Below are soundbites from panel discussions at Solar Power International in Las Vegas on September 11 and 12. The soundbites are organized by topic, rather than in chronological order, and were prepared without the benefit of a transcript or recording.
The topics covered are: Tax Reform • Tax Equity Volume and Investor Mix • Tax Equity Structuring • Deficit Restoration Obligation Structuring and Senior Secured Debt in Partnership Flips • FMV Valuation Issues and Insurance • Community Solar • Community Choice Aggregators • Power Purchase Agreements • Residential and Community Solar Markets • State Policy • Department of Defense Procurement
ITC has already gone through tax reform and already has a transition rule in place. These arguments resonate pretty well with Republicans. — SEIA, Gov’t Relations
Anyone who tells you where we are now in this tax reform debate, is lying to you. — Boutique Investment Manager
Low likelihood of comprehensive tax reform in 2017. Chances for a tax cut are pretty good. Indemnification for a tax rate cut is built into these transactions. — Boutique Investment Manager
We are using a 25% corporate tax rate in most deals. The specifics depend on allocation of risk [of change in tax law] and [the financial strength of] the counterparty. We are more likely to put in less capital now and contribute more later if there is not a tax rate cut. — Commercial Bank, Head of Business Development Energy Investing
Not one size fits all. We use a 35% tax rate for 2017 and a lower rate for 2018 and beyond. In our deals, for federal tax rates we use between 25 and 30% [for 2018 and later]. If rate reduction doesn’t occur, we then fund more. It frightened me when Paul Ryan said he was aiming for a 22.5% tax rate. [This was before the Republican Big 6 released their proposal with a 20% corporate tax rate.] — Money Center Bank, Managing Director
We have very flexible solutions in place now to address tax rate reduction risk in deals. It is not the headache it was six months ago. — Boutique Accounting Firm, Director
Since corporations generally pay less than 35% in federal taxes now, and $1 of tax credit is $1 of tax credit, it remains to be seen what a lower rate really means [for the solar tax equity market]. — Boutique Investment Manager
The potential change in tax rate means the potential for a cash sweep, which means sponsors can raise less back leverage. — Commercial Bank, Head of Business Development Energy Investing.
Solar Tax Equity Volume and Investor Mix
There was $3.66B in solar tax equity volume in the first six months of 2017 versus $3.7B in the first six months of 2016. (Wind is down 70% from 2016.) — Money Center Bank, Managing Director
The number for the volume of solar tax equity is flat, but the mix is changing. In aggregate, more transactions are getting done. — Boutique Investment Manager
We don’t have tax credit expiration looming creating numbers to drive deals through. — Boutique Investment Manager
Tax equity is 40 to 50% of a solar project’s capital stack. Lenders are getting comfortable with tighter coverages, so sponsors are able to raise more back leverage to make up for reduced tax equity funding amounts due to issues such as tax reform.— Commercial Bank, Head of Business Development Energy Investing
Easier to find tax equity than it was. Starting to see competition for tax equity. Seeing corporations and insurers providing tax equity. Competition is related to the need for 2017 tax credits. — Boutique Accounting Firm, Director
The education cycle for new entrants [into the tax equity market] remains long and complex. When they come into the market, they come in at scale, but it is still sporadic. —Boutique Investment Manager
More competition to provide tax equity for utility scale – less competition for C&I, resi, and community solar. — Boutique Accounting Firm, Director
Still a lot of opportunity for yield for community solar and C&I, but you have to be prepared to do the work. — Commercial Bank, Head of Business Development Energy Investing
Easier for utility scale solar to find tax equity than resi, community solar and C&I. — Commercial Bank, Head of Business Development Energy Investing
There are more investors that are going to do resi deals. — Money Center Bank, Managing Director
The larger the portfolio of resi, the greater the attractiveness. — Boutique Investment Manager
Huge trend in syndications. The number of tax equity investors is growing, seeing more club deals as deals grow. — Money Center Bank, Managing Director
We have ten tax equity syndicate partners for a total of $700 to 800 million. — Commercial Bank, Head of Business Development Energy Investing
Thirty-five to 36 tax equity investors, but there are ten to 15 ones that consistently invest. — Boutique Accounting Firm, Director
Corporates [(i.e., tax equity investors that are not financial institutions)] have been promised yields exceeding ten percent, but they want them in the gold-plated utility scale deals. Corporates will get that ten percent, but they’ll have to do messy deals. — Commercial Bank, Head of Business Development Energy Investing
Should we, as tax equity investors, be pressing for higher returns or the safety in gold-plated transactions that are utility scale? — Boutique Investment Manager
