by Emma Foehringer Merchant
June 10, 2020

The coronavirus pandemic threw nearly every element of the U.S. solar industry into disarray. Developers and suppliers sent preemptive force majeure warnings. Utilities paused some requests for proposals. Experts warned of tightening financial markets. 

Amid the turmoil, at least one trend seemed to remain stable: the capacity of solar projects and portfolios acquired in Q1 2020 actually eclipsed that of the same period last year, according to tracking from Mercom Capital Group.

But Mercom's most recent numbers suggest the pandemic may have mowed down even that trend.

More than 12 gigawatts of large U.S. solar projects changed owners in Q1 2020, more than double the capacity sold in the same period the year prior, and with more action from oil and gas companies. But Q1 overlapped only partially with the impacts of the coronavirus.

Deal-making has slowed significantly in Q2, Mercom CEO Raj Prabhu said in an interview. Only about 2 gigawatts have exchanged hands so far, though the quarter is not yet complete.

“Quarter-over-quarter, the trend looks pretty bad,” Prabhu said.

Project acquisitions provide an important indicator of market health, allowing developers to recycle that capital into the market, Prabhu said.

Lingering concerns over solar finance

When the coronavirus crisis hit this spring, clean-energy experts warned that the industry could face similar challenges to those it encountered during the Great Recession.

So far, however, most of those fears have not come to pass, even if project mergers and acquisitions have slowed down. The solar market looks different, and deal-making much more resilient, than it did in the late aughts.

“I don’t think I’ve seen the dropoff we saw when credit markets dried up in the [2008] downturn," said Eric Macaux, an attorney at Mintz who advises clients on energy transactions. "Part of that might be that this is a much more mature market then it was then, and there’s just a lot more money sloshing around."

Concerns over the availability of tax equity for renewables projects persist, analysts say.

“The number-one thing we’ve heard on the financial markets is the cost of capital and the cost of debt have both gone up, simply because everything is viewed as more risky," said Colin Smith, senior solar analyst at Wood Mackenzie Power & Renewables. "That additional risk comes with additional cost."

Still, Smith noted a “tremendous amount of interest” from potential buyers of U.S. solar projects. Some likely acquirers, including NextEra Energy, feel the economic downturn could lead developers to put more projects on the market — potentially resulting in a swift rebound in deal-making.

“The core fundamentals for solar remain pretty attractive, and on an M&A front, there’s still a lot of capital that finds that to be a good investment,” said Macaux. “COVID-19 is a bump, and the contracting of the credit market and tax equity markets is challenging. [But] these are 30-year assets.”

Tom Burton, chair of Mintz's energy and sustainability practice, said he's seen U.S. solar project M&A continuing at more or less the same level as before. But there has been a "flight to quality," Burton said. 

The projects that are being bought come from established developers and are purchased by confident, experienced financiers. Mintz pointed to a recent Goldman Sachs Renewable Power acquisition it advised on; the bank purchased a 27-megawatt solar project in New York from Massachusetts-based developer East Light Partners.

All eyes on the second half of 2020

Mercom's Prabhu said that if things pick up in June, U.S. solar M&A could still hit 3 to 4 gigawatts of volume in Q2, which would bring the first half of the year to 15 to 16 gigawatts — still substantial growth over last year.

In many ways it's still a “seller’s market,” Prabhu said, with solid projects winning three or four bids each. Logistics have held up efforts to close transactions. “It’s a matter of people and companies being able to go out there and meet [and perform] due diligence.”

Deals that can't get done now are likely to leak into the second half of the year. Wood Mackenzie is still expecting the U.S. to add around 14 gigawatts of new large-scale solar capacity in 2020, Smith said. 

Meanwhile, there are signs that the U.S. economy may be opening back up, with unemployment falling in May. The U.S. stock market has rebounded strongly and is not far off its pre-COVID-19 record highs. Power demand is creeping back up and may reach its pre-pandemic levels by the end of the year.

Signs like those may give investors the confidence needed to rekindle stalled solar deals. “Looking at the past couple of weeks, I think people are getting more comfortable,” Prabhu said.