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As enthusiasm for renewable energy trickles down from pioneers of procurement like Microsoft and Amazon to enterprises with more modest or more distributed capacity needs, there’s just one major problem from a financing point of view: scale.
By now, financing a 250 MW project with a single utility offtaker is a walk in the park for even the most conservative lenders and tax equity investors, while residential rooftop solar arrays can be packaged together into large portfolios and financed relatively painlessly because of the uniformity of the underlying leases or power purchase agreements.
Not so with portfolios of commercial and industrial projects, whose power purchasers are more likely to want bespoke deals or insist, for instance, that contracts be drafted under Oklahoma law. Due diligence on small projects can be lengthy and expensive as legal fees pile up.
But the commercial and industrial solar market was responsible for more than 2 GW of installations in 2017 and the market is likely to grow at 9% a year through 2022, according to GTM Research, and as spreads are squeezed across the renewable energy capital stack, investors are eyeing distributed generation for those high single-digit returns.
With increasingly attractive state incentives and falling component costs, could the C&I solar sector be the last great untapped source of U.S. project finance deals? If so, what is the solution to the standardization problem?
We brought together experts from across the project ownership cycle to help understand how to unlock the potential of distributed generation. Leaders from project originators ReneSola and Soltage, alternative asset manager Ares Management and long-term sponsor C2 Energy Capital discussed state policies, debt pricing and the evolving world of storage PPAs.
If you’re looking to invest in America’s next big solar market, this is a conversation you don’t want to miss.
Speakers (pictured left to right):
Doran Hole, ceo North America, ReneSola
Shravan Bhat, reporter, Power Finance & Risk (moderator)
Mike Roth, principal, Ares Management
Rich Dovere, managing member, C2 Energy Capital
Sripradha Ilango, cfo, Soltage
PFR: As we look at the U.S. market, which are the states that you think have been the most successful at attracting C&I solar investments and are there any interesting ones that are not the usual suspects for utility-scale solar?
Mike Roth, Ares Management: Historically, the most successful states have been California, Massachusetts and New Jersey. The common denominator across these states is that they have a high cost of power (behind-the-meter) and strong regulatory support and incentive programs. We can debate how to define an effective regulatory program, but one key attribute is a continued message of support because it helps attract both investors and developers alike.
PFR: So, it seems that the C&I space, probably to a larger extent than the utilityscale, is driven by the state incentives and the support mechanisms there. I keep hearing about New York as another state where we’re seeing growth. What are your thoughts there on that one?
Roth, Ares: New York has attempted to implement programs to incentivize the development and construction of distributed generation resources. While there has been some increase in activity, most industry analysts believe the programs have underperformed because the market remains complex and not well understood. However, my personal view is that we will see an increase in transaction activity in New York over the next five years.
Sripradha Ilango, Soltage: An important aspect that has made the penetration of C&I and distributed solar possible in Massachusetts, New Jersey and California has been the presence of a defined set of reliable attributes. Developers in these markets can rely on a set of incentives over the long term and better plan for any remaining risks, allowing them to execute into those markets. I’ll add North Carolina to the list of successful programs because they set out to do gigawatts of installation and have achieved it. North Carolina is a good example that the quality and stability of the program is also important. In some newer markets, the regimes have faltered a bit – regulators had the right idea in not burdening ratepayers with additional costs but ignored the risks developers were being asked to shoulder. It’s important for regulators to understand the effort it takes to forecast over three years, deploy the capital and put your balance sheet at risk. Then develop the assets, put down the interconnection cost, build the asset and make sure financiers will finance the assets in the long run. Having support from a regulatory standpoint is essential.
PFR: You would obviously like policy stability in being able to plan ahead. Are there any specifics that, Carolina for example, has done in how they’ve structured it that has made it attractive for you?
Ilango, Soltage: In North Carolina, a QF market, regulators and utilities offered a standard PPA and allowed developers to secure an interconnection and a PPA by meeting certain thresholds. The achievable thresholds and straightforward process allowed lots of developers to have success in that market. To offer another example, Massachusetts had SREC-I/SREC-II, which provided an SREC contract in exchange for a set of specific development targets. Straightforward structures like these are helpful.
Doran Hole, ReneSola: In Minnesota, for example, Xcel Energy manages the program very well as far as utilities managing things goes. New York, on the other hand, has a very favorable outlook but the regime certainly hasn’t been as stable thus far.
