Financing

Financing is quickly become necessary for the successful adoption of renewable energy in the United States. If you want to sell geothermal or solar projects, you need to understand finance.

Read the Guide to Financing Commercial Solar Projects
Advice from a $20MM Solar PV Investor for Commercial Solar Installers = Focus on a Niche, Be Fast, and Standardize your Operations
60 Minutes of Video Answering 7 Questions on Financing Commercial Solar Power Purchase Agreements
50 Minute Presentation on Due Diligence, Crowd-funding and Finding Investors to Finance Nonprofit Solar PPAs
Solar MBA Course. Learn how to Finance Commercial Solar Projects from Start to Finish
Test Drive 1% of the the Solar MBA For Free

Great Resources
Finance 101 for Renewable Energy Pros
Finance 101 for Solar PV Pros
The Beginngers Guide to Financing Solar PV Projects
The Complete Guide to Geothermal Tax Credits

Building Microgrids? Four Economic Factors to Consider

Microgrids are poised to alter the economics and topology of the electricity grid, ultimately transforming the electricity industry as we know it. In this article, we discuss the four economic factors to consider before and during microgrid development and provide an opportunity for designers, policymakers, and industry experts to join a community of microgrid professionals looking to capture the green, reliable, resilient energy of microgrids.

TWO CASE STUDIES 

Last week, Dr. Mahesh Bhave, Visiting Professor of Strategy at Indian Institute of Management, Kozhikode, India, explained how microgrids will soon create the potential for 100% electrification worldwide, along with cleaner, cheaper electricity. (Access the full free lecture here or see the recording below.) In his lecture, Dr. Bhave presented two case studies to demonstrate how to assess the economics and feasibility of a prospective microgrid project:

1. Indian Institute of Management, Kozhikode: Kerala, India

microgrids

microgrid

2. ~120 home homeowners association in California

microgrids   FULL FREE LECTURE – RECORDING  QUESTIONS TO CONSIDER FOR MICROGRID DEVELOPMENT According to Dr. Bhave, anyone considering or currently involved in microgrid development needs to be asking two big questions:

  • How economical are microgrids today?
  • What factors drive their deployment?

THE FOUR ECONOMIC FACTORS THAT DETERMINE MICROGRID FEASIBILITY In his 60-minute lecture, Dr. Bhave broke down the four factors that determine microgrid feasibility with each case study:

  • Optimization for capacity, or sizing of generation sources
  • Optimization of operations
  • Pro forma cash analysis with assumptions
  • Demand management, especially in emerging economies

THE FACTORS THAT DRIVE DEPLOYMENT OF MICROGRIDS The factors the drive deployment span technology, regulatory, research, industry trends, and more. At the end of his lecture, Dr. Bhave connects the dots, reviews regulatory challenges that must be overcome for microgrids to succeed and discusses the impact of favorable microgrid economics on industry structure in emerging and developed markets.

microgrid deployment

WATCH THE FULL LECTURE, ACCESS MORE RESOURCES, VIEW ARCHIVED DISCUSSION BOARD: You can view the recorded lecture below or enroll in the full free lecture to access more than 20 additional articles and learning resources, listen to Dr. Bhave’s answers to attendees’ questions, and read the archived discussion board, which is brimming with interesting ideas and knowledge.

JOIN THE CONVERSATION: Looking to learn more from other professionals in the microgrid industry? Join our LinkedIn group: Microgrid MBA: Best Practices for Evaluating Economics of Microgrid Projects.

LEARN EVEN MORE – ONLINE TRAINING: Looking to dive deeper into the world of microgrids? Building one of your own or hoping to in the near future? Check out Dr. Bhave’s 6-week course, Microgrid Executive MBA Training. Designed in partnership with RenewableEnergyWorld.com, this rigorous, online course will teach you how to evaluate the economics of microgrid projects in a variety of markets using case studies, financial models, and templates. The course is approved for 18 GBCI credits. View the full course outline here. The course is capped at 50 students with 30 discounted seats.

mahesh bhave croppedDR. MAHESH BHAVE

Dr. Mahesh Bhave is a Visiting Professor of Strategy at Indian Institute of Management, Kozhikode, India. He has worked in product management, strategy, and business development positions at Hughes, Sprint, and Citizens in the United States. He is the founder of a rich media communications start-up in San Diego, CA. He is an engineer from IIT, New Delhi and Ph.D. from Syracuse University. He is also LEED AP certified.

Posted in Financing | Tagged , , | Leave a comment

Community Solar 101

There’s been a lot of buzz about community solar lately. While the amount of investment in community solar projects is a fraction of the investment of the entire solar industry, there are a few leaders who recognize the incredible potential of community solar.

Over the next few months, we’ll be publishing a series about community solar. This is the first article in that series. If you’d like to learn more about the subject, sign up for our free Commercial Solar PPA 101 course.

In this article, I’ll address the following questions.

1. What is community solar?

2. Why is community solar important for the solar industry?

3. What are the regulations that make community solar possible?

4. Who are the key parties involved?

5. Are the different structures that can be used to develop community solar projects?

Background – Why are we writing this article?

To give you a sense for how small community solar is at the moment, SEIA reports that there “at least” 52 “shared renewables energy projects” in the US. While it’s likely the amount is higher, even if it’s 10 times more, that’s only 520 projects.

We decided to create this article series simply because of the volume of questions we’ve been receiving about this topic in three places.

  1. A section in our commercial solar PPA 101 free course dedicated to community solar has been getting a lot of questions.
  2. Professionals continue to join our LinkedIn group “Best Practices for Financing Mid-Marketing Solar Projects” and ask for help on community solar topics.
  3. Lastly, in our Solar Executive MBA, where students are focused on learning how to develop and finance commercial solar projects from start to finish, we’re getting more and more questions about community solar.

This article will outline some of the basic key points around community solar. The goal with this first article is to go much deeper than most of the trade press can go and provide practical advice on the subject. While some of the content will be original, a lot of what I’ll focus on will be curation and organization of the existing material on the Internet that will make it easier for you to do research on your own time.

We’ll start with the basics and get more and more detailed.

There are so many questions to be answered that it’s difficult to determine where to start, so I asked our “Best Practices for Financing Commercial Solar Projects” Linkedin group, focused on financing mid-market solar projects any questions about community solar, to tell me what they wanted to learn. Here’s what they asked:

  1. How much should a developer expect to pay to lease the land/rooftop space for the array?
  2. Are lease payments based on $ per acre (sq. ft.)? or $ per MW? or $ per MWh?
  3. Are there typical escalators? 1% a year?
  4. Who takes responsibility for paying the taxes? Landowner? Developer?
  5. Are typical lease terms 20 or 25 years? Do they typically have options for renewal?
  6. What sort of developer fee is reasonable given the significant additional overhead associated with managing a community array?
  7. Do the community solar customers really own a piece of the system? Or do they only own the rights to the energy and environmental attributes of the production from their piece of the system?
  8. Is the community solar LLC able to depreciate the value of the solar array?
  9. Who gets the federal tax credit? The community solar owners on a pro-rata basis? or the community solar LLC?
  10. What are the advantages / disadvantages of having a large anchor tenant / off-taker?
  11. Are there any rules of thumb on the cost of sales? How much should a developer budget in cost per watt for sales/marketing/admininstration/legal expenses to close a customer?
  12. Do you have any legal agreement templates to review for several agreements needed between the various parties?

