German-headquartered solar firm Conergy has set out on the path to become a solar independent power producer, two years after Miami-based private equity firm Kawa Capital Management rescued it from bankruptcy.
The company has long been involved in project development, financing, construction and operations and maintenance, with a presence in 15 countries, but recently made its first venture into asset ownership, when it decided it would hold onto a portfolio of solar assets in North Carolina instead of selling them (PFR, 9/29).
Conergy’s regional head of the Americas, Yann Brandt, spoke to PFR editor Richard Metcalf this week about the company’s plans to grow its portfolio in the U.S., Brazil and Mexico, how it will finance that growth, and long term financing options including securitization and yield companies.
PFR: Can you explain the reasons behind Conergy’s change in strategy and the decision to become a solar independent power producer?
BRANDT: It’s a natural progression for Conergy as we increase our bankability and look to increase our value proposition to our partners, and it allows us to increase the shareholder value for our owners, but at the same time, it increases deal flow. So it’s a great next step for the company and its growth within the solar industry.
PFR: You are starting off with two portfolios of solar assets you’ve acquired from early stage developers. Is that how you plan to continue growing, and would you also consider acquiring wind projects?
BRANDT: It’ll be exclusively solar, and we are continuing to partner with early stage developers. We’re also doing some early stage development ourselves—Brazil and Mexico are good examples of that—but in the U.S., we’re acquiring late-stage assets as well as partnering with people pre-development. If the developer has the right footprint, if they have the right relationships in the right region, then we’ll enter into co-development arrangements even before a project is on the map.
PFR: We have reported on Conergy’s projects in Brazil (PFR, 8/31), but not in Mexico. Can you tell me about them?
BRANDT: We’re doing greenfield development in Mexico, both trying to acquire projects that are grandfathered under Comisión Reguladora de Energía rules, as well as looking to enter the Mexican sustainable energy tender with co-development partners. The grandfathered projects are really interesting.
The development process is similar to the U.S. in that you find the site, you work with the interconnection party, and then you find a private power offtaker, which is something that we have particular expertise in, so there’s a value proposition there for us.
PFR: Can you be any more specific about the projects you are looking at acquiring?
BRANDT: We’re still doing diligence on a few projects, and looking to have a nice pipeline going into the auction.
PFR: Can you tell us any more about how this strategy is going to be financed?
BRANDT: Bankability plays a big part in it. We continue to improve on bankability since our turnaround and acquisition two years ago. Obviously in the U.S. we now have stable access to federal tax equity, and this year we did a state tax equity transaction in North Carolina. Going forward we continue to see more parties becoming interested on the tax equity side. And on the construction side, we just closed a $55 million dollar transaction with MMA Energy Capital (PFR, 10/7).
PFR: As you build your portfolio you’re presumably watching closely what’s going on in the yieldco space, and I notice that you are speaking on a panel on securitization at the Solar Capital Markets conference in New York later this week. Are you looking at these kinds of options as a long term strategy?
BRANDT: We’re tracking everything; we’re watching everything. We’re still in the very early stages of figuring out what the financial models for solar asset ownership look like in the long term, whether SunEdison’s yieldcos are the right way or SolarCity’s securitization. I don’t know yet, but what I do know is that owning solar assets is valuable, and that’s our next progression.
Whether you’re doing securitizations or yieldcos for financing, it’s really just another round of funding that is aimed at lowering your cost of capital, and at some point we’ll find the right path for Conergy. The capital markets will probably take some of it as well, depending on where the comfort level is for solar assets at the time.
If you look at where solar asset yields are versus pretty much any other infrastructure, there’s still a huge spread, which means the markets are not fully comfortable with solar just yet. And that tells me that we’re able to increase the value and really put a credible face on assets from a bankability and O&M standpoint. So we’ll look to build a portfolio and then try to figure out how to maximize shareholder value after that.
PFR: It sounds like you think that despite the recent market dislocation, the yieldco model is one that will stick around.
BRANDT: The yieldcos in some ways maybe overestimated what the growth was supposed to be, but they aimed to lower the cost of capital and I think they had some pretty decent access to low cost capital at the outset. But it’s a traded equity and right now that’s not the lowest cost of capital available to solar assets.
As with everything in the public markets, there are ups and downs, but I think they’ll continue to be around and an option for anyone in the energy space. This isn’t purely a solar phenomenon. If you look at NRG, NextEra, they have yieldcos for other assets as well. SunEdison is unique being mostly solar and wind. But our portfolio today is still too small to consider a capital markets exit.
PFR: Some people have suggested that renewables assets might be undervalued at the moment, that it might be a good time to buy. Do you subscribe to that view?
BRANDT: Well, we’re buying assets! So, sure. Solar assets in particular—for some reason—still trade at a premium to pretty much anything else. Something with a 15-, 20-, 25-year contracted cash flow, and something as stable as solar, which is very predictable over a range of years, remains upside for us, because we can only see that a large portfolio with diverse offtakers and geographies continues to improve in value as the comfort level increases. And particularly for Conergy—being the EPC and O&M counterparty to the investment risk—as our bankability increases, the value of the asset increases as well. So, sure, we’re buyers now and we will continue to be.
PFR: What about tax credits? With them fading out, how will that affect the industry?
BRANDT: Yields are going to remain within the yield range, so if the tax credit goes from 30% to 10%, it means we have to replace that source of capital with other sources of capital. It’s not going to adjust the yield. What it’s going to do is—and I’m just talking about the U.S. here—some geographies are going to fall out and those projects are no longer going to be viable. In some markets there will still be viability and we’re forecasting those and pursuing them as such. It’s a very mathematical analysis for us.
That being said, the U.S. Congress should bring the tax credit back. It’s what makes solar competitive in a highly subsidized energy market. If you take away the subsidy, really just a tax investment incentive, you’re putting solar in a non-competitive stance against energy sources that are subsidized much more heavily.
PFR: And we’re seeing that happen outside of the U.S. aren’t we? SunEdison recently pulled out of the UK, partly in response to cuts to subsidies there.
BRANDT: Sure. In the UK we are one of the largest developers, and we will develop far less next year. Overall, we see a resurgence in Europe where solar competes on a grid parity market. We still have to be wary of the taxes that want to punish solar assets on their feed-in tariffs, but we see open energy markets available to us that allow for competition. You’ll see a little bit of a resurgence.
We just did a rooftop operating lease where there are no upfront costs to building owners in Italy, where, under no subsidy, 500 kW and below will be net-metered to those businesses, which can then lower their costs of energy. So we’re bringing some of our knowledge from the U.S. to other markets.
But in terms of the UK, I think it’s important if you try and grow a market and create a market and create tens of thousands of jobs, you don’t want to do drastic cuts overnight. You want to pare it down over time and let the market catch up so that businesses can find the efficiencies to continue to operate over time without subsidies.
PFR: The assets you are using as the basis for your independent power producer portfolio are entirely in North Carolina. Is there a particular reason why you started there?
There’s no particular reason. It was a good opportunity, we do really well in mid-sized solar farms, 5 MW to 15 MW. Our teams are built for that. But we’ll add more pipeline from other states throughout 2016: New Jersey, Massachusetts and others. We’ll continue to grow our portfolio strongly in those regions and we’ll continue in North Carolina as well.