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This article excerpt is taken from the forthcoming issue of Renewable Energy Focus magazine (March/April issue). To register to receive a digital copy click here.
Bank loans, power company equity, federal programmes and tax credits have so far succeeded in growing the US solar market to 6.4GW installed capacity in 2011. More good times lay ahead too, with the US forecast to reach 30GW installed capacity by 2020.
However, to get there, more capital is needed, just at a time when federal loans have run out. The US Investment Tax Credit (ITC) is decreasing from 30% to 10% in 2016 and Basel II regulations have reduced the tenor of loans from 20 years to 10 years, a more natural fit with most solar projects.
So financial innovation will be key to unlocking a trillion dollar opportunity in the sector and bring the industry to the next stage of maturity. Some of these funding mechanisms are unique to solar, and others are transplants from other sectors such as real estate, mortgage debt and the fossil fuel industry.
Dramatic cost reductions in PV panels, from $4 per watt in 2008 to $0.65 per watt at the end of last year, have helped balance the equation for developers as 20GW of oversupply wash around the global market and destroy manufacturers’ bottom line or cause them to collapse entirely. “The cost decline of equipment because of manufacturing overcapacity and technology improvements is the silver lining in the midst of the ongoing rationalisation of the solar sector,” says Partho Sanyal, managing director of the global energy and power group at Bank of America Merrill Lynch. “The cost of delivery of solar power has dropped so dramatically that every day solar power is becoming more cost competitive.”
But rock bottom prices are not enough.
Asset financing for PV projects has grown 58% since 2004 and surged to a record $21.1bn in 2011, according to Bloomberg New Energy Finance (BNEF). However, BNEF analysts estimate that about $6.9bn of annual funding will be required to meet the anticipated growth in the US by 2020.
Michel Di Capua, head of research North America at BNEF, says: “This financing picture is so interesting because it’s a frontier that hasn’t yet been tested. There’s still opportunity in terms of bringing down the costs of capital.”
Solar projects require three types of capital: equity; debt and tax equity. Utilities or independent power companies often provide 20-30% equity, while banks can expect returns of around 6-7% for their loans and tax equity investors can expect a 14-18% yield.
In the utility sector, the ITC has been particularly attractive to investors with a large tax liability, such as banks like Morgan Stanley. But corporations have been slow to grasp the potential benefits with the exception of a few companies like Google.
Over the past couple of years, third-party lease and power purchase agreements have revolutionised the way consumers and businesses finance solar. Under these agreements, a customer will repay a third-party through monthly fixed charges, or based on how many kWh the system produces over 10-25 years.
Demand for SolarCity’s stock after its successful IPO last year proved the economic effectiveness of third-party financing. Its competitor, Sunrun, attracted $200mn in funding from Credit Suisse last year.
But other financial innovations being discussed now in the industry could open up unprecedented access to capital. Securitisation may be a loaded concept after the derivatives from mortgage debt turned sour, triggering the financial crisis.
“If we look at many of the derivatives that were used for the mortgage industry, those structures were abused,” says Tim Keating, senior vice president at SCS Renewables, which is developing software platform to assess the bankability of solar projects. “But they are rational, reasonable financial structures. Like anything else, they are sound if you don’t abuse them.”
Small-scale third-party-owned solar could require up to $5.2bn in financing in 2014, say BNEF analysts. But if all of 2011’s installed residential capacity were securitised, the proceeds from the securitised assets would contribute 32-47% of capital for residential solar in 2012 and 31-42% of commercial build, according to BNEF’s Reimagining Solar Finance report published last year.
Kristian Hanelt is the senior vice president of Renewable Capital Markets at Clean Power Finance, which connects financiers with installers who can draw down from $600m in funds from Google and Morgan Stanley. “Securitisation is going to happen this year. That’s going to be a great step. There will be a lot of momentum to get more volume out into the public market. That’s going to be a great thing for the industry and will get a lot of folks on Wall St excited.”
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