PFR: What have been some examples of regimes that have changed?
Hole, ReneSola: So, Massachusetts—there’s one. Rich can comment on that more than any of us. SREC-I to SREC-II to nothing and then now the SMART program. Not that it’s in the United States, but the Ontario market is another really, really good example where a large number of developers were stuck holding the bag on feed-in tariff contracts that were all canceled by the new government there. For changes for the better, for example, in the early days of the New York community program, the maximum size of the project was smaller than it is now and they’ve just upped the maximum sizes, which creates more work for the developer. We’d love to do it because it results in larger projects but you have to go back to all your landowners and look at their property again and say, okay, wait, I’m no longer doing 2 MW—I’m going to do 7.5 MW. Can I fit that?
Ilango, Soltage: And also, how does that impact your interconnection?
Rich Dovere, C2 Energy Capital: Stability of regime is one side of it. A government program is successful when it’s fully utilized. That is the benchmark for success, right? A government incentive program that sits there for two or three years with money left in it, is an example of an unsuccessful implementation. If you look at everything from SREC-I to SREC-II to SMART, the capex is going down for systems and the incentive regime goes down and so, as long as there’s preservation of the incentive in terms of what went into the investment, that is fine. Why did Ontario get canceled? Some of those feed-in tariff contracts were 30 or 40 cents per kWh. Canceling it, in the first place, was probably an inappropriate action, but an adjustment of it would have been absolutely viable for the developer community to make more than adequate returns on that endeavour. So long as the program that is the basis for the actual investment is there, I think there are things that show policy level successes on what is, unfortunately at least in the aggregate U.S. energy mix, small incremental changes. What we don’t have is a U.S. national energy policy, which is frustrating. With the federal tax credit, you could say that there is at least a nod to it, but that’s how this country incentivizes policy—they do it with tax credits. In reference to your first question about C&I and regional growth - what’s great about C&I is that in many instances we’re not competing just against the commodity price. We can compete against transmission and distribution as part of our overall revenue structure and so it actually opens up to the extent that, from an execution standpoint, we’re able to manage costs on execution very well. It opens up the map of the country in a very interesting way. We have started looking at states that would not otherwise have been viable. I mean, C2 Energy Capital is doing deals in Louisiana, Florida, Indiana, and places that are not C&I hotbeds. The reason why is that with on-site C&I generation, we have the ability to compete against T&D and the commodity class. By applying scale to C&I execution, we can actually deliver those projects.
Roth, Ares: While many programs have changed and evolved over time, in some instances the change has allowed the market to continue thriving, whereas in other instances change resulted in market dislocation and a decrease in activity. If you look at Massachusetts, there has been a change in the incentive program from SREC-I, to SREC-II, and now to SMART. Those programs have all been successful and I believe MA is a top three C&I solar state. From a private stakeholder’s perspective, all have generally done well including developers and third-party lenders and equity investors. Contrast that to New Jersey, where the megawatts were built based on a belief that SREC prices would remain high. However, NJ SREC prices have been unstable which has led to underperformance. This, in turn, has caused certain companies and investors to exit the market and/or monetize their portfolios. The underperformance and market dynamics have caused many folks to stay away from NJ. Richard hit on the word ‘scale’ before and I’d like to expand on that. As we think about defining success in the C&I sector, it is important to recognize that the sector is highly fragmented and that many companies active in the space are unable to scale to a point where they can access efficient capital and drive operational efficiencies. If you survey the market, there are only a handful of companies which have successfully raised project-level debt from commercial banks at a cost of capital in line with single-asset projects. In order to understand why, you need to take a step back and observe how the industry has evolved. Many C&I companies were formed around 2010-2013. They were typically backed by venture capital and family offices and they didn’t do so well because they expanded their headcount and teams very aggressively, but could not aggregate asset volume and create asset-level value at a sufficient pace. Moreover, accessing the debt market was very challenging, and as a result, many of these companies would use dilutive corporate capital to build and acquire assets. In some instances, companies were able to build 20 to 30 MW but the management team was heavily diluted. In other instances, the company was unable to raise follow on corporate capital as investors grew frustrated with a high burn-rate and inability to source efficient asset-level debt. While leverage was available around 2014, it was typically fairly expensive at L+4% and with very high friction costs and fees. As headcount ballooned, and results were limited, many of these platforms were repositioned or shut down around 2014/2015. Moving forward in time to 2016/2017, we witnessed growth in new markets and there’s efficient leverage available from a handful of banks, partially due to slow-down in single-asset renewables deals. While some folks exited the market, the companies that persisted gained scale and worked with lenders to get comfortable with the asset class. Today, there are perhaps at least 10 banks that are able to lead a $20 million deal at rates of approximately L+2%. The efficient leverage available today provides equity investors an ability to generate levered returns which offer a premium over single-asset utility- scale solar investments.
