Financing of U.S. solar projects is in the midst of a transformation, with new business models, new investors and new financing vehicles gaining sway, according to new research by Bloomberg New Energy Finance (commissioned by Reznick Group).
U.S. solar projects have historically been bankrolled by some combination of energy sector players, banks and the federal government, but the landscape is rapidly changing. New business models are emerging, with an emphasis on third-party financing, the report says. New investors, including institutional players, are entering. New financing vehicles – such as project bonds and other securities – are being assembled to tap the broader capital markets.
Bloomberg New Energy Finance's report, called ‘Re-Imagining U.S. Solar Financing,’ is designed to assess where the market is today, where it is heading and what is behind this important finance transition.
The evolution toward a broader investor base is expected to help maintain growth for U.S. solar deployment. Asset financing for U.S. PV projects has grown by a compound annual growth rate of 58% since 2004 and surged to a record $21.1 billion in 2011, fueled by the one-year extension of the U.S. Department of the Treasury's Section 1603 cash-grant program.
Funding the next nine years of growth (2012-2020) for U.S. PV deployment will require about $6.9 billion annually on average, the report says.
Two factors are predicted to drive the evolution. First, traditional players are scaling back their participation. Constrained by regulatory requirements and by the continent's financial crisis, eurozone banks are offering loans of shorter duration and with slightly wider spreads.
In the U.S., the Department of Energy's loan-guarantee program – considered key for project finance – lapsed in 2011, making less low-priced capital available for large-scale projects.
Second, thanks to the continuing low-interest-rate environment, nontraditional investors are becoming more interested, lured by the risk-return profiles of solar projects that employ well-proven PV technology.
Motivated by attractive yields and the examples set by companies such as Chevron and Google, U.S. corporations are eyeing forays into tax equity. Similarly, pension funds and insurance companies are willing to give solar projects a serious look in the wake of the successful bond issuance for a solar project owned by a Warren Buffett-backed utility.
The past year has seen a crescendo of conversations around financing vehicles that draw on the capital markets, such as solar-backed securitization, master limited partnerships, structures resembling real estate investment trusts (REITs) and publicly listed solar ownership funds.
In parallel, new business models for deployment of solar have flourished, including variations of third-party financing structures that enable customers to enjoy the benefit of local systems at little or no up-front cost. These models have the potential to substantially broaden the universe of solar investors.
‘Solar equipment prices have dropped by more than half since the start of 2011, but financing costs matter, too,’ says Michel Di Capua, Bloomberg New Energy Finance's head of analysis, North America.
‘New financing vehicles and new investors across the solar project lifecycle – development, construction, commissioning, and then long-term operation of assets – will cause the costs of equity, debt and potentially even tax equity to migrate down,’ he predicts.
Policy could accelerate the transformation. Investors surveyed as part of the report said that they seek stronger solar renewable energy credit programs, new standards, more flexible tax credits, and sanctioned high-liquidity investment vehicles, such as solar REITs.
‘A greater understanding of project risk and return is driving new investors into the solar PV market,’ says Tim Kemper, renewable energy practice leader at Reznick Group. ‘However, investors still need to pay attention to tax and structuring issues, as these are the factors that will often determine the viability of a project.’
The full report is available here.