The U.S. solar industry experienced a transformative 2013, with a proliferation of physical assets, installed capacity and new finance mechanisms. The wind industry raced to begin projects by end-2013 in order to receive production tax credits. The next few years -- and 2014 in particular -- will be marked by new advancements in these sectors as rooftop and utility-scale solar continue to mature, utilities grapple with changing business models and investors continue the search for opportunities that offer the greatest yield.
“The word on the street is another big [solar] securitization -- twelve or more in the next year -- could be expected. These would be SolarCity-type deals and a number of yield cos,” according to John Lochner, Vice President of Corporate Development for Locus Energy.
“Yield co” became a bit of a buzzword in renewable energy circles in 2013, though the strategy has existed for several years in other industries. “A yield co is a publicly traded company that is formed to own operating assets that produce cash flow. The cash is distributed to investors as dividends,” Carl Weatherley-White, CFO of K Road Power, said during a 2013 panel discussion.
“Yield cos are financial structures designed to reduce the cost of capital for operating assets. They comprise a variety of different legal structures; some can be sold to a buyer directly, some are more equity-like, some are buying into a tranche of assets,” Lochner explained.
NRG’s solar securitization was a major 2013 story, and we could see some additional IPOs this year.
“We saw SolarCity launch with 70 percent residential and 30 percent commercial [assets]. That’s important because it shows you can get a portfolio together and make it work,” according to Madeleine Tan, a partner at law firm Kaye Scholer.
“NRG’s yield co last spring proved to the market that you could spin off generating assets into a separate entity,” said Lochner.
What’s Next for Tax Reform and Tax Equity Deals?
The Production Tax Credit for wind power projects may not be extended this year, while the Investment Tax Credit for solar will likely remain intact at existing levels in 2014, but trend downward over the medium term.
“The market right now believes ITC will remain intact at 30 percent for 2014 then go down to 10 percent in 2017,” said Dan Loflin, Locus Energy’s Executive Vice President of Business Development. “The market sees solar government tax benefits as pretty static. The differences come with state and local rebates added on top of the ITC. Take New Jersey, for example. The expectation is local subsidies on top of the ITC will diminish, and as that happens, other costs like installation will come down. As the market moves forward, physical costs should continue coming down significantly, and that makes up for reduced subsidies,” said Loflin.
For his part, Arno Harris, CEO of Recurrent Energy and chairman of the Solar Energy Industry Association, thinks it’s important to view solar finance trends in two distinct categories: rooftop and utility-scale.
“It depends on the sector. Finance is becoming popular in rooftop and more mature in utility-scale where it’s now considered a mature asset class. There are nuanced ways of looking at finance, depending on what sector you are considering,” said Harris.
Locus Energy sees the conversation shifting slowly away from tax equity and into new investment strategies. How many new deals can the market expect to see, and how will the structure of these deals differ from what’s been done in the past?
“A lot of the discussion around residential and commercial solar activity had been about whether tax equity deals would diminish and whether loans [would] come into the market. The number and structure of new SolarCity-type deals and what they look like is the question,” said Lochner.
“How will the capital structure fueling the industry change and what are refinance opportunities? Everyone almost takes for granted that physical costs will continue coming down, so now the interesting focus has turned to initial financing structures and [whether] tax equity will continue to be the king of the mountain. This is a broad but tangible shift in the conversation,” Loflin observed.
How Are Utilities Dealing With These Changes?
As distributed power generation sources continue to proliferate, the large established utilities can get out in front, scramble to adapt, stick their heads in the sand, or push back against change. It does appear, however, that as wind and solar generating capacity increases, utilities are being forced to confront the issue one way or another.
“Large utilities have woken up [to the fact] that solar is growing at a pace where they need to understand their strategy to either enter the market or deal with the shift. We work with a few large utilities -- NRG being one -- and see a few more entering the market in 2014.“ said Loflin. “We’re having conversations with other [utilities] about how distributed solar will impact centralized generation and existing business models. A lot of utilities are sticking their toes in the water, and the next two to five years will see more utilities enter the market in some fashion,” he said.
Harris largely agrees, saying, “It’s really apparent to me as someone in the industry for twelve years that 2013 was a year of change. Growth is inevitable, and in the next two years, we’ll see what’s effective and feasible. This year will be informative with regard to:
- Utility-scale: Which companies will survive the next wave of regulatory changes, like California shifting from renewable mandates to a carbon reduction approach?
- Rooftop: How will we solve policy questions like net metering?”