Dovere, C2: To Mike’s point: C2 Energy Capital was founded in 2014. We hired our first employee, other than my partner and me, in November of 2016. We now have 22 employees and by the end of June we’ll have 40. That kind of growth can be very scary. If you look at most of the platforms that have failed, it is overhead that drives the failure. The cash flow in the business is very lumpy. The ability to manage payroll, healthcare, and all those costs, on top of making interconnection deposits and other development, is key. You end up doing cash flow planning that has to be, not only a very precise operation, but also one with a huge amount of built-in contingency. For example, if you’re expecting a closing and the utility is three weeks late with their interconnection, then tax equity is not coming in. If you’ve done your planning around that and not managed correctly, it can be very scary. This is where the extensive experience of C2 Energy Capital’s team makes an impact.
PFR: What have you seen in terms of your conversations with lenders in the space?
Ilango, Soltage: Right now, there is a lot of capital chasing a limited amount of deals. Between tax equity, common equity and debt, there’s a lot of capital to be invested. That said, it’s not all cheap money. For example, people have looked at utility-scale assets and found that they are trading at such low returns that sometimes the cost of equity is seemingly lower than the cost of debt! But there are a few hundred basis points of difference between a utility-scale and a C&I asset, depending on how you look at it. For example, I used to wonder if lenders would actually look at a diversified C&I portfolio. A few years ago I was talking to a few lenders at one of the conferences and they said, “Of course I’d take 500 residential customers over one large offtaker because 500 customers aren’t going to pick up and terminate a contract on the same day.” It’s a different viewpoint and I was surprised to hear it from a lender. But I also think as developers getting ready for financing, we need to be careful about putting the right metrics in place when building portfolios of offtakes by looking at FICO scores, churn rates, etc. How will I make sure that 200 of those 500 customers don’t leave? How would I replace those customers? I need to be ready to answer all those questions because at the end of the day, the lenders need their money back within a certain timeframe at the cost of capital.
PFR: Presuming that the bank will lend you at Libor plus 200 or plus 250 and that that rate won’t change too much, does that just mean that as the equity—by virtue of going with a tier one contractor—that you have to take a little bit less return but you are more certain in the long term?
Dovere, C2: A financial model is a couple of folks putting their finger in the air and guessing. You can have some parameters around it but, realistically, everybody who owns an asset around this table understands that. It was a really bad winter in Massachusetts last year. On a weather-adjusted basis, our projects are doing great - on a weather adjusted basis. What difference does that metric make relative to the overall actual production and the actual revenue coming in?
Hole, ReneSola: So, this is where equity sponsors and lenders are completely aligned, right? This operational commentary by Rich, the markets still would love to view these things as financial assets and so as a developer oftentimes I have to equate myself with a bond originator. The “bond” has to work. In securitization markets, you’ve got guys who are buying paper and they’ve got two prospectuses on their desk and one of them is car loans and the other one is resi solar. They’re just looking at financial assets. There’s no deep recognition of operational efficiency or operational characteristics until it goes wrong. And then that’s the last kind of C2 bond that that buyer’s going to buy. When you do things right, that doesn’t happen and those capital markets will be there for you.
Dovere, C2: Doran also knows on a firsthand basis how stringent C2 Energy Capital is on standards.
PFR: In the last year or so, how have you seen spreads for construction debts change and what have you seen on term debt and on tax equity?
Ilango, Soltage: Over the last few portfolios that we’ve executed, we’ve seen the cost of capital get competitive across the capital stack. It’s possible lenders will reduce their spread to accommodate the rising interest rates but I think it’s unlikely. Frankly, I don’t think we should expect a further decreased cost of capital over time.
PFR: Where does term debt generally price?
