Changing the US financing landscape for restarting stalled and future solar PV projects

27. August 2012 By:  Jonathan Jaffrey, Renewable Social Benefit Funds

With incentives drying up, and a market that has not yet hit grid parity, solar PV projects in the U.S. are stalling faster than ever. The dilemma facing the industry, writes Jonathan Jaffrey, founding member of Renewable Social Benefit Funds (RSB Funds), is finding innovative ways to restart and complete these stalled projects while continuing to forge ahead with new, future solar PV projects in the current financial landscape. To do so, the industry will be required to seek out more collaborative models that include new funding alternatives. Concurrently there must be a continued press for improved technology that can help lower capital costs even further.

Jonathan Jaffrey of RSB Funds.

Jonathan Jaffrey of RSB Funds.

The advent of the Section 1603 Cash Grant Program in the U.S. helped legitimize the solar industry, especially for commercial and industrial (C&I) installations, and drove renewable energy into the mainstream as a viable alternative to traditional carbon-based fuels.

According to an article in the New York Times in December 2011, since the program started, it supported over 33,000 domestic solar projects and leveraged US$5.44 billion in private sector investment for projects in 49 U.S. states. Like a rising tide, the program helped create jobs and generate economic activity during the economic crisis. And, like a receding tide, once the program expired, increasing numbers of renewable energy projects stalled or were abandoned.

Since early 2012, speakers at virtually every major solar convention have predicted massive consolidation, with scores of businesses exiting the solar industry by choice or default as the Safe Harbor activity came to a halt.

The federal business energy Investment Tax Credit (ITC) enables solar project owners to offset 30% of a solar system’s cost through tax credits. Because most commercial and utility-size projects do not generate enough taxable income to utilize the ITC and related depreciation, owners adopted the practice of working with tax equity investors.

The financial crisis of 2008, however, essentially ended most tax equity investors’ participation in the renewable energy market. In fact, Environmental Finance reported that "just $3.6 billion of tax equity financing will be available for renewable energy projects in 2012, according to a survey carried out by the US Partnership for Renewable Energy Finance."  This level of financing is far below the amount required to meet market needs, and is contributing to an ever increasing number of stalled projects.

From tax credits to cash

As part of the American Recovery and Reinvestment Act of 2009, the Section 1603 Cash Grant Program was approved. It was designed to effectively stabilize the renewable energy market by providing billions of dollars in cash grants in lieu of tax credits. In other words, the 1603 Cash Grant Program allowed for the monetization of the 30% "Investment Tax Credit", encouraging relatively simple and efficient third party finance models. The models allowed for the transfer of the up-front capital costs to an entity with greater access to capital, a lower cost of capital, or greater ability to utilize tax-specific incentives and has been critical to C&I customers adopting solar technology.

The 1603 Cash Grant Program transformed the solar market, so much so that nearly 80% of solar projects opted for the cash grant, resulting in growth of 104% between 2009 and 2010 in the United States. In addition to the federal Cash Grant Program, many states also offered incentives through utilities, which, when taking depreciation into account, in many cases eliminated the project expense completely. 

For example, if a utility provided a 50% incentive, the federal Cash Grant Program covered another 30% and the project could be depreciated at 35%, which would essentially pay for the entire project. This situation spawned a plethora of new solar companies and specialists, comprising everything from HVAC firms and roofing companies, to contract manufacturers and former salespeople. Since October of 2010, the federal government invested over a billion dollars in solar projects through the 1603 Cash Grant Program.

The expiration of the program at the end of 2011 has left these businesses and their customers with little to no way to monetize the Investment Tax Credit, all but bringing this segment of the market to a standstill. Projects stalled without a free flow of cash to pay for them. Developers and customers now must search for alternative financing structures that include a more complex tax equity component. And companies with workable deals that were not large enough to be embraced by tax equity investors have lost the ability to move their projects forward.

As a result, the industry is facing some critical hurdles including:

  • Decreased funding due to evaporating government support and incentives;
  • A lack of grid parity with hydrocarbon alternatives getting cheaper, at least in the short term; and
  • Potentially increasing interest rates.

Establishing a new funding model

Committed renewable energy companies are working with customers to create new models to provide continued access to third party capital. Smaller-scale projects will require the pooling of multiple systems with similar characteristics or a portfolio approach to access meaningful investment capital. Some of the characteristics that will make this possible are:

  • Standardization of documents: Project documentation and varying credit quality are 2 of the greatest limiters of the market in a non-1603 Cash Grant Program environment. The ability to produce and use a set of repeatable documents will greatly reduce the transaction cost and the time needed for investor review and approval.
  • Utilizing a single EPC provider: Quality design and installation, and a firm financially capable of providing real installation warrantees will be required to access larger sums of capital and debt to allow for efficient and reliable financing solutions in this market. This will require larger, more financially sound EPC providers, or the continued consolidation of smaller firms. Either way, the risk of poor design and installation will need to be minimized.
  • Utilizing a single O&M provider: The long-term nature of these assets will require professional and guaranteed maintenance from a firm that can stand behind each project and ensure the highest quality of ongoing operations. Large-scale O&M providers will in essence protect the power generation and cash flow of a system backed by institutional investors. This will also require high quality components with long-term bankable warranties.
  • Providing a bankable production guarantee: Different production profiles will add complexity to the predictability of cash flows and will have a profound effect on the availability and cost of project level debt. A meaningful production guarantee from the O&M provider or a credible third party will help to reduce financing costs and streamline the approval process.