If tax equity investors want to lock up opportunities, they have to make longer commitments [(i.e., more than a year)]. — Commercial Bank, Head of Business Development Energy Investing
Corporates can’t and won’t make long-term commitments. Corporates commit based on 3Q projections for tax appetite for the [current] year. — Boutique Investment Manager
Tax Equity Structuring
To ask me today about an end-of-2018 project is a big ask. There are capital costs associated with that commitment. — Money Center Bank, Managing Director
Depreciation is a relatively modest portion of the overall return of the tax equity investor. — Boutique Investment Manager
The sale-leaseback structure is predominant for portfolios under 20 MW. The partnership flip is predominant in the market overall. Inverted lease can be an attractive structure in rich deals. — Boutique Accounting Firm, Director
One reason to use an inverted lease structure is if the sponsor has tax liability. — Boutique Accounting Firm, Director
The partnership flip is 80% of market measured by MW. — Boutique Accounting Firm, Director
There are a lot of small sale-leasebacks. — Boutique Accounting Firm, Director
Deficit Restoration Obligation (DRO)
Structuring and Senior Secured Debt in Partnership Flips
A lower priced PPA means a higher DRO, which means a less tax-efficient structure. — Money Center Bank, Managing Director
DROs are higher than before. — Boutique Investment Manager
There were investors who wouldn’t give DROs, and now they will. The most efficient thing [to address a negative capital account problem] is to switch to project level debt with a strong forbearance agreement. — Commercial Bank, Head of Business Development Energy Investing
Handful of investors who just won’t give a DRO. — Money Center Bank, Managing Director
We’re seeing DRO capped at 30 to 40% of the tax equity investor’s total investment. — Money Center Bank, Managing Director
Project level debt would mean a higher flip rate. — Money Center Bank, Managing Director
We did a senior secured debt tax equity deal. — Boutique Investment Manager. This was repeated by the Head of Business Development Energy Investing.
FMV Valuation Issues and Insurance
We’ve only seen basis adjustments on the grant. Q&A from our IRS auditors suggest basis / FMV on ITC is not something the IRS is focused on. A ten to 15% level of a developer fee is what is seen typically. — Commercial Bank, Head of Business Development Energy Investing
Seeing ten to 15% developer fees. — Money Center Bank, Managing Director
The appraisers aren’t getting paid more for [opining as to] higher valuations. — Boutique Accounting Firm, Director
There is some modest risk with respect to FMV/tax basis. — Boutique Investment Manager
I punt to the appraiser regarding whether value must be allocated to the PPA. Hasn’t been a major issue in [structuring] most deals, but occasionally it is. — Boutique Accounting Firm, Director
A very robust insurance industry that is underwriting FMV/basis risk. We use tax risk insurance on a portfolio level. — Commercial Bank, Head of Business Development Energy Investing
The pricing for tax risk insurance is disproportionately pricey relative to the risk insured. Eighteen months ago we were seeing premiums at five to six percent [of the maximum insurance pay out] for tax risk insurance. — Boutique Investment Manager
We have brokered tax risk insurance for 25 to 30 tax equity transactions with 15 insurance companies. — Tax Risk Insurance Broker
Ten community solar tax equity transactions executed so far in total [in the market]. We have done five. — Commercial Bank, Head of Business Development Energy Investing
We are working on a community solar transaction. — Money Center Bank, Managing Director
In theory, there is backlog to fulfill consumers’ subscriptions for community solar; worst case, you can sell to the utility which is obligated to buy the power at its avoided cost under PURPA. — Commercial Bank, Head of Business Development Energy Investing
A project can have a mix of commercial and residential subscribers in community solar, so you end up with what is like an anchor tenant. — Boutique Investment Manager
Our approach to community solar:
(i) No long-term control commitment for the consumer;
(ii) The consumer must provide six months’ notice to terminate due to [the time required to update the billing credit records with the utility]; and
(iii) No floor on the PPA pricing for the consumer, so the community solar subscription arrangement will always cost the consumer less [than standard retail rates from the utility]. — Community Solar Developer, CEO
In Massachusetts, 80 to 85% of residential roofs are not suitable for solar. How do you democratize solar? The answer is community solar, and Massachusetts provided community solar with a higher SREC factor. — Community Solar Developer, CEO
Community solar is driving down the cost of solar with larger systems but creates off-take with retail-like risk. — Community Solar Developer, CEO
The net result of community solar is more solar. Broadens participation in solar. Helps with operating costs as the sponsor can operate more efficiently. — IPP, Senior Director for Structured Finance
Cheaper economies of scale with community solar. — Solar Developer, Exec. V.P.