Ilango, Soltage: The L+200 is probably a decent handle. That said, all our executions have been in the 50 MW range which is a nice size for capital providers.
PFR: For tax equity investors in this space I remember having conversations with folks on the utility scale space, looking at about 7% for tax equity returns. What’s it like for C&I?
Ilango, Soltage: It’s probably a few hundred basis points higher than that.
Roth, Ares: One high level observation - there are certainly more tax equity investors available to invest in the C&I space today as compared to 2013. This creates competition which drives down the cost of capital.
Dovere, C2: Return is not necessarily apples to apples, depending on what your strategy is. Our ultimate fund is effectively a large partnership flip. Because we have investors that we have to manage their tax liability through a U.S. blocker. For us there can be different parameters relative to what matters, whether it’s structure or factors of the deal, like DROs and really nuanced things within the tax equity stack which can drive material optimization, if you know how to do it right. But it depends on the nature of the investors that you’re serving.
Roth, Ares: I think what’s very notable in this sector for tax equity is that there may be over 100 active companies developing and owning assets in the C&I sector but only a small subset of them actually have access to a sizeable tax equity commitment to capture a significant pipeline of over 25 MW. Perhaps one of those reasons is that only a small subset is truly considered by tax equity investors as stable and creditworthy to satisfy the indemnities. As the sector matures and folks gain scale, perhaps you’ll see more companies being able to access tax equity. However, at the same time, we’re seeing companies exit because they don’t have sufficient liquidity at the corporate level to fund payroll across business development, finance, marketing, and operational support functions. So, it’s just a very dynamic sector.
Dovere, C2: And not that many people can agree to a material liquidity covenant.
Ilango, Soltage: And most of the market is also doing time-based flips, inverted leases or other structures, which are not immediately translatable to a yield calculation the way a yield-based flip is. So, the utility-scale uses other structures to bid out more.
Roth, Ares: What we’re seeing is that for many of the assets that were originated in the last six years, the original levered equity returns were above 10%. As folks are exiting, those assets are sometimes being sold to lower cost of capital investors which might be infrastructure funds, strategics, new companies being formed and even pension and insurance companies going direct. As assets trade and companies evolve, their ownership base and capital structures also evolve – in many instances the key driver of a transaction is premised around finding a new sponsor that can more effectively raise tax equity than the previous asset owner. As I think about capital flows in the sector, I believe that many investors in this space have rigid investment criteria which may restrict them from taking development risk or construction risk and so some of the companies in the sector have a very complicated ownership structure to accommodate certain investors. This, in turn, leads to companies with fragmented and complicated ownership structures, which leads to misaligned interests, and an inability to execute a business plan efficiently. One of the things that we’re very proud of at Ares is that we have a flexible mandate by capital structure, life cycle, sector, and can invest in both assets and corporates. Further, we can act as a value-added investor with shared control or direct control, as well as a passive investor. Our team has deep experience in development, construction management, commodity risk management, asset operations, and we have excellent financing relationships with lenders and tax equity investors. We understand some of the challenges of the sector including tax equity – but we see it as an opportunity to partner with strong management teams and companies to help propel them to the next level of success.
Dovere, C2: For C2 Energy Capital, when we went out to the market for our fund, we would start off a meeting talking about discretionary capital and effectively priced capital. You have to have confidence in the management team, that they know how to manage risk. That is what we have achieved at C2 Energy Capital. I would say you can probably count on one hand the number of groups that have truly discretionary capital to go after this space. That is an important differentiator because, if you don’t have discretionary capital, you might as well keep on flipping assets.
Roth, Ares: I believe that many of the lenders and equity investors in the C&I space - historically their experience has been in single asset power, whether it’s renewable or thermal, and when they take a look at C&I, there are issues they’ve never thought about such as team-building, recruiting, business development, strategy and they put forth a structure to a team or a company or a developer that holds back the company from achieving success. Because the investor is seeking to mitigate or isolate that risk out and cause another stakeholder to bear that risk. While it may de-risk the investment for the investor, it puts additional strain on the company which indirectly impacts the investor in the long-run. I believe that in order to be effective in the space as an equity investor or developer, one should acknowledge and embrace the notion that the skill sets required to be successful are a hybrid between project finance and growth equity. Frankly, it’s a skill set that many folks in the power space do not have. I believe this has held back the industry from realizing its full potential. At Ares, where we recently combined the credit group with the EIF team into one combined team, we’re fortunate enough to have that skill set, and leverage that experience both from within our team and outside of our team. That has given us an advantage in the space. In addition, we strive to think proactively about risk-adjusted returns.