This pooling or portfolio approach for projects will provide similar characteristics to utility-scale investors with the added benefit of diversification. Achieving the above will not be easy, but for those who can deliver on this type of model, the benefits of a more streamlined, professional and institutional solar market await.

Securitization is well-established across a range of financial assets and has become a mainstream financing vehicle in the last 30 years. With securitization, individual financial assets such as commercial solar power purchase agreements (PPAs) and residential solar PV system leases can be aggregated based on an analysis of various criteria. These pooled PPA’s and leases can be packaged into a trust that issues bonds with the underlying agreements and leases as collateral. Investors who buy these bonds will receive the cash flow from these systems, without the worry of management of the underlying systems.

According to Anthony Kim, North American solar analyst for Bloomberg New Energy Finance who was quoted in Environmental Finance, "Securitization of solar leases and power purchase agreements is certainly going to play a very large part in introducing more liquidity in the US solar market."

Experts speaking at the SolarFuture: Eastern USA conference in New York City in May 2012 agreed with Kim noting that along with residential projects, commercial-scale projects could and would be securitized. "I do fully expect large commercial funds to appear in the $100 million-plus for systems of 500kW to 2MW, and larger funds if system sizes exceed that," said Tom Leyden, a solar energy industry veteran executive.

Grid parity is key

Solar grid parity, an environment where installed solar power will provide power for the same as or less cost than buying electricity from the power grid, is considered to be the tipping point for solar power. It’s also the tipping point that will enable businesses, nonprofits and individuals to choose energy production and self-reliance over dependence on their electric utility, and funnel cost savings into core programs. 

Most business make decisions about solar energy projects based on economic reasons like profitability and maximizing shareholder value. Therefore, if a business can save money by acquiring energy at lower costs, the barrier to purchasing is eliminated. However, without grid parity, the financial incentive disappears and businesses are forced to find alternative rationalizations for solar projects.

For example, a business may embrace a sustainable business mission or make a commitment to highly visible, socially responsible corporate citizenship. Alternatively, they may opt to embrace solar energy projects on a smaller scale as a testament to their clean business practices. This limited approach can backfire, however; if a multimillion-dollar company is claiming to embrace a sustainable business philosophy, but only tackles a relatively minute project, their credibility may be tarnished.

While the industry has not yet reached grid parity in the United States, looking to the future – over the life of a solar system – industry participants can anticipate that the cost of solar long term will be lower than existing, traditional alternatives. In April 2012, Forbes Magazine noted that "grid parity implies 'today’s cost' based on today’s fuel costs and ignores the fuel escalation over the next 25 years for natural gas, coal and nuclear." In addition to escalating fuel costs, most utility companies raise their rates on an annual basis in order to maintain, expand and update their complex, mechanical and electrical infrastructure. 

To offset these concerns, there has been much discussion about hydraulic fracturing or fracking, a means of natural gas extraction employed in deep natural gas well drilling, as an inexpensive alternative in the past year. Yet even with fracking, the process of extraction and delivery require equipment with sensitive controls and moving parts that are prone to breakdown, contributing to consistently increasing energy rates.

On the other hand, Pacific Gas and Electric reports that some of the very first solar PV panels produced in the 1970’s are still generating clean, renewable solar electricity in Northern California after 40 straight years of consistent usage. In addition they are still generating 80% of their original power ratings. While not all solar PV panels will work as efficiently that long, the typical operating lifetime for solar panels with proper maintenance is greater than the operating expectancy of most homes. This longevity will serve to greatly reduce the capital costs for infrastructure maintenance. In addition, renewables like solar energy have zero or very small (1 or 2%) fixed escalators in their power contracts. 

Therefore, when evaluating grid parity between traditional and alternative fuels, the comparison should be made using a net present value basis, not just on the next 30 days or even 12 months, but on the next 20 to 30 years.

Added to the long term savings of solar generated energy is the ability customers have to leverage rate switching. Most utilities offer multiple rate schedules allowing consumers to choose the best plan for their consumption needs, or "time-of-use" rates. These rate schedules vary the price of energy, charging more for electricity consumed during peak demand periods, such as on hot sunny days when demand can become exorbitant. Organizations that have solar installations may opt for higher peak period rates during daylight hours, knowing that the majority of their power will come from the sun, not the utility.

Once grid parity can be achieved, the solar energy market will become a more a viable business model. Organizations can choose between energy sources at roughly equivalent costs; the financial negative for embracing solar and other renewables is removed. In addition, investing in solar energy will be a smart way to hedge against consistently rising utility costs driven by increasing fuel, operational and maintenance costs. The ability to leverage rate switching to take maximize the benefit of solar energy by managing usage and pricing will only provide an added advantage.

