More pie for all


As solar equipment prices have fallen, the cost of project financing has remained lofty, making up a growing percentage of total solar project costs. And those high prices are only for projects lucky enough to qualify for financing at all. Plenty of projects can’t even get those high rates.
“There’s a real lack of capital in the U.S. solar industry,” says Lisa Curtis, Communications Director for Mosaic, an Oakland, California-based solar project financing and crowdsourcing startup that enables individuals to invest as little as US$25 in commercial solar projects. “Unlike in Europe, where you can walk into a corner bank and get a loan for a solar project, less than 5% of our banks finance solar. Most banks here don’t really understand solar projects and either don’t finance them or finance them with very high interest.” One example is small commercial projects, which often fall into a financing gap between large credit-rated projects that banks will finance and the large groups of residential projects that companies such as SolarCity, SunRun and Sungevity will finance.
“Where there’s a financing gap is where you have small commercial projects where you don’t have a big portfolio to bring to an investor,” said Shayle Kann, Vice President of research at GTM Research. “If you have 100 kilowatts comprised of four projects, you could put together a grand total of a few million dollars on these and a lot of investors – certainly tax-equity investors – wouldn’t look at it.” Why is it harder to get less money than to get more? One of the main reasons is that investors have to spend significant time assessing each project with due diligence before investing, making only larger projects – or groups of projects – worth the trouble. One of the most time-consuming parts of the process is collecting all the information needed to assess the risks and determine whether it makes sense to invest.
“Basically, the way we finance projects now is we work with attorneys, technology experts, insurance specialists and others and gather all kinds of information about the project before we finance it,” Curtis explained. “A lot of that information comes from different sources, so we have to spend a lot of time hunting for that information.”

Risk assessment standards

Mosaic demonstrated both the demand and appetite for small commercial project financing in January, when it sold out of its first round of four public investments – totaling more than US$313,000 – in less than 24 hours. But even though the company fields daily calls from developers and property owners seeking loans, it wasn’t able to add any new publicly available projects in February, Curtis said, because it takes so long to get through the due diligence process.
A new consortium of 16 organizations – including Mosaic, as well as industry heavyweights such as DuPont Photovoltaic Solutions, which supplies PV manufacturing components such as films, resins, seals and additives; solar insurance company Assurant; SMA America, which makes PV inverters and monitoring systems; management and technology consulting firm Booz Allen Hamilton; and ratings agency Standard & Poor’s – hopes to tackle this problem by creating a new industry standard to evaluate solar projects’ risks in that middle segment between home rooftop and solar farm sizes.
The consortium, which calls itself truSolar, envisions creating something like a FICO score, which would give lenders an instant sense of a borrower’s creditworthiness, for U.S. commercial solar projects. That score would reflect all the risks that come with a solar project, including design and performance risks, financial and credit risks and deal or terms risks, said Eric Romano, Strategic Marketing Manager at DuPont Photovoltaic Solutions.
The idea is that if the industry can agree on the information needed to assess project risks and bankability, it would take less time to evaluate projects for financing. In turn, that would make more projects financeable, potentially narrowing the financing gap. And, because time is money, reducing the amount of time required to assess projects could also reduce financing costs.
The concept makes sense, Kann explained. After all, every 50 basis point reduction in financing costs – that’s a rate cut of only one half of one percent – lowers system costs by roughly US$0.10 per watt, he said. So reducing the rates even a small amount could quickly add up to real savings.
“If they can pull this off, it would be a great thing,” Kann said. “If something is prescreened so an investor doesn’t have to put an identical amount of work in each of these and is able to spend a minimal amount of time, maybe they would be willing to take a look at the smaller projects now falling by the wayside. And if the due diligence part is less onerous, investors might be willing to charge a little less.” The consortium is focusing on U.S. commercial projects, at least at first. Because the segment is so difficult to finance today, with the least uniform financing practices in the industry, it stands to benefit the most from standardization, members say. And for seven of the last 11 quarters, the U.S. commercial solar segment – in this case defined as anything between a rooftop installation and a massive solar farm, including municipality, university and other school, hospital, military and federal installations – has installed more capacity than any other segment and three times that of the residential segment, said Doug Payne, Senior Vice President of Corporate Development for commercial solar developer Distributed Sun, which spearheaded the truSolar initiative along with DuPont Photovoltaic Solutions. “The U.S. commercial segment has the most friction and the most opportunity,” he said.
But if truSolar is successful the implications could ripple beyond U.S. commercial markets to global markets, members said. “Whatever we do here could be applied elsewhere,” said Trevor D’Olier-Lees, Director of Standard & Poor’s infrastructure and renewables practice. “You’d have to adjust for local issues, but assessing a panel and how it performs is common and global.”