PFR: One thing is kind of the profile of investors. What about the structure of actual lending? Because there was an interesting private securitization for a C&I portfolio. What will it take to bring in more private placements?
Ilango, Soltage: I want to say 20-year PPAs even though they don’t exist anymore. Theoretically, that is the ideal plan for most people building a large portfolio. At Soltage, we have focussed on developing and building a large portfolio of diversified utility assets that start mimicking one large utility asset, but with the benefits of diversification.
PFR: Yes, but do you think it’ll stay in the bank market primarily?
Ilango, Soltage: No, not necessarily. Right now the bank market is a very flexible source of capital, so you can put the portfolios together. Once you have an operating portfolio of around 400/500 MW, it’s a good time to take out all the bank debt and put in some kind of securitization if the cost of capital still cooperates.
Dovere, C2: It’s sort of a false narrative to say that securitizations are a more efficient way of doing these types of assets. Relative to how inexpensive and where bank debt is right now, when you layer in transaction cost and reporting and everything else that comes with the proper securitization - it’s not necessarily a better financing option. It’s a different beast. I would argue relative to Doran’s point about car loans versus solar; most people in solar don’t know how to deal with managing a securitization, whereas most people in car loans know how to deal with securitization investors.
Ilango, Soltage: It goes back to talking about solar assets as a bond - it’s not just a bond, there are operating risks. So, as the person issuing the green bonds, I want to be careful about what we are signing up for. These are operating assets that have real risks. Dovere, C2: You can extract a lot more from the banks.
Hole, ReneSola: Transaction cost is such an important factor when you’re thinking about sales of smaller portfolios and financing the smaller portfolios. When I look at the market there are a number of investors that actually have no need to go get external tax equity to line up with their sponsor equity. It doesn’t matter what after tax return you’re targeting for that tax equity investor: those transaction costs will actually take that way out of whack. And it is difficult to do an apples to apples comparison. When somebody says, “Oh, I’m going to do this at 7%,” the other one’s says “I’m doing it at 15%” and you’re talking about a small portfolio, well, the 7% guy could have $500,000 worth of transaction costs because of all the consultants that he hires and a dozen lawyers on the phone for a call two times a week, and then the 15% guy is doing something more simple and much more efficient from a transaction cost perspective.
Roth, Ares: The way we think about the sector is: What problems can we solve for the company or developer and the most obvious one in the D.G. solar sector is scaling efficiently. One way we think about investing in the sector is to find a company that requires multiple solutions, package it up in a bespoke solution and help that company grow and create value. We may be more expensive during the growth phase as compared to a financing source for a static portfolio such as a core infrastructure fund – however, that is not a fair comparison because our solutions and value-added expertise can create incremental value. We are very focused on maintaining aligned interests. As such, we seek to structure transactions in a manner that allows us to participate in the financial benefits of value creation including driving down the cost of capital, sourcing efficient tax equity, identifying attractive investment opportunities, and generally leveraging our market intel. A recent example of this is our investment in the Navisun platform.
PFR: Perhaps the most interesting issue in this space is standardization and it’s a theme that I hear from everyone that I speak to in the C&I space. What have been the most useful lessons that you have learnt in terms of ways to streamline all the diligencing, all the legal fees, all the permitting?
Dovere, C2: As far as it relates to transaction costs, I think the only thing more expensive than really good advice is bad advice. That cost is something that we take very seriously and I think that we’ve been advised very well. That being said, there are efficiencies we do want to look at. Over the last two years at C2 Energy Capital, we’ve asked our law firms for data on what went into every one of our legal bills and actually have built analysis around what words were the most often built into descriptions. We now have an in-house legal team that is growing and takes on some of this work. From a staffing perspective, it only makes sense if you know that you have identified a pipeline in order to execute with these individuals. It’s not a “build it and they will come” type of thing. You know, there’s no standardization. I don’t know if standardized is the right word but the main thing that’s consistent across everything is the quality of the sponsor and I think that really drives whether it’s debt or equity or tax equity. But as far as standardization goes, high quality engineering, high quality management continuity and just making sure you have well-organized data rooms is huge.