Community solar is better than behind the meter: (i) you can substitute customers; (ii) you can always sell under PURPA to the local utility at its avoided costs; (iii) operations and maintenance is done on sponsor’s site, not the customer’s site. — IPP, Senior Director for Structured Finance
In a traditional residential solar portfolio, the tax equity assumes a certain percentage of permanent payment defaults. In community solar, you don’t have to do that. You can always substitute customers. — IPP, Senior Director for Structured Finance
Each market is so specific. Each market has its own definition of “community solar” with respect to size and SREC pricing. — Solar Developer, Exec. V.P.
We aren’t offering [customers] co-ownership [in community solar projects]. There was some discussion of impact under securities laws. We do subscription agreements. — IPP, Senior Director for Structured Finance
SEC raised issue that community solar is a security under securities laws, but some comfort was given. — Boutique Accounting Firm, Senior Manager
We’re starting to see that the companies structuring these arrangements are not adequately considering the federal tax consequences. — Boutique Accounting Firm, Senior Manager
Arkansas imposed sales tax on transfer of community solar interest. — Boutique Accounting Firm, Senior Manager
FICO scores don’t correspond to risk. Low income people get more [relative] benefit from a 15% reduction on their electric bill than high income households do. — Community Solar Developer, CEO
The largest struggle we had with the tax equity investor was asset management – how to substitute customers and minimize customer changes. Took nine months to get tax equity comfortable. — Community Solar Developer, CEO
Not as simple as if a customer defaults you can substitute another customer right away, because the utility can only update the list [(Schedule D in Massachusetts)] every six months. — Community Solar Developer, CEO
Different states have different rules for substituting customers. — IPP, Senior Director For Structured Finance
We’ve seen very little churn [(i.e., replacement of one consumer for another)] in residential community solar customers. The history [of community solar for consumers] is good, even through financiers prefer large commercial off-takers to residential customers. — Community Solar Developer, V.P.
New York and Massachusetts utilities manually enter all of this community solar customer data for billing credits, and it is a nightmare. Utilities consistently make errors in entering data for billing credits. — Community Solar Developer, CEO
Resi customer acquisition costs $800 to $1,200 for 10kw for SunRun and Tesla [according to their public filings]. Our customer acquisition costs are one-fifth of that. — Community Solar Developer, CEO
We use the web to get to customers. We don’t use door knocking. — Community Solar Developer, CEO
Community solar “stickiness” for consumers is around branding lifestyle. — Solar Developer, Exec. V.P.
Need to aggregate to make interesting to debt providers. That comes down to standardization of community solar contracts. Minnesota has been great with standardization. New York less so. — Solar Developer, Exec. V.P.
We haven’t seen a risk premium for debt for community solar. — Community Solar Developer, CEO and repeated by Solar Developer, Exec. V.P.
New York has a green bank that will finance over the full asset life. — Solar Developer, Exec. V.P.
Do you need 100% subscription to get a construction loan? Construction takes two to four months. You have to wait for interconnection. Consumers get impatient waiting that long. — Solar Developer, Exec. V.P.
Community Choice Aggregators in California
The aggregator doesn’t necessarily have a credit rating. — Commercial Bank, Head of Business Development Energy Investing.
My preference would be to put community choice aggregator projects in a portfolio with something more traditional. — Money Center Bank, Managing Director
Power Purchase Agreements (PPAs)
[As a tax equity investor,] we’re pretty impervious to PPA pricing. — Commercial Bank, Head of Business Development Energy Investments
For a corporate PPA, my preference is [at least] a 12-year PPA term. You need to look at off-taker’s actual entity signing the PPA and the off-taker’s ability to transfer or terminate the PPA. — Money Center Bank, Managing Director
For corporate PPAs, you need to look at the “outs.” — Money Center Bank, Managing Director
A ten-year PPA is as logical as anything else for a corporate PPA. No science to this. Corporate PPA terms are going to trend down. — Boutique Investment Manager
For corporate PPAs, you need to look at the “basis” risk [related to payments for electricity (not a reference to tax basis)]. — Money Center Bank, Managing Director
[Explanation: “Basis risk” in the context of a corporate PPA means that the project’s owner sells the power in at the price available at the node, but financially settles with the corporate “buyer” based on the price at the hub. For instance, the corporate PPA provides that the corporate buyer contracts for power at $30 a MWh, so if the price at the hub is less than $30 a MWh, the corporate pays the project owner the difference and if the price at the hub is more than $30 MWh the project owner pays the corporate the difference. What actually happens is the project owner sells its output for the spot price at the node.]
