describe this ongoing evolution of US solar financing: where the market is today, where it is heading, and what’s behind this important transition. The resulting report, â€œRe-imagining US solar financing”, can be downloaded at http://www.reznickgroup.com/sites/reznickgroup.com/files/Re-imagining-US-Solar-Financing.pdf.
The evolution towards a broader investor base will help maintain growth for US solar deployment. Asset financing for US photovoltaic (PV) projects has grown by a compound annual growth rate of 58% since 2004 and surged to a record $21.1bn in 2011, fueled by the one-year extension of the Department of Treasury cash grant program. Funding the next nine years of growth (2012-20) for US PV deployment will require about $6.9bn annually on average.
Two factors will drive the evolution. First, traditional players are scaling back their participation. Constrained by regulatory requirements and by the continent’s financial crisis, Eurozone banks are offering loans of shorter duration and with slightly wider spreads. In the US, a key Department of Energy loan guarantee program lapsed in 2011 making less low-priced capital available for large-scale projects.
Second, thanks to the continuing low-interest rate environment, non-traditional investors are becoming more interested, lured by the risk/return profiles of solar projects that employ well proven PV technology. Motivated by attractive yields and the examples set by Chevron and Google, US corporations are eyeing forays into tax equity. Pension funds and insurance companies are willing to give solar projects a serious look in the wake of the successful bond issuance for a solar project owned by a Warren Buffett-backed utility. The past year has seen a crescendo of conversations around financing vehicles that draw on the capital markets, such as solar-backed securitization, master limited partnerships (MLPs), structures resembling real estate investment trusts (REITs) and publicly listed solar ownership funds.
In parallel, new business models for deployment of solar have flourished, including variations of third-party financing structures which enable customers to enjoy the benefit of local systems at little or no upfront cost. These models have the potential to broaden substantially the universe of solar investors.
â€œSolar equipment prices have dropped by more than half since the start of 2011 but financing costs matter too,â€ said Michel Di Capua, Head of Analysis, North America, at Bloomberg New Energy Finance in New York. â€œNew financing vehicles and new investors across the solar project lifecycle â€“ development, construction, commissioning, and then long-term operation of assets â€“ will cause the costs of equity, debt, and potentially even tax equity to migrate down.â€
Policy could accelerate the transformation. Investors surveyed as part of this report seek stronger SREC programs, new standards, more flexible tax credits, and sanctioned high-liquidity investment vehicles such as solar REITs.
â€œA greater understanding of project risk and return is driving new investors into the solar PV market,â€ said Tim Kemper, Renewable Energy Practice Leader at Reznick Group. â€œHowever, investors still need to pay attention to tax and structuring issues as these are the factors that will often determine the viability of a project.â€
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