Hole, ReneSola: Operational efficiency from a developer perspective just feeds right into this conversation. So, a data room is the end result of everything that precedes it. Avoiding bureaucracy is really important. The staff will change, locations will change. Whether it’s the project management process, the asset monetization process, the origination process, selling subscriptions, whatever it is, the systems need to be built around that to ensure that there’s consistency and operational efficiency. Our project managers are the people that are filling out permit applications and dealing with contractors and making sure the wetland delineations are done properly. They are also the same people that are populating the data rooms all along the way, knowing full well that that data room is what’s going to be shown to a lender or investor when we go to monetize the asset and it’s important to have that connectivity and the operational efficiency straight through to achieve your business goal.
Ilango, Soltage: To add another layer of detail: the geographies are different. You cannot overprescribe the standardization. You need to have just the right amount so that teams can figure out what is right and do the right thing. There also needs to be enough support from both the top and the bottom of the organization to make sure everyone is working efficiently.
PFR: The issue that I keep hearing from lenders especially, is how to get comfortable with unrated offtakers. Is there a way to build up some kind of risk assessment that can scale easily? How do you deal with lenders on that conversation?
Ilango, Soltage: If it’s unrated and you cannot have a qualitative view as to why that should be creditworthy, you have to have a diversification strategy. Can you blend it with enough A-rated offtakes, utility offtakes, etc. to get it done? There is also a big push to do low and moderate income assets. Regulators are coming up with an LMI requirement in community solar and even though banks talk about not linking LMI to credit quality, that is always the first question developers get and it needs to be solved in a few key markets. I think it’s a qualitative assessment or building a large enough portfolio and tucking it into the right markets.
Dovere, C2: It’s also a matter of the regulatory regimes. We have a portion of low income housing in our portfolio in Massachusetts. There are two things that go with that and are important when we talk to debt providers. One, those contracts are typically priced on a discount to retail rate basis. So, if that is a design, it will always make sense if a bill gets paid, right? If you’re saying, okay, well, I could either pay 80 cents for something that would otherwise cost me $1 or I could default on this contract and then have to pay that $1 - the electricity bill as a fundamental is an important thing to make sure it gets paid. The other side of it, which I think is important, is community solar. It is such an elegant way of going with credit risk mitigation because to the extent that there is a default, it can be frustrating, but you have the ability, within the service territory, to swap out another customer on a physical asset. Which if you were saying I’m going to build that on top of an unrated school and the school goes out of business or something like that, then you’ve got an asset that’s stranded there. Community solar as an asset or otherwise virtual metering programs or things akin to that, provide a de facto and quite material credit enhancement within the context of the regulatory structure.
Roth, Ares: I would highlight two points: First, efficiency is a function of whether you are executing a function in-house or out-sourcing to a third party. Outsourcing may be an efficient path towards executing a new task which the existing team cannot perform (due to lack of experience), or does not have the bandwidth to perform. However, outsourcing presents quality-control issues and may require you to forego certain profit margins by allowing a third-party to capture it. In-sourcing is typically more efficient if you can recruit the right folks or already have the skill set in-house. It can allow you to capture additional margins and create more attractive asset-level opportunities by optimizing the economics and commercial/ operational framework. However, this exercise may drive your headcount and overhead costs up. Therefore, it may only be appropriate if you expect volumes to remain high. Otherwise, you run the risk of having spare under-utilized labor capacity. This is what makes scaling in the C&I sector challenging. On the one hand, success relies upon local expertise. On the other hand, a good developer/management team should remain nimble and opportunistic as new markets open up. It may be difficult to balance both while also making the right decision regarding in-sourcing versus outsourcing and keeping your overhead costs at an appropriate level. Second, the C&I sector is a people business. There are many decisions, as Doran said, that a company needs to make and having fewer decision makers increases efficiency. The way I think about it is, who do you think is going to be more efficient? Developer A, which has to answer to six different capital providers for start-up capital, development capital, construction loan, back leverage, tax equity and cash equity (and within that whole framework there’s multiple decision makers because you might have multiple equity investors), or developer B, which is simply supported by Ares and a tax equity investor. I think the latter has a significant competitive advantage.