We haven’t closed on solar hedge deal yet, but we are looking at some. — Commercial Bank, Head of Business Development Energy Investing
Recently seen solar transactions with a hedge, which is not a non-starter but something we need to work through. — Money Center Bank, Managing Director
We’ve seen merchant wind farms but not merchant solar because we haven’t had to finance merchant solar yet. But merchant solar is not a non-starter, as there are not as many PPAs now as there were. — Money Center Bank, Managing Director
Residential and Community Solar Markets
The statistics in this section are based on a market update given by representatives from Greentech Media and SEIA:
• Residential public solar companies are transitioning to profitability and a strategy of customers owning solar.
• When Nevada rolled back net metering it cratered the Nevada market. It was then restored.
• Emerging state markets are more sensitive to what is happening in the state policy space.
• Major trends:
– Cheaper cost of customer acquisition
– The “Big 3” [i.e., Sunrun, Tesla/SolarCity and Vivint] are assuming a strategy of profitability, rather than growth at any cost.
• 2017 is the first time solar installation growth will fall in California [versus 2016].
• ’17Q2 – Texas surpassed Massachusetts for residential solar installations.
• Top 3 community solar states – California, Massachusetts and Minnesota in 2016.
• California, Massachusetts and Maryland are projected to be the fastest growing community solar markets in 2018.
• Colorado has a significant pipeline for community solar for the end of 2017 into 2018.
• Resi solar is projected to have a 30% decline in installation in 2017 [versus 2016].
• Loan and cash sales will outpace third-party ownership (i.e., PPAs and leases) for resi.
• Maryland has allocated 200 MW to community solar.
• Illinois passed a new RPS that has an RPS carve-out specific to community solar. Illinois could rival Minnesota for community solar.
Massachusetts governor’s administration doubled the size of solar in Massachusetts. — Solar State Policy Advocate
Massachusetts did not set out to have a community solar market. The tools were in place, and it came to be. — Solar State Policy Advocate
From 2010-2011, the New Jersey SREC market crashed. In 2012 legislature restructured SREC. Governor Christie signed that bill and it resulted in massive growth: end of 2016, 2.1 GW of solar in NJ. The good times in New Jersey are about to end, unless something happens. — Solar OEM, Sate Policy Advisor
A RPS bill is sitting in the New Jersey legislature for a year. Governor Christie won’t sign it. The governor’s administration is not engaging. The Democratic candidate for governor is enthusiastic about solar. A new bill would mean 700 MWs through 2020 by increasing the RPS solar carve-out to 5.3% to be met by 2020. The RPS in New Jersey bill is a Band-Aid bill. New Jersey used to be second to California in solar. Now it is fifth. — Solar State Policy Advocate
The solar industry needs to be more engaged at the state level. Understanding solar’s issues is difficult for politicians. — Solar OEM, State Policy Advisor
The best way to engage with politicians is to invite them to ribbon cuttings. Invite them to visit your office. — Solar State Policy Advocate
Not every state’s political climate is the same. New York and New Jersey, it is at the governor level where solar advocates need to be engaged. In Massachusetts, solar advocates need to be engaged with the legislature. — Community Solar Developer V.P.
Nobody knows how much community solar will actually get built into New York. I don’t know anyone who has taken New York community solar to the bank yet. — Solar State Policy Advocate
Department of Defense’s (DOD) Procurement Policy
The Obama administration had 1 GW renewables goal for each of 3 branches of the military [(i.e., Army, Navy and Air Force)]. — Industrial Solar Company, Gov’t Relations
The Navy changed the name of its renewable energy office from the Renewable Energy Procurement Office to the Resilient Energy Procurement Office. — Industrial Solar Company, Gov’t Relations
The Air Force issued a request for proposal for energy services solutions recently. — Industrial Solar Company, Gov’t Relations
The Army is looking at where it can add storage. — Industrial Solar Company, Gov’t Relations
DOD wants something that will provide additional streams of value to increase resilience. — Industrial Solar Company, Gov’t Relations
DOD is trying to wean off backup generators with solar PV. Backup generators are expensive in terms of maintenance and fuel. DOD will give solar credit for those savings over backup generators. — Industrial Solar Company, Gov’t Relations
DOD can sign 20-year PPAs. Civilian side of federal government can only sign ten-year PPAs under Office of Management and Budget rules. — SEIA, Gov’t Relations