Below are soundbites from panelists at the Renewable Energy Finance Forum Wall Street held in New York City on June 21 and 22, 2016. The soundbites are divided by topic below: market conditions, the tax equity market, cost of capital, community solar, challenges facing the renewables market, net metering, the YieldCo market, economics for utilities and storage.
Market Conditions
“The market is long capital and short projects.” Boutique Investment Banker
“The brightest spot in clean tech today is that panels, turbines, batteries and balance of system are all moving down in cost.” Bulge Bracket Investment Banker
“Year over year there have been very precipitous declines in the cost of these technologies.” Boutique Investment Banker
“Before the expiration of the production tax credit, wind will reach grid parity [with electricity from natural gas] in many parts of the country.” Bulge Bracket Investment Banker
Background: The production tax credit is available for projects that “start construction” prior to 2021, and to meet the Internal Revenue Service safe harbor a wind project would have to be placed in service prior to 2026. Our article discussing the start of construction rules for wind projects is available here.
“It feels like we should have sub $4 [per BTU natural] gas, until we hit the production tax credit and investment tax credit expiry. But it is extraordinarily difficult to predict.” Bulge Bracket Investment Banker
“On a subsidized basis [(i.e., with tax credits)], [wind] is on grid parity. The last [wind power purchase agreement (PPA)] we looked at [was priced at] 1.9 cents per kilowatt hour. That should be cheaper than [electricity from natural] gas.” Boutique Investment Banker
“The price of natural gas can change quickly, as we have seen in the past month, so grid parity can change quickly.” Boutique Investment Banker
“Renewables are on sale, possibly for the last time if you believe the legislators [in Congress]. The pie because of the subsidies has become bigger.” Boutique Investment Banker
“The quality of solar portfolio has not changed since SunEdison filed for bankruptcy, but you do have to consider the credit quality of the sponsor for indemnities and whether the sponsor can survive for the life of the deal.” Investment Bank Tax Equity Investor
“We’ve got the jobs; we’ve got the money; we’ve got the growth. So whoever is elected President, this industry is here to stay.” Distributed Solar Investor
The Tax Equity Market
“The market for [tax equity] looks like it did last year – $13 billion. 2016 will be similar or a little higher. Last year solar surpassed wind; much of the solar was distributed generation.” Money Center Bank Tax Equity Investor
“For 2015 tax equity, $6.8 billion in solar and $6.4 billion in wind.” Money Center Bank Tax Equity Investor
“The [tax equity] market did have a slow start [in 2016]. Q1 and Q2 were slower than last year for solar. Developers shifted projects to the right [on their timelines] waiting for solar prices to come down. No projects were cancelled.” Investment Bank Tax Equity Investor
“Tax equity is between 40 and 60 percent of the capital for solar projects.” Regional Bank Tax Equity Investor
The availability of “tax equity is the single biggest bottleneck. Certain sectors will see growth constrained due to a lack of tax equity [investors].” Bulge Bracket Investment Banker
“The roadblocks for tax equity investors are:
- [It is] complicated and [until the extension in 2015] the short period [the tax credits would be available did not justify some companies learning about it.]
- The financial accounting.
- Lack of liquidity [(i.e., if an investor wants to sell its tax equity investment, the tax code and the thin market make that difficult)].” Bulge Bracket Investment Banker
“The 30 tax equity investors in the market are fabulous. We thank each one every day. They invest to their point of indifference. We need 100, not 30.” Distributed Solar Investor
“Even if a corporation’s board of directors and chief financial officer decide that tax equity investments in renewables is the best way to reduce the corporation’s effective tax rate, then they still still have to figure out how to account for the investment. The FASB has yet to opine on that.” Distributed Solar Investor
“Debt at the project level is difficult because of the way tax equity works.” Distributed Solar Investor
Background: In solar, tax equity prefers to avoid debt secured by the project because a foreclosure by lender in the first five years would trigger recapture of the investment tax credit. The production tax credit in wind transactions is not subject to recapture, but tax equity investors in the current market are nonetheless reluctant to be behind debt secured by the project. This dynamic causes developers to use back leverage whereby a default provides the lender with the remedy to take over the developer’s position as managing member but not to foreclose on the project.