Complex procedure

Ultimately, truSolar could influence not only developers and investors, but also – indirectly – manufacturers, Mosaic’s Curtis said. If the standard gets adopted industry-wide, manufacturers will know what projects can get financed and what developers are looking for, she said.
Before that happens, though, truSolar has plenty of work to do. “They are trying to look at everything, from the quality of the PPAs to the quality of the materials and panels, so it’s a big task,” Kann said. Not just big, but complex. There are nearly 200 distinct risks that can be weighted or priced, with several thousand dependencies, Payne said. “The challenge is to translate this into a reliable and usable framework,” he said. “The entire premise is to reliably forecast performance and accurately predict defaults – the keys that unlock the risk-pricing door.” To get there, truSolar has formed a working group of company representatives, each focusing on different risk areas and working with others – or “cross cutting,” as Romano puts it – in those that overlap. Working group members represent more than US$100 billion of annual review and more than 600 years of institutional experience, Payne said. The group is scrambling to etch out a framework to present to the broader industry at Greentech Media’s Solar Summit 2013 in Phoenix, Arizona, in April and at other events, such as Solar Power Generation USA in Newport Beach, California, in January 2014. At these industry events, truSolar hopes to solicit peer review and engage the industry to resolve any sticking points about the framework.
The group also plans to create an open-source tool to make it easier to gather all the relevant information and assess and select projects. It wants to have an early prototype of the tool ready to share with the industry in the spring, Romano said, and then plans to test the tool on real projects and make additional changes based on how its predictions compare with real-life performance. Finally, in 2014, the group plans to bring its standard to a standards body to help drive industry adoption and to keep the standard updated.

Delicate balance

“We really believe the industry needs this quite seriously,” Romano said. “We’re trying to get a lot of work done quickly in a very meaningful way.” That requires a delicate balance: Getting too many people involved too quickly would make it impossible to meet its deadline for presenting an initial framework in April. But truSolar also needs to widely engage the industry if it expects others to adopt its framework as an industry standard. To that end, truSolar plans to keep its initial working group small and avoid adding more members just yet, but also to make sure to talk with everyone who wants to be included, Romano said.
“I want to make clear that this is very inclusive,” he said. “In no way is this a closed shop.” The group already has received many suggestions from many companies who want to get involved, Payne added. Inclusiveness will be especially important given that opinions about risks differ across the supply chain. Even if they look at similar information, banks also have different approaches to assessing credit risks and weight their criteria differently. “Morgan Stanley may care about one thing while Wells Fargo cares about another,” Kann said. “And you have to include everything that any of these guys care about if you want to include them in any of this.” In addition, banks don’t usually make their methodologies public, D’Olier-Lees said. Banks investing in smaller commercial projects tend to hash out their assessments inhouse and in small groups, and that means there is less transparency for those deals and also less uniformity compared with how investors in larger projects do their deals, he explained.
One of the biggest tasks will be to gather enough data to support whatever standard it ends up with, Kann said. “You want as much hard data as possible on the performance of systems, PPAs and what actually has been a bankable solar project in the past,” he said. “The more they can do that, the more robust their inclusions will end up being. All that data is generally stuff that companies hold pretty tight to the vest, so they’ll definitely have to put the work in to get the data and to make sure it remains private, in many cases.”

A module’s not a module

DuPont, for one, is already working on this. It has been studying panels that have and haven’t performed as expected, Romano said. “We’ve got a lab full of fielded modules and we have performance data and know what they’re made from, so with a great level of detail, we’re going through how material choices impact performance,” he said. “People say a module’s a module, but we were finding a module’s not a module.” A facilitator is also conducting in-depth interviews with companies to assess the different elements of project performance, he added.
To succeed, truSolar will need to create a strong set of screening criteria, get projects on board and get key companies – including investors and ratings agencies – to adopt it, Kann said. There’s more, Romano adds: “We have to develop a quality tool that’s actually useful. And we have to hold a dialogue and have to do it very effectively or folks will frankly feel left out of it, which will not be useful.” So far, with the consortium still in the early days of creating the framework for discussion, it’s unclear who – if anyone – might oppose an industry standard. Of course, developers with projects that get high risk scores might object, but it’s too early to tell which criteria will result in such scores. Still, Payne knows the group may face naysayers. “There will be those that want to preserve the status quo,” he said.
There’s no question that truSolar is taking on a daunting task. But it’s certainly achievable, according to Kann, and the impressive list of companies involved lends the initiative some credibility.
And, Payne claims, it’s worth doing. A standard could help grow the whole industry quickly in a systematic, cost-effective way, “expanding the pie for all,” he said. “We’d like to believe everyone shares this long term view, even though it will not come without innovation and change by all of us. Everyone has raised their hand to be part of this because they believe the reward to the industry for overcoming the sticking points is worth the toil.”

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