Dovere, C2: Increasingly in the market there are providers that want to provide tax equity and debt as one financial solution. So, yes, it might be Mike’s “all in one” type of deal, but again, there’s a difference between developer and sponsor. Sometimes they’re the same, but sometimes they’re different and the goals of each may be very different. No one around this table is the appropriate long-term—no one around this table ten years from now will be owning solar assets, realistically. It’s not an appropriate asset for any of us to own. It’s an appropriate asset for a power company to own or a proper IPP. C2 Energy Capital has been aspiring to establish itself in the investment management business more than in the specific solar IPP business. C2 Energy Capital has an investment management business that right now has one portfolio company which is its solar IPP. However, C2 Energy Capital can invest from its funds into biogas, or into wind, or into other asset classes, not only into projects, but into another portion of the capital stack and other strategic investments as well.
PFR: I keep hearing from developers about this magical standardized contract that can be used and scaled for dealing with EPCs, for dealing with O&M, whatever it is. In your experience, will we ever reach a stage where we will be able to have scale by standardizing some of these contracts?
Ilango, Soltage: We’ve learned that the more buying power someone has, the more heavily negotiated the contract is. On the resi side, there are state regulators and other commercial regulators who need to sign off on individual contracts. Once you’ve passed a contract through them, you’ve got a good template and there’s typically no need to negotiate a single contract with any residential offtaker. In terms of EPCs, O&Ms and others, we have standard forms because as long-term owners of hundreds of assets, you don’t want a different EPC and a different O&M for each. That helps, but you still need to customize according to the geography, technology etc. because each asset is different and has a different requirement, so as an owner you would be ill-served to have a standardised contract across every single asset. Where we have seen the benefits of really reducing what we broadly call “transaction cost” is in relationships. Having the same set of parties to work with across many different transactions reduces friction costs. So having good relationships across the market and having transaction history with the parties you continuously do business with, helps. It’s the 80:20 rule - if 80% of your deals go with 20% of the parties, that’s not a bad thing.
Hole, ReneSola: But I think that balance is important. Whether it’s 80:20 or some other sort of ratio, what you’re doing is you’re deciding to save on friction cost at the cost of potentially capturing additional margin from competitive forces that are at play. The market for lending and buying solar assets continues to grow and continues to move and cost of capital is coming in and terms change. If you end up sticking with the same party and you stick with them for four years you’re missing out on pretty much all of the improvements that happen in years probably three and four of that period. But for a certain period of time for a certain asset type it can make sense. The strategy we take is if we find the right buyer through a really good competitive process in a particular market, then repeating a sale of that same asset type to that buyer is going to make sense for a period of time.
Roth, Ares: Yes, that is the point I’m trying to clarify. If developer A has six different financing relationships to manage and each of those relationships imposes different concentration limits on the developer, then that developer is forced to originate based on the parameters of those various legal documents. As a result, that developer is unable to act opportunistically and pivot based on the market opportunity and what makes sense. Further, the reporting requirements across six different investors will require additional hires and drive up headcount and overhead. Developer B has a financial partner that’s willing to make decisions based on the most attractive opportunities at that point in time. Developer B will be more successful because he has lower overhead, lower friction costs and is able to capture the best opportunities irrespective of concentration limits which were set several years prior.
Dovere, C2: And we know that it’s not only the counterparty, but the counterparty’s advisors and when you’ve done enough of a diversity of successful transactions that track record can pay off. We’re doing deals where the law firms have actually recommended their clients as tax equity investors to us which is really nice. Number one, it’s a very positive comment when you have the other side’s lawyers recommending you to their clients. We know what those attorneys are looking for and what the top four or five independent engineers are looking for. There’s an institutional memory that exists in terms of working with them from the team. We’re doing three different tax equity transactions right now with the same law firm and the same team that have worked on other deals. You know who you’re getting e-mails from and what the responsiveness of this person is.
Ilango, Soltage: You can fight in shorthand!
Dovere, C2: For C2 Energy Capital’s largest tax equity deal, we negotiated the term sheet in two days for a new tax equity investor. It was the first time with that institution, and when everybody knows the rules from the adviser side and no one is asking for anything too crazy, it becomes a very commercial pricing discussion. It’s really a very satisfying moment in time. Many of these financings can be so difficult with tax equity, which is generally known as being a very difficult beast to wrestle.