Interest rates can tip the scales

Financing solar projects typically means looking for a tax equity partner who will provide cash to build a solar array in exchange for helping to use the federal tax incentives for solar. The tax equity partners in these scenarios typically would receive a substantial discount for purchasing these credits. But what if a solar developer could borrow money at the same rate and term as today’s mortgages instead? 

The savings would be so significant that they could even forgo the federal tax incentives and still produce less expensive electricity. This approach has the potential to lower costs while adding billions of additional dollars into the renewable energy financing market. Yet, there is no guarantee that interest rates will remain at today’s low rates; in fact, it is inevitable that rates will rise, we just don’t know when.   

In most discussions about solar energy, interest rates are rarely mentioned, yet, the highest cost of renewable energy projects is financing. According to GreenTech:Media, "California, which represents 40 percent of U.S. solar, went from 42,933 total kilowatts installed in the first five months of 2011 to 77,473 in the same period of 2012. But kilowatts installed with cash went down from 23,360 to 21,223, while kilowatts installed using third party financing nearly tripled from 19,572 to 56,250." 

A closer look at 30 year debt powerfully tells that story of how increasing the acceptance of solar equipment as long-term debt would actually eliminate the need for incentives. For example, all things being equal, revenue from a solar project used to support an 8%, 20-year loan for $1 million less 30% ITC, will fully support the same system without any ITC benefits over 30 years at a maximum 6.5% interest rate. By comparison, a current 30-year mortgage rate is just 3.62%*, allowing for almost 3% more rate for the solar system, which – unlike a mortgage – produces revenue daily.

The combination of low interest rates and their inevitable and unpredictable increase is perhaps one of the single most compelling reasons for making solar energy projects an urgent priority right now. 

A brighter future for solar

Despite these challenges, the industry’s imminent consolidation may actually be a silver lining for solar energy consumers, producers and finance organizations. Consolidation inevitably will result in a smaller industry that is replete with more financially stable companies that have the capabilities, experience and knowledge needed to again move projects forward. 

In addition to a number of solar energy companies that will succeed on a small scale independently, others that can demonstrate exceptional expertise, professionalism and proven successes will embrace a team approach, and create collaborative partnerships that give them the ability to secure and deploy large scale installations.

An example of this collaborative approach is the partnership forged between RSB Funds and Panasonic Eco Solutions North America. These companies, both leaders in their respective areas of the industry, anticipated this consolidation phase of the solar energy market and formed a partnership designed specifically to restart and complete stalled solar projects in the non-profit and corporate social responsibility sectors. 

The vision of both partners in this collaborative effort is to help reduce overhead costs for schools, charities, non-profits and corporations dedicated to social good so that funds can be used for core programs – teachers, civic investments, and community programs. The unique attributes each contributes, including brand awareness and reputation, expertise in project scope and deployment, the ability to bring projects to fruition quickly, and deep financing capabilities, are crucial in ensuring a mutually beneficial relationship. 

This can be seen in an early Panasonic-RSB Funds collaboration, the creation of a 115 kW solar power generation installation on the corporate campus of the Conrad N. Hilton Foundation in Agoura Hills, Calif.  But probably the most extraordinary aspect of this collaboration, which is also a critical success factor, is the synergy between the organizations’ cultures.


The eager adoption of solar energy as a viable alternative when funding was plentiful underscores the fact that solar is the solution to long-term energy challenges. A report from the Solar Energy Industries Association and GTM Research predicts that utility-scale will continue to drive United States solar growth, and that overall, solar energy in the United States will grow by 75% from 2011 to 2012. Clearly, new financial models are required to support this growth by reviving and completing stalled solar PV projects and driving new installations. 

Even as the market consolidates and traditional players scale back their participation with the expiration of incentives, the continuing low-interest rate environment is attracting banks and non-traditional investors who understand the positive risk/return profiles of solar projects that utilize proven PV technology to generate consistent, long-term revenue.  Collaborative business models that marry the technical prowess of larger, established companies and the financial acumen of solar-based entities will continue to emerge and keep the industry vital, alive and growing.

* Freddie Mac, 30-year fixed rate, August 20, 2012.  Source: Wall Street Journal

About the author

Jonathan Jaffrey is a founding member of Renewable Social Benefit Funds (RSB Funds) and Panasonic Eco Solutions North America (PESNA) strategic finance partner. He has more than 15 years of experience managing a $2.5 billion multi-generational family office while simultaneously managing the $1.5 billion W.M. Keck Foundation, and currently serves as the Chairman of Students Philanthropists Advancing Real Change (SPARC) and as a Director of the Greater Los Angeles Zoo Association. Jaffrey earned his Bachelor of Science degree in Finance and Communications from the University of Arizona and a Masters degree in Finance and Venture Management from the University of Southern California.

Disclaimer: The views and opinions expressed in this article are the authors own, and do not necessarily reflect those held by pv magazine.

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lenny karke

Thursday, 20.11.2014 22:24

Even people that sell gold in Houston TX can confirm that the solar photovoltaic projects in the U.S.A are “stalling faster than ever” and agree that we must find new funding alternatives that would have positive effects on these stalled projects. What the government considers to be the best strategy that would allow us to find new alternatives for the traditional carbon-based fuels?

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