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Q&A: Josh Goldstein, Recurrent Energy — Part II

In the second part of this exclusive interview, PFR’s managing editor, Olivia Feld, speaks with Josh Goldstein, senior v.p., finance and capital markets, at Recurrent Energy, about tax equity, market dynamics in Texas and Recurrent’s strategy regarding distributed generation and power hedges.

PFR: Moving to the tax equity market, we hear a lot from sponsors who say it is proving to be quite challenging to secure tax equity investment. How would you describe the state of that market in the U.S.?

Probably more supply-constrained than other forms of capital. But tax equity is definitely available for the strongest sponsors with track records that are bringing high-quality projects to market. We have heard of more capital providers coming into that market as well.

PFR: Market participants have said it has been harder to secure tax equity investment this year because many investors overcommitted last year, not knowing what the outcome of the ITC extension would be. Is that something that you can speak to or you have not seen that yourself?

We haven’t seen that because we haven’t brought projects to market in ’16, but obviously there will be fewer projects brought to market in ’17 as well. If there is less tax capacity, there are also less projects, but I can’t honestly comment because we don’t have new projects.

PFR: I suppose the irony is that the investment tax credit extension has slowed down the market.

I think that is a natural part of the development cycle. A lot of people like us had many projects they wanted to get done in 2016. There might be a little bit of a lull in 2017, in total volume, but it will be picking up again very quickly.

PFR: One of the other areas I wanted to touch upon was Texas. When PFR interviewed Recurrent’s former ceo and chairman Arno Harris in 2014, he described the company’s push into Texas. In examining Recurrent’s portfolio, that doesn’t seem to have come to fruition. Can you talk me through how the company sees market in ERCOT right now?

We’re still very active in the Texas market. Our Roserock project, which is 212 MW peak, will be online this year and it’s one of the largest solar facilities in the state. We have a strong pipeline of more than 800 MW in Texas specifically because large-scale solar is cost-competitive and has enormous potential in the state, and that pipeline is the result of being active in Texas for about six years. In fact, we have seen significant opportunity and interest from different customer types.

Texas definitely has very good natural resources, and industry trends are making solar resource more competitive and valuable. For example, capital expenditure on our projects continues to decrease and we’re seeing increased efficiency and balance in system costs.

Additionally, greater acceptance in the capital markets is leading to cheaper capital. I think finally, ERCOT’s analysis of the Clean Power Plan supports our thesis on the market, and in October 2015 they estimated that 13 GW of solar will come online by 2030, and that is the business-as-usual case without the Clean Power Plan or changes to the policy landscape in Texas. Additionally, ERCOT’s draft June 2016 long-term system sector report also supports a bright future for solar in Texas.

PFR: The company has developed a small number of distributed generation projects. Does Recurrent plan to finance more distributed generation in the future?

In 2007, Recurrent started seeing greater opportunities in large utility-scale projects due to falling technology costs and economies of scale, and at that time we transitioned the company to utility-scale development, and our focus definitely remains on large-scale solar in the U.S.

PFR: So no plans to do more C&I projects any time soon?

Not likely for distributed generation. We can definitely serve C&I customers through larger utility-scale projects.

PFR: I know you mentioned the company’s focus on the U.S. market, but, of course, Recurrent was recently successful in Mexico’s first power auction. How do you anticipate those projects will be financed and are you looking at developing projects in other Latin American countries?

That contract was actually a big win for Canadian Solar and marked its entry into the Mexico market. Recurrent continues to focus on opportunities in the U.S. The background there is, as with the acquisition of Recurrent, Canadian Solar acquired an entity that we created, Recurrent Energy Mexico Development. That entity is now a separate subsidiary of Canadian Solar, even though it still carries the Recurrent name, and Canadian Solar won that contract using that entity.

PFR:  So you and your team will not be actually working on those Mexican financings?

Correct. It’s Canadian Solar’s team in Mexico.

PFR: What plans are there for further LatAm expansion, or again is that being handled on the parent company level?

Yes, that’s Canadian Solar. After the acquisition, we focused all of Recurrent’s resources on U.S. development. 

PFR: Market participants have been telling me some interesting things about what’s happening with hedges. Is that a structure you have used at all or plan to use at all, or are you continuing to focus on fully contracted utility-scale projects?

We have not done any projects with hedges. However, we have utilized hedges for short periods of time before our PPAs [power purchases agreements] have come into force, for a three-year hedge period before the PPA starts. We have not done any projects that are 10- or 12-year hedges in lieu of having a PPA.

PFR: What I have been hearing from people is that in some of the more turbulent markets right now, hedges are proving to be more challenging to arrange. Is that something you have seen at all or is that more of a PJM issue?

I can’t comment on specific markets and the availability of hedges, but I would not be surprised if you start to see more projects in the future getting done with hedges, instead of PPAs, and that’s a structure that is pretty prominent in the wind space.

PFR: Regarding Moody’s downgrade of Canadian Solar’s rating outlook to negative, I was wondering if you could comment at all on that change of rating, and why it came about?

As a subsidiary, I’m not in the best position to comment on that and I am not involved in the rating process.

Read the first part of this interview, in which Goldstein discusses the solar project finance landscape, a growing pool of investors and the impact of subdued yield company activity here.

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