These are all excellent questions. They’re just hard to answer without a significant amount of work. Also, given that such a small number of installations have been completed, it’s not clear that there are concrete answers for any of these questions.

By the way, if you’d like to connect with other professionals working on financing community solar projects, please join our Linkedin group on best practices for financing community solar projects.

For this article, I’m going to assume that most solar professionals have heard of community solar and know that it’s something about having one large array that credits a larger number of residential customers but have not done much more reading than that. If you have a much deeper understanding of community solar than this, this article will be dull to you. If this is exactly what your understanding is, it should be a better fit.

What is community solar?

In the most basic form, community solar means that there is a single solar asset that is producing power. The power that is produced can be owned or purchased by multiple parties that are not sited at the exact location of the array.

In many ways, community solar is similar to community wind, although community wind has been far more successful. The wind industry, unlike the solar industry, first developed as a utility-scale energy provider and has slowly been working towards smaller and smaller projects. Two of the largest community wind developers, National Wind and OwnEnergy, have developed a combined capacity of 5,000 MW.

How does community solar work?

  1. There is a single large solar array that is installed.
  2. Similar to financing any commercial solar project, it can be structured as a power purchase agreement, where the homeowner is simply purchasing a specific amount of power, or an ownership model, where the members technically own a certain number of modules of the array and receive the production of those modules.

Why is community solar important for the solar industry?

Community solar is important for a number of reasons.

  1. Increase the addressable market size by 2X to 3X overnight.
  2. Instantly lower the customer acquisition costs for a residential solar installer that is already generating and selling roof mounted solar projects.
  3. Lower investor risk, in theory.

Let’s dig deeper into each of those.

First, community solar drastically increases the number of people that can buy solar. Increasing the number of potential customers means that the solar industry simply has more room to grow, more equipment can be installed, more people employed.

Faze1 screened all of the 1.2 million single family homes in Massachusetts and found that only 26% of them have suitable roofs for solar. It is true that some of them could install a small ground mounted system in their yard. However, it’s reasonable to assume that this would be a small percentage. Community solar provides solar access to the rest of the homeowners who don’t have proper roofs.

It also provides solar access to renters who cannot buy solar because they don’t own their home. In the existing solar model, solar makes the most sense when you own the building where the solar is being installed. Because community solar can change ownership quickly, renters will have access to solar.

The benefit of having more potential solar customers is clear. By increasing the potential market size of solar, it allows there to be a larger target market, more customers, more companies, more solar workers, and more cash flowing.

Second, community solar instantly lowers the customer acquisition costs for a residential solar contractor that is already selling roof mounted solar projects.

Reducing soft costs, and specifically customer acquisition costs, has been a focus of the solar industry for the past 18 to 24 months. Allowing community solar development would solve this problem. In fact, a recent solar bill in Massachusetts would have eliminated community solar potential because it removed virtual net metering. 

I’d argue that the most important reason for more community solar development is the ability to decrease customer acquisition costs for existing roof-mounted solar providers by at least 50% to 70% overnight. Let me explain why.

Let’s look at the sales funnel of a typical solar customer. This data was provided by Faze1. They have done extensive research on optimizing solar marketing profitability using better consumer data.

Let’s assume this is what a typical sales funnel looks like. Yes, these are averages and over-simplified, but they will illustrate my point. You could simply plug in your business’s number to get a better idea.

  • Marketing spend: $10,000
  • Leads Generated: 300
  • 30 – Qualified lead. Those that are willing and able to go solar.
  • 120 – Willing and not able lead. Willing means that they are interested in solar, have good credit, etc. They could purchase cash, use a solar loan, or buy cash. Not able means that the existing site is not suitable for solar.

This is anecdotal evidence from most of the contractors I’ve spoken with. But it’s clear that in order to find customers who can go solar and have acceptable roof space requires attracting and talking with 3 to 5 times more potential customers who want solar but don’t have the roof space. By being able to sell that customer a 20-year PPA for their home’s power or a 5kW share of a 1MW community solar facility, you can generate more revenue for the same marketing spend and number of salespeople.

If selling a community solar share was possible alongside roof-mounted solar, then the same $10,000 investment in marketing would yield 150 qualified leads instead of just 30.

Here are the numbers from my simple example.

  • Cost per qualified lead without community solar; $333 ($10,000 divided by 30)
  • Cost per qualified lead with community solar: $66 ($10,000 divided by 150)

Third, community solar has lower investor risk, in theory.

With community solar, the risk of default is lower than a PPA with a traditional roof mounted system. The reason for this is simple: In the case of non-payment, the community solar provider can instantly find another customer and change who is being credited for the power. In the case of non-payment for a roof-mounted project, power can be shut off from the solar provider, but there is no easy way to recoup the value of the solar array.

However, I’d suggest that, while this theoretical reduction in risk is true in the long term, community solar is perhaps a little more risky in the short term from an investor’s perspective simply because it is new. Potential risk will be affected by regulations, policy, and execution.

Key Parties

Here are the key parties in a community solar project.

  • Community Solar Service Provider. The community solar provider is responsible for setting up the SPE, gathering members, changing members, and handling billing.
  • Special Purpose Entity (SPE). The SPE is the specific legal framework that is set up to finance the project. It’s typically a LLC and it’s set up to own and operate the project.
  • Subscribers or Members. The subscribers or members are the “off-takers” for the project. They are buying the power. If they are “members” and invest in the project, they contribute their own money to buy a part of the project.
  • Host. The host is simply the location where the physical array exists.
  • Utility. The utility is responsible for distributing the power and billing credit. In the case of a utility-sponsored model, they are also buying the power and then distributing it to their members.
  • Developer. The developer does the engineering, procurement, and construction work and sets up the PPA.
  • Installer. The installer is responsible for building the project.
  • Investor. The investor is the individual or entity that is financing the project and monetizing the tax credits if the community solar project is financed with a PPA.

Regulations

There are three types of regulations that allow for community solar development:

  1. Group Billing Standards. Group bill is often compared with how master metering arrangements can be set up in real estate transactions. A landlord receives a single bill for the entire building. The landlord then determines how to split that bill up between all of the tenants. Using group bill in the content of solar works the exact same way, except all of the “tenants” don’t need to live in the same building. What happens is that the utility creates a group of members who want to be billed together. The utility produces a bill that describes all of the members’ electric usage and charges. Second, the output from the solar array is netted against the group bill. In this way, a number of residential homes can receive credit from a single facility. In this structure, there must be a single utility representative that deals with disputes and billing. This is the structure most commonly used in Vermont. Read about community solar lessons learned in Vermont.
  2. Virtual Net Metering. Virtual net metering allows net metering credits generated by a facility to offset loads at multiple retail electric accounts within a utility’s service territory. Under virtual net metering, credits appear on a customer’s bill as they would under a traditional net metered project.
  3. Joint Ownership. Laws and regulations that allow joint ownership allow many individuals to invest and own a certain percentage of a larger solar array. They are then are entitled to the power produced by that array.