PFR: I would be remiss if I did not ask you all about storage because I feel like that is a theme I also hear a lot in this space and the main complaint that I hear from people is around storage PPAs. With that in mind, I’d like to go around and ask all of you on the storage front, what are one or two of the issues that are front and centre, looking ahead this year? Is it the nature of the contracts? Is it to get financing? Is it the technology?
Ilango, Soltage: I’m very excited about storage. I think that’s the next big push in the market, especially given the problems solar has created or will create with its growth. I think the key issues are technology and revenue. We continue to be excited by not just lithium ion but also other technologies on the market and we want to be thoughtful about which technology fits which application, because it’s not a one size fits all. Second is the revenue, monetization of contracts: There are a lot of revenue stacking models out there. I am comfortable with merchant revenue but I need to take something to the bank. I cannot take hypothetical merchant revenues two years down the road and finance an asset today at the cost of capital that solar is getting financed today. I think the industry is at a moment of reckoning and hopefully it’ll be solved the way solar was solved ten years ago.
PFR: So, when someone now gives you a solar contract, you would like to see some piece in there that is a capacity price for the storage or just something fixed?
Ilango, Soltage: The SMART program is a good example. There’s a fixed price, depending on where you are and how it is done, between three and seven cents a kilowatt hour. The fixed price is a good start but, again, it’s an open question whether that is sufficient to get the amount of storage in the Massachusetts market that the Department of Energy Resources and everyone else wants.
Dovere, C2: This conversation is directly contrary to anything that we’ve been talking about relative to standardization. There are at least 100 questions that are derived from those three or four issues. Understanding how it plays into your business is still such an opaque process for the end customer versus solar, which is now actually a relatively simplified asset. It’s the type of thing that, fortunately or unfortunately, is realistically going to be driven by a utility and ISO needs. What Sunrun just did is extremely interesting. And then it also takes a huge amount of technical expertise in order to even talk about it.
Hole, ReneSola: I think the technical expertise has to cross over with the financial expertise. From our perspective, developing projects and deciding whether to put storage on is kind of this trade-off: if it’s going to pay for the capital cost, then it can make sense if it’s accretive to the value of the project, but how do you get from the beginning of that sentence to the end of that sentence?
Ilango, Soltage: I think storage is a standalone conversation. It unfairly gets bundled with solar because they are complementary. The investment tax credit is a good example - storage can get some ITC but using it opens up the whole new recapture issue. Regulators are better off solving storage and then figuring out where any technology can coexist with any other technology.
Dovere, C2: It is an excellent retrofit opportunity.
Hole, ReneSola: The way Massachusetts is approaching it, by just putting an adder in, will create a platform for implementation. If you’ve got an adder that creates a revenue stream sufficient to actually fund the capex and make it accretive without going into the gruesome details of the alternative revenue streams—whether it’s coupled with solar or not—that will create the learning which will create the experience and people will start to understand what it is that these things actually do and what kind of revenue they can generate. Then you’ve got to take that and export it to the other utilities around. But ones that don’t have adders right now, it is virtually impossible to respond to an RFP for a California CCA that wants solar plus storage without just simply going, “You know what, pay me for capacity.” Because the engineering and design that goes with the financial design leads to questions like what type of battery, how many hours of charge and discharge do you need? And that depends on the revenue and then the revenue depends on the design and how high of a DC/AC ratio should you go and then that actually impacts the cost of the actual DC of your solar. It’s just horribly circular in ways that we’ve never experienced before. It makes it exciting, don’t get me wrong.
Ilango, Soltage: But someone’s got to be paid to do all this and I am not sure all markets are there yet.
Hole, ReneSola: Finding the people who can actually help you with this – to get into a room with the right people just to hear that out – it is a vacuum right now and it’s only going to take experience of actual systems being built and implemented to make it work.
Roth, Ares: I believe there is a significant investment opportunity in storage but the way we’re approaching it is by trying to first study the various applications and investment opportunities by geography, by origination point, but also by sector. We’re not only involved in solar D.G. but also involved in utility-scale solar. We’re building storage through our Conti Solar EPC investment and we are looking at microgrid deals, electric vehicle deals and other applications outside of solar and we believe that that will put us in a better position to make better investments in storage, not just in D.G.
Dovere, C2: And we should all be very appreciative to the state of Massachusetts because by virtue of establishing an adder, it’s the first time, on a commercialized basis, a financial benchmark has been established.