“Tax equity is not more expensive for a corporate PPA than a utility PPA, but there may be more investors interested in a utility PPA.” Money Center Bank Tax Equity Investor
“The biggest mistake developers make with respect to tax equity is that they [try to secure tax equity] too early, when they don’t have the fundamental characteristics [of the project] fully baked.” Money Center Bank Tax Equity Investor
“The biggest mistake developers make with respect to tax equity is not understanding the breadth of diligence tax equity requires.” Regional Bank Tax Equity Investor
“The biggest mistake developers make with respect to tax equity is a lack of a complete data room. If it is your first tax equity deal, work with an advisor who you can run scenarios by.” Investment Bank Tax Equity Investor
“Deficit restoration obligations (DROs) are getting larger.” Money Center Bank Tax Equity Investor
Background: To oversimplify, assuming the transaction does not involve debt, a DRO is necessary under the partnership tax regulations for a partner to be allocated tax losses and distributed cash in excess of the sum of its contributions and the taxable income allocated to it. A DRO is a promise by a partner to contribute cash to the partnership, if (a) the partnership liquidates and (b) at the time of liquidation the partner has a negative capital account (i.e., it has been allocated losses and distributed cash in excess of its contributions and taxable income allocated to it). DROs are typically provided by tax equity investors, and the rule of thumb used to be that tax equity investors limited them to 20 percent of their contribution to limit the exposure to the contingent obligation to contribute capital. However, solar transactions are being structured with DROs almost twice that, and even wind transactions are typically exceeding the old rule of thumb by a material amount.
Cost of Capital
“Markets are very good for debt. We haven’t been working outside the bank market. Spreads have been tight and tenors have been long. Underwriting standards are prudent but can be accommodated in a well-structured project.” Solar Investor
“The cost of sponsor equity is down from [a range of] 9 to 15 percent to [a range of] 4.5 to 8 percent, but you have to be in the flow to get those rates in terms of structure.” Distributed Solar Investor
“The distributed generation solar industry has to understand money [(i.e., the requirements of investors)]; money is not going to understand distributed generation.” Distributed Solar Investor
“Family offices like distributed generation solar a lot, for all sorts of reasons.” Distributed Solar Investor
“It is getting harder for banks to put money out with the regulatory regime getting tighter every day. If money center banks can’t do it, others will step in.” Bulge Bracket Investment Banker
Community Solar
“Community solar is a new trend. We are getting a lot of questions about it.” Regional Bank Tax Equity Investor
“It is much easier to replace a defaulting community solar subscriber. You don’t have to pull the system off the subscriber’s roof.” Regional Bank Tax Equity Investor
“In some community solar deals, the subscriber can terminate with one week’s notice. Mitigate that risk by having a backlog of subscribers.” Regional Bank Tax Equity Investor
“Community solar has utility solar’s installed cost [advantage from the economies of scale of building a large project] with the power sold at [higher] consumer rates.” Investment Bank Tax Equity Investor
Challenges Facing the Renewables Market
“Tax equity is still the biggest impediment in our industry because there are not enough large companies investing $1 billion in tax equity, like the ‘golden’ 25 tax equity investors have.” Distributed Solar Investor
“The second biggest threat in our industry is lack of standardization for interconnection. The utilities are private companies. They interconnect how they want to interconnect.” Distributed Solar Investor
“A lot of state policies are in flux. We are waiting for net metering 2.0. We don’t live in the United States: we live in 50 states, and that means it is complicated.” Distributed Solar Investor
“We can’t grow and invest a trillion dollars with bespoke transactions every time. We need standardized structured products.” Distributed Solar Investor
“Residential solar is easier to execute because the documentation in residential is standardized while in commercial solar it is not.” Regional Bank Tax Equity Investor
“You have to do everything in a $2 million project financing as in a $100 million project financing. [In small projects,] these costs will kill you. You have to do it efficiently.” Distributed Solar Investor
“The challenges in the market are profitability levels for developers and that there is not unlimited amounts of tax equity.” Boutique Investment Banker