Available States

Technically, there is some form of virtual net metering in 11 states according to DSIRE:

virtual-net-metering-policies-feb-2014.001

However, only 4 states have effective policies that are actually spurring investment. Those are Massachusetts, Vermont, Colorado, and Minnesota.

This is a development map from Clean Energy Collective. You can see they only develop community solar projects in 4 states.

Screen shot 2014-10-09 at 8.54.07 AM

Why is there a difference between laws on the books and development?

Laws on the books and effective regulations are separate animals. I ran into this when trying to help a friend develop a small community solar facility in Maine, a state that does allow joint ownership and virtual net metering, technically. What I ended up having to do is work through a loophole to make the project the work. However, this loophole is only something that’s possible with close friends or family situations and made it obvious why community solar on a commercial basis in Maine is impossible. Read more about a step-by-step guide to a 14.25kW community solar project in Maine. 

 Ways to Structure Community Solar Programs

In my research, I have found that there are three main ways to structure a community solar facility. All of these images are courtesy of a NREL report on community solar. 

1. Utility-sponsored model

Under the utility-sponsored model the utility itself owns or operates the solar array. Ratepayers of this utility are then allowed to voluntarily chose to receive power produced by solar.

Here is how flows of capital work in the utility-sponsored model.

Screen shot 2014-10-09 at 8.44.56 AM

2. SPE. In special purpose entity formation, a group individual investors join a business enterprise to develop a community solar array.

Here is how this model is structured.

Screen shot 2014-10-09 at 8.45.05 AM

3. Non Project Buyback structure. Through a non-profit entity, donors contribute to purchase a community installation that is eventually owned by a charitable organization.

Screen shot 2014-10-09 at 8.45.16 AM

This is the first article in a series of articles and interviews that we’ll do on community solar. If you have a question about any of the content, please leave it in the comment section.

Additional Recommended Reading

If you’d like to learn more about the topics in this article, I highly recommend these resources.

 

Posted in Financing | Tagged , , , | Leave a comment

How to Handle Unknown Risk to Increase Solar Project Success

Known Knowns PNGImage: Universe of Issues, Risks, and Challenges

This is a guest article from Chris Lord, Managing Director at CapIron, Inc. He’s a former lawyer with extensive banking experience who now consults with solar developers and investors. I’ve never met anyone else who can, seemingly, answer any financial or legal questions about financing commercial solar projects.

In the article, Chris shares some of his experiences about how to understand and mitigate the risks that you don’t know exist in commercial solar development. Unknown unknown risks are extremely important to understand because they can have large negative impacts on profits and relationships with investors and clients. These risks are especially important for firms that are experienced in solar but new to financing larger commercial solar projects.

I found this article extremely interesting and if your work revolves around selling or financing commercial solar projects, I’m sure you’ll love it. If you have questions about the article, please leave a comment. If you’d like to connect with other professionals focusing on best practices for financing commercial solar projects, join our LinkedIn group on Best Practices for Financing Mid-Market Solar Projects.

Chris Lord also teaches our 6-week Solar Executive MBA that starts on Monday, September 15th. In the course, you’ll work a commercial solar deal from start to finish with expert guidance. The course includes financial models, legal contracts, and development tools that are indispensable.

Enter Chris Lord

Not long ago, I spoke with an experienced developer who told me about a small utility-scale project undertaken by a team within his company. Although experienced with distributed generation projects, the team and its leader had never developed a third party financed, utility-scale project. They knew that they had to learn more about the technical and procedural requirements for interconnection with the local utility and delivery of the solar power to the grid. Over the course of development, the project hit many roadblocks and challenges before finally arriving successfully at COD. Throughout the process, the team modeled the project early and often, generally showing a tight but acceptable profit margin for the project. At COD, the company collected its profit and moved on. Less than a year later, the third party investor in the project made a call on the developer’s tax indemnity required as part of the close. It turned out – to the utter surprise of the project manager and his team – that they had incorrectly assumed the federal ITC would apply the interconnection costs paid to the local utility for equipment on the utility’s side of the transformer. The error – when finally caught – cost the company more than its small profit margin on the project and constrained the company’s cash flow.

This articles focuses on the most dangerous and difficult threat to successful project development: the risks, issues, and challenges that you don’t know that you don’t know. These “unknown unknowns” are not the items that you know you don’t know. When you know you don’t know enough about a risk, issue, or challenge, you can remedy that ignorance by focusing on the problem and calling on experts – colleagues, advisors, consultants or lawyers – to help you learn what you must learn to overcome, hedge, or eliminate it. In the example above, the team knew it had to learn more about the technical and procedural requirements for interconnection with the local utility, and they did so successfully. What the team did not know was that it did not know enough about the ITC’s definition of “eligible equipment” and its application to their project.

Understanding the Challenge of Unknown Unknowns

Developers by nature have to be optimistic and confident souls, if they are to make their way through the minefield of project development. Without that optimism and confidence, a developer would never get started on the daunting task of taking a green field site from start to finish. In fact, the persistence that everyone tends to think of as the critical ingredient in developer success is actually just a manifestation of optimism and confidence.

Known Knowns (PNG)

But as life shows us, our greatest strengths are also our greatest weaknesses. That very same optimism and confidence necessary for successful project development often blinds a developer to the biggest risks of all. These are the risks – that through optimism, confidence, and ignorance – are simply not on the developer’s radar screen. These are not the known or expected risks. A successful developer manages a known risk by minimizing and staging investments of time and money until more about the risk is known or its threat neutralized. There are a lot of surprises in the life of a development project, and, because developers are an optimistic lot, it is rare that these surprises add to a project’s upside. More often than not, these “upside” events were already incorporated into project economics as “good to average assumptions.”

So what really can kill projects are the unknowns and the unexpecteds. We will just call them the “unknown unknowns.” These items consist of issues, events, or results that a developer does not even know that he does not know. And while a wealth of experience and education can reduce the potential unknown unknowns, they are always there. Nassim Nicholas Taleb (author of The Black Swan and several other books on risk) and many other investors specialize in investment strategies designed to capitalize on unexpected and dramatic events, such as the mortgage meltdown crisis of 2008. These strategies involve multiple small bets on a wide variety of extreme outcomes. But a project developer is betting on not having unknown unknowns occur, and that is a lot harder to do.

Tackling the Problem of Unknown Unknowns

The image above illustrates the problem. If we begin with the blue box, then that is the complete universe of all issues, risks or challenges. At the very center of the box is the yellow circle that illustrates what we know (sometimes called the “known knowns”). These are the items that, through education and experience, we know how to handle and are comfortable wrestling with them. The orange cloud surrounding the yellow circle represents the items that we know we don’t know. Within this nebulous cloud are the issues, risks, and challenges that we know just enough about to know we must anticipate and manage them, but we don’t know enough to define them and consider the solutions, hedges, or alternatives. In other words, we know that we can expect the item to arise, and that to manage that item we must either educate ourselves, find an expert to manage it for us, or some combination of the two. For example, most developers know that they must consider whether a project will be subject to property tax over the course of its existence. Property taxes are a set of arcane rules that vary not just from state to state but also from county to county. Moreover, solar PV projects may be characterized and taxed as real property in some jurisdictions, but they may also be taxed as personal property in jurisdictions that make the distinction. In this case, when a developer begins a new project in a new state or county, he or she knows to consult local counsel early – before even meeting with local taxing authorities to discuss abatements or PILOT agreements.

