It is always a good indication that a market is maturing when consistent, less expensive sources of capital appear. Now more than ever, there are more sources of capital for solar transactions – especially debt in the commercial and industrial (C&I)/middle-market solar space. Non-bank lenders, regional banks and a few large national banks are creating renewable energy finance programs to meet the needs of this sector. This surge in competition to finance projects is driving rates and fees down on a regional basis.
These newer entrants to the market have long seen the opportunity, but now they need to understand the credit risks and get more comfortable with the technology. Certain regions of the country where solar is very active are attracting these new lenders. We haven't seen this upswing in lenders on a national basis yet; but, as favorable solar policies evolve in new areas of the country, lenders are sure to follow.
Yieldcos. Over the past year, yieldcos have been a huge growth engine for the C&I/middle-market segment of the solar industry. Yieldcos are solar's version of a master limited partnership or real estate investment trust, notwithstanding the tax benefits. Yieldcos offer stable sources of cashflow to investors, and the yieldcos have been aggressively buying portfolios of solar assets and solar development companies. The importance of yieldcos cannot be overstated.
Without a yieldco, smaller development companies would not be in a position to sell their assets and recapitalize their companies. This recapitalization allows companies to continue to develop projects by redeploying this capital or by finding cheaper sources of capital, given their newly reduced liabilities. In the past month or so, yieldcos have experienced some investor pullback; however, this appears to be temporary.
Some investors have been concerned that yieldcos are growing too fast and are acquiring assets too quickly. In a sense, they are exceeding the investors' speed limit. Yieldcos are proving to the market that they can sustain a robust pace and still acquire quality assets. This minor pullback may slow things down a little in the immediate future. However, all indications point toward a go-forward, business-as-usual approach, with a focus on quality. If for some reason yieldco investors struggle with returning to this type of investment, it could have an adverse effect on the solar industry.  Â
NTP versus COD. Most of the entities purchasing solar assets (i.e., yieldcos, utilities and independent power producers) prefer to acquire completed assets at the commercial operation date (COD) as opposed to an NTP (notice to proceed). This has increased the need for construction lending. A COD delivery benefits both the original developer and the buyer. The developer is able to realize a bit of a premium by taking on the construction risk and delivering a completed project, as opposed to selling at an NTP. The asset purchaser benefits because it is acquiring a turnkey, fully functioning asset, and it does not have to take on construction risk or deal with any issues that can occur during that process.
PACE. Residential Property Assessed Clean Energy (PACE) financing has seen some success in various places across the country, such as California, New York and Colorado. The recent trend is toward commercial PACE programs currently being implemented in parts of Texas, Georgia and Florida. Commercial PACE is another viable tool for financing good C&I/ middle-market solar projects, and it is another financing resource with plenty of potential. Â
Community solar. Also referred to as solar gardens, community solar has gained popularity over the past year. Community solar systems allow consumers to buy solar from panels located at a different site from where the power is consumed. Individuals, as well as businesses, who were unable to access solar due to shading or space now have access to it. There are a number of these systems that will have a commercial off-taker and residential off-taker receiving power from the same solar array. This setup gives developers flexibility when structuring power purchase agreements and allows them to attract financing because the system is large enough to meet minimum finance size requirements. The most active states for community solar are Colorado, Massachusetts, Minnesota and New York. Community solar is a popular, growing trend across the country.Â
IPPs/utilities. The market for merchant independent power producers (IPPs) is seeing strong competition for good solar assets. The IPPs and the utilities have been aggressively buying solar assets – something very similar to what we are seeing with the yieldcos. They are looking for large assets, or pools of assets, around the country, and they are willing to step in at an NTP or a COD. These solar assets are driving strong returns for the investors. Purchasing solar assets also allows the utilities to meet renewable portfolio standards or other regulatory requirements for renewable energy that are in place. The IPPs and the utilities are playing an increased role in purchasing solar assets, and this trend should continue.
The good news for developers of C&I/middle-market solar projects is that there are plenty of options for financing or selling their assets. Depending on what the business model is, there are plenty of programs available to fit a company's needs.
Chris Diaz is principal of Seminole Financial Services. He can be reached at cdiaz@seminolefinancialservices.com.