“What is killing the margins [for wind developers] is wind on wind [(i.e., wind developer bidding into utilities request for power purchase agreement proposals against each other)] or solar on solar. There are 40 bidders for each request for proposal.” Boutique Investment Banker
“Distributed generation solar portfolios are misunderstood. That’s why their cost of capital is higher than utility scale [solar projects].” Distributed Solar Investor
Net Metering
“Net metering is a fair trade because the [net metering] customer chooses to deploy capital. The states with good net metering policies get the money [(i.e., investment in solar)]. [Due to policy,] solar only works in one third of the country now.” Distributed Solar Investor
“Net metering is really a tax on all people with FICO scores under 720 that cannot get SolarCity financing.” Boutique Investment Banker
“That [(i.e., the quote above)] is sour grapes from yesterday. If 50 percent to 33 percent of the supply to the grid is from distributed generation, it means a more stable grid. The utilities need to pay for it [through policies like net metering].” Distributed Solar Investor
The YieldCo Market
Background: A “YieldCo” is a publicly traded corporation that owns interests in power projects subject to long-term contracts. The projects have typically been renewable energy projects, but there are some gas-fired projects that are held by YieldCos. They are similar in nature to master limited partnerships (MLPs), but they are subject to corporate income tax and MLPs are not. YieldCos were the toast of Wall Street in 2014 and early 2015 but have had a fall from grace. Nonetheless, there is no reason that a YieldCo that follows a disciplined investment philosophy cannot be successful, so long as its management and investors understand that it is fundamentally a dividend stock (much like a utility) and not a growth stock (like a tech company).
“YieldCos were too much, too fast. There were new issuers almost weekly, but the investor base was fairly narrow with many of them being quick-trigger hedge funds. [The price stability problem] was exasperated by shorting [YieldCo stocks].” Bulge Bracket Investment Banker
“It would help to have a new set of investors in the YieldCo market, like value investors, stable long term.” Bulge Bracket Investment Banker
“We did see ebbs and flows in the master limited partnership space, and the master limited partnership market has become big and stable over the years. That bodes well for YieldCos.” Bulge Bracket Investment Banker
“We’ve been seeing hedge funds taking positions in YieldCo’s debt.” Solar Investor
The YieldCo metric of cash available for distribution “(CAFD) yields are ten to 12 percent but need to be like eight percent for accretive growth. YieldCos are being outbid by utilities that have a lower cost of capital [and unlike YieldCos generally have their] own [tax appetite and can avoid the cost of] tax equity.” Bulge Bracket Investment Banker
Economics for Utilities
“Utilities are there to take a de-risked project [(i.e., one that is developed, constructed and operating)] and take the earnings [from it] for the next 30 years.” Boutique Investment Banker
“Southern, PSE&G and Dominion are very aggressive in the use of their own tax base [to monetize and value tax credits and depreciation resulting in more favorable economics]. They’ve done some very successful deals.” Boutique Investment Banker
“The tension utilities feel most acutely is with commercial and residential solar. We are seeing the corporates taking kilowatts inside the fence and disappearing from utilities’ rate base.” Boutique Investment Banker
“Corporate procurement [policy for electricity] is being made on a very rational basis in the c-suite and is being validated by chief financial officers.” Solar Investor
“It is shocking to me that there is not more initiative by the public utility commission to try lock in a low cost of energy for the long term.” Solar Investor
In California on any given day 30 to 50 percent of [electric] generation can come from renewables.” Bulge Bracket Investment Banker
“There have been announcements to shut down five nuclear plants over the last six months because operating costs are not competitive. We can argue whether that is good policy. Nuclear power plants need $50 per megawatt hour power prices, but power prices are $30 a megawatt hour. Nuclear power plants generate power 24/7. At this point, their owners have fully amortized their investment.” Boutique Investment Banker
Storage
“Right now, we are seeing the most battery activity in California and New York. That is policy driven.” Solar Investor
“Price points for batteries are plummeting. Batteries are much more than just an energy technology.” Solar Investor
“Some battery warranties are out to 15 years.” Solar Investor
“We see so many proposals for co-joining renewables and batteries. We think the highest value is for grid operators who operate them with computer optimization for the grid as a whole.” Solar Investor