Known Knowns PNG

Image: Universe of Issues, Risks, and Challenges

Specific Actions to Address Unknown Unknowns

So, turning back to our unknown unknowns, how does a developer guard against something that by its very nature is unknown and unexpected? Not easily, of course. But a couple of options come to mind. The key to all of these options is to work on expanding the known knowns and the unknown knowns. If you look at the illustration above, we are talking about expanding our knowledge and leveraging the experience of others to make the yellow circle as large as possible and grow the orange cloud outwards as well. In effect, we want to shrink the blue portion of the box – the unknown unkowns – by expanding the circle and cloud. Of course, we can never eliminate the blue, and should not imagine that is where our efforts should focus, but the faster we can grow the yellow circle and orange cloud, the better hedged against the unknown unknowns we will be.

Continue reading

Posted in Financing, Solar Photovoltaics | Tagged , , | Leave a comment

The Most Common Solar PPA Modeling Mistake, The Fix, and a Free Tool

solar modelling

This article will address the most common error that developers and EPCs make when modeling commercial solar PPAs. The video below will discuss the problem, the solution, and provide a free tool you can download so you can work through the answer yourself.

This article is part of a series common topics and questions that professionals have about financing commercial solar projects. Past topics include how to price the risk of cash equity vs tax equity in a partnership flip and how to calculate the buyout process of a PPA.

This lessons will be on the most common modeling mistakes that Chris Lord see’s developers make. Chris Lord runs a consulting practice called CapIron and is a co-teacher of the Solar Executive MBA that teaches students how to finance commercial solar projects from start to finish with expert guide. You can get a $500 off the Solar MBA here. 

The modeling problem has to do with properly discounting the tax benefits of a project. The result of that problem is two-fold. First, it’s an obvious beginners mistakes. If you want to look like a professional, you need to make sure that you’re not doing this. Second, if you do it improperly, it inflates project returns, which can hurt you when the investor does their due diligence.

Note: If you want to see what Chris is doing, click on the FULL SCREEN button on the bottom right of the video. You can also download the tool Chris is using by entering your email at the bottom of the article. 

We all know the importance of understanding and modeling the economics of a solar project, but what is the most common and easily corrected modeling mistake you see Developers make?

Failing to properly discount the federal tax benefits in a transaction, particularly the ITC. Most show the ITC as a direct and immediate reduction of the Capital Cost of a Project. In effect, developer is asking the tax investor to buy the tax credit by paying $1 for every $1 dollar of tax credit. Developers want to pay a discount. Sometimes the discount is expressed as a price per dollar, but the best way to account for the cost is show the purchase price paid in year zero and the ITC recovered in year 1. This ensures that the ITC will be discounted at least one year by the Investor’s discount rate.

How would you handle depreciation? 

Answer: You take the available depreciation for each year – let’s say that is the excess depreciation beyond what is needed to shelter the project’s current income – calculate the value of that depreciation as the amount of tax savings that such excess depreciation will generate. For example, if you had in year 2 $110 of depreciation and $10 of project income, you would have $100 of excess depreciation. For an investor with enough other qualifying income to use that $100 of excess depreciation, the value is equal to the applicable tax rate times $100. At a 35% federal tax rate, that would mean $35 of value in year 2. Discount that back to year 0 to determine today’s value of that $100 of excess depreciation in year 2.

Download The Sample Model

Enter your email to download the model to help your calculate the value of the ITC and MACRS on commercial solar projects.
  • This is where email where the model will be sent.

 

Posted in Financing, Solar Photovoltaics | Tagged , , , , | 1 Comment

Interview with Cory Honeyman, GTM Research Solar Analyst, on Emerging Trends in Residential and Commercial Solar

In this interview, GTM Research Solar Analyst Cory Honeyman provides some background on the U.S. Solar Market Insight Report and discusses trends in residential and commercial solar, including hard costs, important skills for salespeople, state incentives, common misconceptions, and financing. (The interview has been lightly edited for length and clarity.)

Tom McCormack (TM): Can you give some background on the U.S. Solar Market Insight Report?

Cory Honeyman (CH): The U.S. Solar Market Insight Report is a publication that we release with the Solar Energies Industry Association (SEIA) on a quarterly basis. The key takeaways from the report are a combination of understand installations across each state and market segment, our outlook on future installations, our forecast, by state and market segment on future installations through 2017. Within that, we break apart and identify the leading states and provide qualitative background on the key drivers and challenges to growth that are fueling or hampering installations across the top 10, and some of the newer state markets that are just beginning to hit the national radar. We also cover installation pricing trends, manufacturing and component pricing trends, and, finally, a breakdown of both PV and concentrating solar trends.

TM: What is the methodology for the report?

CH: The quantitative data comes from an extensive data collection effort that I take the lead on. We reach out to 60-80 sources, including utilities, incentive program administrators, and government program administrators, who provide figures on new installation capacity across the major market segments. One key element that sets this report apart from other reports that are tracking growth in the solar industry is the fact that I think we have the most robust coverage of actual utility interconnection data. We also conduct an extensive array of channel checks where we have discussions with people across the downstream value chain for solar about the major drivers of growth in the states where we’re seeing upticks in a given quarter.

TM: What is driving the increase in residential installations?

CH: Customer acceptance and the interest in going solar in the major state markets, especially in California, is increasing every year. When you see three of your neighbors go solar, it inevitably makes you want to go solar, too. Outside of the increased social acceptance, the economics for installing solar on the residential side have become increasingly attractive. The cost to install has gone down, but it’s also been driven by the introduction of a lot more innovative and attractive third-party financing options that have really scaled up growth. The entrance of companies like SolarCity that can enable homeowners to avoid a lot of the upfront costs of installing solar is driving a lot of the growth in the established state markets. We see, on the residential side, in most major markets, that third-party ownership accounts for two thirds to 85 percent of the market each quarter.

TM: What is making solar cheaper?

CH: On the upstream side, we’re seeing declining prices across both components and polysilicon. Combined with that is the fact that we’ve seen increased electricity retail rates for customers. Those two things together increase the value proposition for customers to go solar. Also, in many of the established state markets installers have fine-tuned their internal operational efficiencies, cutting down on a lot of soft costs and have also even focused on customer acquisition.

TM: Do the current solar trends suggest any new careers or skills that will be more in demand in the coming years?  

CH: Our partner SEIA recently released a report on the number of jobs that have been created within the solar industry, and that goes into the types of jobs the industry attracts and how that has evolved over time. As we’ve seen really impressive and continued growth across the entire market, obviously that requires a ramp-up in sales capacities. So, if you go on LinkedIn and type in “solar,” all of the leading companies have positions open for outside and inside sales consultants, and I think that is an area where there will be constant demand. Although it’s becoming increasingly heterogeneous, the U.S. market is still concentrated in the hands of a few state markets. However, the dynamics within those states is changing, so I think there’s a need for more and more roles that involve a strong understanding of where the market is heading both geographically as well as in terms of financing trends and other major trends that can lead to increased acquisition of customers.

TM: What types of skills would make a prospective solar employee marketable today?

CH: It’s a different conversation depending on whether you’re pitching to a residential or a commercial customer. The requirements for commercial are more technical and focused on the financial returns whereas with residential, you really just need to shore up what your elevator pitch is when you’re reaching out to potential customers. Regardless of what the customer acquisition strategies are for a given company, if you’re in a sales position, a lot of that is going to be external-facing and either on the phone or face-to-face work. So, it’s important to understand financing options and be able to explain the key metrics that homeowners care about. So, what is the payback period? Or, what is the discount I can expect based on what I am currently paying for my electricity bill?

TM: What do you consider to be an overlooked or not-well-understood element of the current solar market?

CH: I think one of the prevailing notions about installing solar is that you need to have incentives to make it work, and I think we expect any project to take advantage of the federal-level incentives, which means the federal investment tax credit along with another incentive or accelerated depreciation. That will continue to be the primary driver of growth for the next couple of years. When a lot of people think about the economics of solar working out, it has to go hand-in-hand with the availability of really strong state incentive programs. That does fuel a lot of growth across many smaller and middle-tier state markets. But we’re really beginning to see a number of the leading states, that account for 80 percent of the market begin to shift away from needing any state incentives to make projects work. Last quarter was a hallmark moment for California, where over half of all the residential installations that came online actually came online without any state incentives. The trend is getting closer to this notion of retail rate parity, where a project can work with only the federal-level incentives. The misconception that you need incentives to make projects work is an important one because if you’re interested in making sales pitches and becoming an attractive candidate for jobs, being able to talk confidently about where the industry is heading and how it’s becoming increasingly independent of these state-level incentives is important.

TM: What are the main drivers of solar growth? Is it the political landscape of the state, the incentives in the state, or simply the availability of solar based on state geography?

CH: I think they all work together and are weighted differently depending on the state. The underlying market fundamentals that need to be there are: “What are the current retail electricity rates in a particular state?” and “What are the solar resources for that state?” When you have those two questions factored in, the role of incentives plays an important role, but when you think about the roles governments and utilities play in helping to promote solar growth, I think it really varies. From an outsider’s perspective, it’s probably surprising to hear that, in a number of states where you wouldn’t expect to see meaningful investment in solar, it’s actually taking place. Yes, California has and will continue to be the #1 state market for solar, but recently, for example, within the utility-scale market segment, North Carolina is the #2 state right now. Also, even farther south, Georgia, and specifically the utility Georgia Power, has made significant efforts an investment to begin ramping up solar development within its territory.

TM: Can you explain why that’s surprising? Is it because we’d expect redder states to be more reluctant to embrace the technology, or is it a different reason?

CG: I don’t think it’s surprising. The value of going solar is not driven solely by altruism and doing right. That’s an important piece to the puzzle, but the economics are structured in a way that, both for utilities and end users, there are strong cases to be made for integrating solar into the mix. So in Georgia, Colorado, and even Minnesota, the value of adding solar not for compliance reasons, but, for example, as a hedge against natural gas prices inevitably rising again. For customers in states where the incentive landscape isn’t as strong, and as project economics become increasingly attractive, the value of avoiding energy costs altogether is something that I don’t think people always factor in to the evaluation of what role solar can actually play across the U.S.

TM: What are the factors that impact how a utility company participates in the market? You mentioned that it’s a hedge against the price of other energy sources.

CH: That’s a second-order driver at this point. The #1 factor has been that states have set renewable portfolio standards (RPS), and a lot of those have solar carve-outs where the utilities are required to procure a certain amount of solar to meet annual compliance obligations. Those pieces of legislation have launched a number of procurement programs and incentive programs across all market segments. There are a number of states where those RPS are set. The most recent one was established in Minnesota.

TM: So, if there’s new legislation in a state, that’s going to be a major driver, forcing the utilities to get on board whether they like the idea or not?

CH: The prospects for new RPS legislation are going to be few and far between. There are a few states where we’ve seen an extension or revision of these standards, but a lot of the standards have been set over the past few years, going back as early as the mid-2000s, so that legislation is not something that will create new demand. It will just sustain demand that’s been set into place over the past several years.

TM: What types of new commercial projects are we seeing on the horizon?

CH: On the commercial side, the market saw a downturn in 2013 and kind of flat-lined. I think the market has shifted toward smaller-scale commercial systems, sub 100 kilowatt. In the past, especially in New Jersey, which was, for a while, the leading driver of growth in the commercial market, you saw a ton of 5 to 10 megawatt, ground-mount systems that were driving a lot of growth there. And, that market fall apart for a bit because its primary driver is SRECs, and the demand for SRECs dropped once there was too much investment in that market. Looking forward, I don’t think you’re going to necessarily see a shift in the types of projects; it’s more about the way in which that market can become reinvigorated. A lot of it has to do with mirroring what has happen recently on the residential side: figuring out ways to unlock capital to start developing projects again. On the residential side, we’ve seen really innovative platforms for linking investors with developers and linking third-party ownership agreements with customers. Coming up with innovative online platforms to facilitate and then unlock investment for commercial customers is a really important strategy that’s been employed on the residential side. Revising the financing structures that are currently in place in commercial markets is a really important trend to keep in mind. But there’s isn’t one specific type of project we can expect to see. It really depends on the state market. In Massachusetts, which is well on its way to being the #2 commercial market, looking at 2014, that market still sees a number of 1 to 5 megawatt, ground-mount systems. So, it depends on which state you’re in, what incentives are in place, and what those incentives are targeting.

TM: If there was something I needed to learn or familiarize myself with, when you’re talking about the more innovative financing for commercial solar, is that just a matter of getting comfortable with the all the different options that are out there, or creatively bringing investors to the table, or exploring new crowdsourcing options? What would I want to key in on to be on the cutting edge of that change as it happens?

CH: That’s one of the million-dollar questions for 2014 with commercial solar. There are a few companies that are beginning to introduce innovative financing structures. There was an announcement from Wiser Capital that they’re introducing a platform for scaling up commercial solar. Topics you’d really want to understand are how a power purchase agreement (PPA) is structured and expected returns and requirements from different types of nonresidential customers. “Commercial” is often used interchangeably with “nonresidential,” but a lot of the developers who are developing commercial projects are also developing projects for municipal, government, and non-profit entities, too. So, it’s important to recognize that the types of financing available for school projects, for example, are different than what you can secure for a commercial customer. And, I think there are trade-offs and benefits to both types of projects, but really understanding what types of debt instruments you can take advantage of with school and government projects, it’s perhaps a little more niche, but some of those opportunities are really important to leverage. Good case studies to reference are a number of school projects that have been developed in California and Arizona where they have PPA documents available to the public that you can review.

We plan to do an interview like this one each quarter to stay on top of quickly-evolving trends in the solar industry. What topics would you like to see covered?

—————————————————————————————————————————–

If you’re looking for solar training taught by industry experts, check out these online options:

Solar Executive MBA – The Solar Executive MBA is technical, rigorous, and challenging. It’s the most intense six-week course you’ll ever find but also the most valuable. We developed it for leaders who are responsible for the financial details that drive solar projects. The course is taught by two instructors: Keith Cronin, who built and sold his solar installation business to SunEdison in 2007, and Christopher Lord, a lawyer with deep banking experience who works with solar companies to find viable projects and investors for those projects.

Megawatt Design – Spend ten weeks learning from Ryan Mayfield, the Solar PV Technical Editor at SolarPro Magazine. Ryan, along with help from other industry leaders, has developed this course to help experienced solar professionals get their projects permitted and installed faster and cheaper. This course goes beyond traditional solar training: it is technical, rigorous, and for experienced professionals only. We cover all types of large solar PV systems, with a heavy emphasis on commercial rooftop systems.

Batteries in Solar PV Systems – Six-week intensive training with solar legend Christopher LaForge. PV systems that employ batteries require significant design considerations. Whether using batteries to “back-up” your utility grid or having them as the basis of a “stand-alone off grid system,” choosing the correct battery and sizing it correctly is challenging. This workshop will be an in-depth analysis of the issues surrounding the use of batteries for PV applications.

40-Hour Advanced Solar PV Installer Training – For experienced solar professionals looking to take the NABCEP Installer Exam and advance within the industry. Includes 40 NABCEP approved hours of training on advanced solar PV topics. We’ll cover electric code, installation, design, commissioning, sales, and begin to prepare you for the NABCEP Installer Exam.

Solar PV Installer Boot Camp + NABCEP Entry Level Exam Prep – The best way into the solar industry. This ISPQ-accredited, 40-hour solar training teaches you to design, install, and sell solar PV (electric) systems and helps you pass the NABCEP Entry Level Exam.

Posted in Financing, Solar Photovoltaics | Leave a comment

How to Price the Risk of Cash Equity vs Tax Equity Positions in Solar Partnership Flips

This article is part of a series common topics and questions that professionals have about financing commercial solar projects. Chris Lord of CapIron provided some insights into pricing certain types of investor risk in partnership flips. Chris is a co-teacher of our Solar Executive MBA. The 6 week class teaches solar professionals how to finance commercial solar projects from start to finish including financial modeling, legal contracts, development tools, and a capstone project.

Now, onto the question.

In a partnership flip, just how much riskier is the Cash Equity position, compared to the Tax Equity position? How do you put an IRR or Discount on that?

In a partnership flip, the cash equity’s return is subordinated to the tax equity’s return. In other words, the lion’s share of all cash and tax benefits for a project are allocated to the tax equity, with only a small allocation to the cash equity. This continues until the tax equity achieves its target return. That target return could range from an upper single digit return for the best of the best projects, and more typically in the low to mid double digits for typical mid-sized DG projects. This allocation favoring tax equity could extend for anywhere from 3 to 10 years depending on the strength of the project’s economics. Only after the tax equity realizes its target return, does the allocation of cash (and tax) benefits swing back to strongly favor the cash investor. This means that cash equity returns are pushed back later into a project’s lifecycle, and that longer term and subordinated role mean a cash equity position is always “riskier” than a tax equity investor and ought to receive a return greater that than the tax equity investor.

How do you put an IRR or Discount on that?

Hard for a developer to put a price on it, but the real test is what kind of a return does the market require.

Posted in Financing, Solar Photovoltaics | Tagged , , , | 1 Comment

How to Calculate the Buyout Price for Commercial Solar PPAs

This article is part of a series tutorials, interviews and definitions around commercial solar financing that is leading up to the start of our next Solar MBA that starts on Monday September 15th. In the Solar MBA students will complete financial modeling for a commercial solar project from start to finish with expert guidance. The class is limited to 50 students, but there are 30 discounted seats. 

This article is part of a series on common topics and questions that professionals have about financing commercial solar projects.

Chris Lord of CapIron provided some insights into pricing certain types of investor risk in partnership flips. Chris is a co-teacher of our Solar Executive MBA that teaches professionals how to finance commercial solar projects from start to finish. The 6 week class involves working a project from beginning to end with expert guidance including legal contracts, financial modeling, and development timelines. You can get your $500 discount on the Solar MBA here. 

Now onto the question.

How do you calculate a buyout price for your host customer if they want to purchase the system in Year 7 or Year 5?

You are trying to determine what an investor will want to sell the project for. An investor would take the remaining cash flows from the project for years 8 through the end of the PPA, and discount that stream back to Year 7 using the investor’s target IRR. This will give you an approximation or guide to what FMV might look like in year 7.

What about a residual? How does that play in?

Project sellers love residuals, but buyers never do. A residual value is a guess as to what a project might be worth at the end of the PPA term. For example, if a 20 year PPA had a renewable term, then it would be fair game. Or, if we have a utility scale project and the site lease goes beyond the PPA term, then there is potential value. The question of what that value is, of course, is hard to determine. Moreover, whatever value might be agreed upon, is then discounted back ten or 15 years, which further reduces its role in the ultimate determination of FMV. So, at the end of the day, you can make some residual values, but it is a bit of a guessing game.

What if you want to set the buyout price at the start of the PPA?

Well, that you cannot do if you are seeking to monetize the tax benefits. If there is a firm, fixed price buyout set as a specific dollar amount at the start of the PPA, the IRS might conclude that the tax equity investor is not a true owner of the system because they don’t have any “downside” risk. To determine whether a tax equity investor is truly an “owner” for tax purposes, the tax equity owner must be at risk for losses if the project proves not to be as valuable as the parties thought. Hence the IRS expects you to agree that an option can be exercised for a price equal to FMV, but that FMV price cannot actually be determined until the time of exercise.

Posted in Financing | 2 Comments

[Interview] How to Provide Solar Financing to Any Non-Profit Solar Project Larger Than 50kW

solar crowdfunding

Lee Barken and his team at Collective Sun have figured out the holy grail of commercial solar financing.

Collective Sun can provide solar financing to non-profit solar projects from 50kW and up. Currently, they’re offering their product in California but are interested in doing the securities and legal work to open up shop in other states, if there is a non-profit that has serious interest in working with them.

Listen to the interview below to learn more about Collective Sun (CS) and how, specifically, their underwriting process is different than a traditional investor. Their key advantage is their unique underwriting process. It’s a really interesting strategy. Their process has more to do with selecting investors that see specific non-profits as low risk, rather than finding the non-profits that meet the stringent constraints of a tradition solar investor’s risk profile.

Why focus on non-profits?

There are several reasons why there has been such focus on non-profit clients.

  1. Non-profits operate on small budgets and they always need cash. Having lower and predictable operating expenses is very valuable to these organizations. It’s an easy sell to get your foot in the door.
  2. Non-profits have a social mission that tends to fit well with solar.
  3. There’s A LOT of non-profits! So the potential target market is huge. According to NCCS, there are 1.4 million non-profits in the US. Figuring this problem out will result in a huge increase in sales for the firms that provide this service.
  4. They can’t purchase a system in cash, because they don’t have a tax appetite, so financing is a natural fit for them.

A few months ago, we did a live Q+A that was specifically on performing due diligence, using crowd-funding,  and finding investors for financing non-profit solar projects. You can see the 50 minutes of video answering 5 question here. If you want to learn how to finance commercial solar projects from start to finish including all of the legal contracts, financial modeling tools, click here to read more about Solar MBA that starts on Monday April 14th. You’ll walk through the financing of a project in 6 weeks. Click here to enter your email and get one of the 30 discounts to the class.

Listen to the Interview

In this interview, here’s what you’ll learn.

  • How many projects Collective Sun (CS) has financed.
  • The types of non-profits that CS is focused on.
  • The size of non-profit that CollectiveSun will work with.
  • The spark that made CS decide to focus on financing non-profits.
  • Lee Barken’s background and how that led him to CS.
  • Why financing non-profits is more than a tax problem.
  • How CS deals with non-profit risk by working with a very specific type of investor.

Continue reading

Posted in Financing, Solar Photovoltaics | Tagged , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

[30 Minute Interview] Why SREC Markets Will Grow in a Post-ITC Solar World + Other Trends in Commercial Solar Finance

Chris Lord of CapIron, Commercial Solar Finance Expert

All eyes are on the reduction or expiration of the 30 percent federal solar tax credit (ITC). While it’s the prime goal of SEIA (Solar Energy Industries Association) to maintain the federal ITC, some have argued explicitly that it’s time to dismiss solar tax credits on the local level, while others have argued the federal tax credit SHOULD be reduced or eliminated to help the solar industry.

In this 30-minute interview posted below, I talk with Chris Lord, of CapIron Inc, a solar finance expert. Chris works with property owners, developers and financiers to develop mid-market solar projects. Chris has extensive experience financing solar projects and because he deals with stakeholders on all sides of a project, I’ve found his perspective to be extremely valuable. We’ll discuss investor trends in the commercial solar market, the possible impact of the expiration of the ITC, non-recourse bank lending trends, how EPCs should find investors in their local market, and the impact of crowdfunding.

My takeaway: The impact of the possible ITC expiration will depend on the local market. In markets that have flexible programs, namely SREC markets, it could actually increase the adoption of solar PV by increasing the value of SRECs — after a short drop in supply — which would then open up an entire markets for both properties and investors that could not use the ITC before. While in markets with more rigid structures, like feed-in-tariffs, cash rebates, or tax credits, it might have a more long term negative impact.

In this interview, you will learn:

  • Why there are a lot of banks and funds investing in 2-MW+ and residential solar projects, but few focusing on commercial. I’ll will share why I do not see a trend of more and more project investors focusing on smaller and smaller commercial projects even though there is a huge opportunity. (Note, there are some funds focusing on mid-market projects, click here to listen to an interview with a $20MM solar tax equity investor that only finances mid-market commercial projects.)
  • Why mid-market commercial projects are the hardest part of the market for investors to deal with. Hint: It’s because of the high transaction cost relative to the size of the deal and the inability to aggregate deals.
  • Even though commercial financing is difficult, Chris will share how he sees projects are still being built.
  • The four characteristics of the right investors for mid-market commercial projects.
  • What are the three steps a developer must take to find project investors for their projects.
  • How an EPC’s development plan for a project and the tax appetite of an investors are intimately linked.
  • How the tax appetite of an investor will be the limiting factor to an EPC’s development plan and how you can quickly reverse engineer the tax appetite required from an investor to fund your development pipeline.
  • Why the standardization of documents (note: you can see the results of NRELs working group here and Tioga’s open source PPA here) will only have a minimal impact on reducing the transaction costs for mid-market deals.
  • Why developers should work on creating a specific formula with their investor partners with a specific jurisdiction that can be replicated as much as possible.
  • How tax benefits are a double edged sword and how the expiration of the ITC could greatly simply financing and increase adoption of commercial solar.
  • The maximum transaction cost-to-project deal ratio that I see in the market.
  • The impact that the expiration of the federal ITC could have on local solar markets and how it will be different based on the rigidity of state incentive programs.
  • How low gas prices could shut down coal plants and increase electric rates, increasing solar adoption.
  • Why non-recourse debt is not getting substantially involved in the commercial solar market.
  • Why the expiration of the 2016 ITC could switch the market to using a hosts debt and their own balance sheet to finance projects, eliminating the need for a PPA because tax credit monetization is no longer needed.
  • Three advantages of crowd-funding over borrowing from banks for developers.
  • Two reasons why crowdfunding is attractive to investors.

If you’re interested in more information about the post federal solar tax credit era, check these out

Do you have feedback or questions about this interview?  

Please leave them in the comment section or send me a note on twitter.

This article was originally posted in Renewable Energy World

Posted in Financing, Solar Photovoltaics | Leave a comment

50 Minutes of Video Answering 5 Questions on Finding, Pitching, Managing Solar Tax Equity Investors

Photo credit: www.LendingMemo.com

Photo credit: www.LendingMemo.com

This event has already happened. Please scroll down to see the recording and read the answers to the questions. 

This week our focus has turned to a question that everyone wants answered. Investors, investor, investors! Everyone needs more capital for projects, so they can build even more projects. Everyone thinks that lack of investors that can provide capital for projects is holding their business back, which may or may not be true.

We reached out to a few HeatSpring friends that are doing commercial solar work and asked them what issues they were facing with project investors. There are 5 questions below that we’re going to answer on Tuesday.

Interested in more information on the financing commercial solar projects?

We have a lot of awesome information on the subject for you to sink your teeth into.

The 5 Questions

Question 1 – Where do investors come in in the development process of a project? I have 8 acres of land and it has the potential of building a 2MW facilities. I’m in EPC with a strong relationship with the landowner, when should an investor be brought in on the project?

Investors should always been in your orbit and you should develop a prospectus template for your projects. You should first have site control for any project you consider developing. A letter of intent is critical to have executed and if it can be binding for a period of time- 3-6 months as you perform your due diligence, the better. Explaining this to the landowner first is essential and once explained “why” they usually understand that the process is detailed and often one item could kill a deal. Creating a development plan, which consists of specific activities and events that need to happen in order to see a project go from idea to interconnection can be the difference in not only completing a project, but providing potential investors with the confidence in you. Investors have alot of places to park their money today and they need to know that you’re a strong EPC and also that you have a solidified relationship with the land owner. This helps everyone be efficient with their time and reduces the potential for the “cry wolf” types of projects that invariably never get built.

Crafting a timeline with specific milestones and assignment of responsibilities is essential, if you want to attract the most qualified investors. A development plan should also be included and be circulated to the investor pool to show them when you will hit the specified milestones. From a cash flow perspective, this is going to be also important as an EPC, so you’re not carrying the weight of the economics of the project throughout the development process.

Question 2 – What are the most important topics to include in the first page of an executive summary on a project when dealing with an investor for the first time? What will get them interested and afraid?

An executive summary can be as detailed as it needs to be to garnish the attention of an investor. Some things to highlight in the summary should be:

a. Project summary- tell them a story

b. Project financials- what is in it for them

c. Project team- who are you and why you are better than other providers

d. Project details- technology to process- (development plan)

e. Project risks- and how you will overcome them

Investors are being pitched by everyone and anyone and its not just in the solar sector. Returns balance risk- higher returns, higher risk and vice- versa.

What is your unique angle on your project that will get them interested? Are you appealing to their wallets, their altruism goals, more projects in the pipeline, simple project, low risk, high returns, etc.?

Ask them questions: what do they want? Listen and take notes as they will tell you what they’re looking for in a one off project or a portfolio of projects.

Question 3 – I’m an EPC in the northeast and I’m in the process of negotiating a deal with an investor on a 450kW rooftop project. The investor is a local real estate investor that has the passive income to invest in these projects, but he’s new to solar investing. What are my biggest risks and how to I avoid them?

Congratulations – you are well on the way to mastering two of the most challenging parts of a middle-market commercial solar transaction: finding a customer and an investor. As an EPC you probably have a lot of experience finding and landing the customer. The challenge is that financing is not normally in the job description of an EPC, and yet it is a critical component of the puzzle you are trying to put together. So, what are your risks? Where do you need to pay attention?

In a nutshell, your risks arise from your investor’s inexperience and ignorance. That means you must be sure they understand the economics and the structure you are using. Now let’s look at the detail behind that short answer.

The biggest risk you have comes from the fact that your investor is not experienced in the solar arena. Let’s assume though that he or she is a successful and confident real estate investor. We can extrapolate and say that – whether your investor verbalizes this or not – he or she will not want unexpected surprises in the structure or economics. Those are your two biggest risks – failure to understand economics and failure to understand the subtle complexity that comes from a tax equity structure.

In this scenario – ignorant and inexperienced solar investor – some people may take the strategy of give them as little information as they can – a “just get the deal done” strategy. But there are serious legal risks to you and your EPC business if the investor experiences unexpected and unpleasant surprises after the deal. There are business risks as well from this strategy, but they pale by comparison to the legal risks. Losing a million dollars could be pretty painful but nothing like prison. Violating legal rules regarding investment disclosures can carry not just civil but even criminal liability. Besides, your business reputation depends on a successful venture from start to finish, and you want to tap into this investor and his social/business circle for future deals, so there is a great deal of value in getting this right.

Your challenge lies in teaching solar investment as thoroughly as you can over the course of your negotiations, and the build out. But at the same time, you don’t want to confuse or discourage him or her.

Given that your biggest risks stem from a failure of the investor to understand the economics and the structure, you need to prepare a simple but effective model so that the investor or his/her specialists can thoroughly get there head around the economics and related risks. You also need to prepare effective material to explain the tax, legal and business ramifications of the solar investment structure you are selling to the investor. We will cover both in the course in greater detail, but that is the answer in a nutshell.

For our discussion here, I would also add that you must recognize that you cannot explain the structure and get an investor comfortable with an economic model in a single meeting. This will take at least a few weeks and you must be patient. Even once you have an agreement in principle, you must be sure to communicate regularly with your prospect about the deal and its progress.

So, cutting to the chase, don’t assume you can slip a fast deal past an investor. Business models and deals built around assuming the gullibility and shortsightedness of the investor are inherently flawed.

Question 4 – How do you manage an investor communications during the development and construction process?

Carefully and diligently!! The answer to this questions flows from the risks we identified in the preceding question: investor knowledge and understanding of the economics and structure of a deal.

For simplicity sake, we will assume an experienced investor and an inexperienced investor. In both cases, you have the same objective, but the detail and tools may vary.

For the experienced investor, a solid and detailed presentation on the deal, coupled with an online due diligence data room will probably be sufficient to get you most of the way there. You not only want to communicate the substantive aspects of the specific transaction to your investor, but you also want a good record of what you disclosed and when. Whether you are an EPC, customer or professional advisor/broker, you are legally responsible for disclosing the investment risks to the investor.

For an investors with three or four deals completed and a couple of years’ worth of payout under at least one deal, you don’t have to worry as much about global, big picture risks as you do specifics that are peculiar to your deal. Cover the most meaningful ones in your presentation. The due diligence data room should cover all aspects of the deal – from the customer through the EPC. Often an experienced investor will have their own due diligence checklist, and you want the structure of your online data room to mirror that checklist to make things easier for the investor. You probably don’t have to share an economic model in this scenario but you need a single document that contains all of the economics assumptions and data. For example, an investor does not want to have to hunt through your data room to get the PPA price and escalator, or the annual O&M Costs.

What that covers the substance and means of communicating with your investor, you must still figure out the pace and timing of your communications. You don’t want to be haphazard, elusive or an obsessive pain, but you do want to be regular, thorough and timely. Schedule each of your follow-up conversations at the end of your current meeting or call. Make sure your emails are timely and have all of the necessary data. Give a heads up if there are unexpected developments. Remember your investor is a human too, and he or she will be communicating internally with bosses, credit committees and other team members. Help them to look professional and competent, and you will be valued accordingly.

For the less experienced investor, you have a lot of work to do. As we noted earlier, you must combine not only the usual disclosure requirements and procedures, but you must also be educating your investor on the economics and structure. For example, you are going to probably have to share an economic model with the investor. You need to make sure it is a good one, and that it can grow with the sophistication of your investor. As hard as it will be to remember, you are trying to build a long-term relationship with a prospect. Even if they do not have the capacity to make multiple investments, they will have a circle of business and social colleagues who may well follow them. Remember – local investors know and watch one another and so your professionalize and performance will precede you in the local community.

Question 5 – There are only 15 or so large banks offering tax equity in huge funds to residential providers or 5MW+ facilities. I run a successful contracting business in the mid-atlantic but we’re new to solar, we have a great reputable and an existing book of business so I have a pipeline of 1MW of projects that I can install at around $2.35/watt  I can build over 4 sites and I see this growing by about 25% per year. What is the specific profile of an investor that I should be looking for for these size projects and how would I about finding them?

My first recommendation for all solar projects – residential, commercial or institutional – is, first and foremost, to find as many customers as possible who will do the projects without financing. Doing deals without the complexity of financing is far more profitable than doing deals with financing. Always.

Residential deals have the challenge of being smaller and so an investor can afford very little in the way of legal and due diligence costs. That is why residential went to aggregators first.

Now, in your hunt for financing, don’t overlook the fact that there are residential aggregators out there who will work with multiple EPC’s. They are essentially in the finance business and pull together a raft of deals that one of the larger institutional investors will then put money into. Of course, there is the middleman’s cut, so you need to be sure you have enough economics in the deal to pay them and still make your EPC/Developer margin. They will also require you to use their documentation or at least markup and approve your documentation, which means you must lock up with such an aggregator before you enter the deal with the residential owner. The aggregator will also want to be comfortable with you as an EPC and a credit risk. So have good data on your construction experience, and be ready to walk them through the details of your design for a specific solution. The aggregator will also want to see your pipeline because they only make real money – and recover their investment in you – over time.

And this brings us to your challenge if you are looking for locally, well-heeled investors looking for a few smaller deals. The economics are challenging when you throw in legal fees, appraisals and accountant’s advice. To find these investors – and make a deal work – you will need to create your own aggregation. You probably need at least ten deals with a common structure, identical documentation, single utility and preferably located in the same taxing authority. As you already know from the size of your pipeline – four deals a year – this could be difficult.

So, I recommend the following profile: a savvy real estate investor with commercial solar investment experience, a large tax appetite and a comfort with solar risk. This type of investor will know and understand that the due diligence must be focused but limited, and the documentation kept as standard as possible. Ideally, this investor might also be an investor in your EPC business. That would give the investor insight on your track record and responsiveness to the “unexpected”.

Posted in Financing, Solar Photovoltaics | Tagged , , , , , , , , , , | Leave a comment