Trends in Solar Finance Roundtable
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Trends in Solar Finance Roundtable

Sponsored by KeyBanc Capital Markets

The U.S. solar industry was shaken in September when the International Trade Commission ruled, in a high-profile Section 201 trade case, that imported panels had harmed domestic manufacturers, paving the way for tariffs that threaten to make some projects uneconomic.

As the ITC considers what recommendation to make to President Donald Trump, market participants are attempting to parse the implications for solar development and financing. As much as 47 GW of solar installations could be deferred, according to Moody’s Investors Service.

Even before the trade case ruling, solar financing was evolving.

As the cost of photovoltaic modules came down, solar projects were better positioned to compete for utility company power purchase agreements, but such contracts have become rarer, compelling developers to look at more exotic offtake arrangements such as corporate PPAs and even hedges.

Solar is also considered to be ideally positioned to take advantage of developments in battery storage technology, which is gaining in efficiency and coming down in price at a rate that reminds some of the development of photovoltaics.

Meanwhile, because it is possible to implement solar projects at a much smaller scale than other kinds of generation, it has been at the forefront of the distributed energy revolution that is changing the way electric grids operate and disrupting established business models.

Residential, commercial, industrial scale projects have required novel financing structures to be developed, and community solar has begun to emerge as another sub-category.

Shortly after the September ITC ruling, PFR assembled a power and utilities banker, two developers, a project finance attorney and an asset manager who focuses on energy infrastructure debt to discuss the impact of the case and all the latest trends in solar finance.

Participants in the roundtable were:

Andy Redinger, managing director and head of power, utilities and renewables, KeyBanc Capital Markets

Jorge Camiña, director of infrastructure debt, Allianz Global Investors

Rich Dovere, co-founder and managing member, C2 Energy Capital

Christopher Moore, partner and member of the energy and infrastructure group, Orrick Herrington & Sutcliffe

David Vickerman, vice chairman and chief corporate development officer, Silicon Ranch

PFR: There has been a lot of speculation in the solar finance industry about the potential impact of the Suniva Section 201 case. It will depend on the actual remedy recommendation and what the president decides to do about it, but I think it’s important to discuss what we think the implications of that will be.

David Vickerman, Silicon Ranch: We are a developer and long-term owner of solar assets, and from our perspective, I think it is going to cause some fragmentation and issues for developers in the market. We have already seen the module market adjust, prior to the ruling, in terms of a price increase, and we’ve also seen developers with projects that do not have a module supply agreement with a manufacturer looking for modules, and potentially looking, at the end, to divest out of those projects. So I think, short-term, we’re definitely going to see a decrease in project construction volume, depending on the outcome, as it works through the market. We are fortunate that we have modules for all of our 2018 and 2019 pipeline.

Andy Redinger, KeyBanc Capital Markets: You’ve locked in the price?

Vickerman, Silicon Ranch: Yes. The DNA of our business model is to have strategic partnerships, whether it’s on the financing side, the [engineering, procurement and construction] side, or the module side, and so we have a module supply agreement, and we had increased that in the last six months. So, quite fortuitous.

PFR: Are there financings that have been signed, that anyone is aware of, where that’s not the case, and where deals may have to be cancelled?

Rich Dovere, C2 Energy Capital: We don’t necessarily have modules lined up for all of our pipeline. We have it for, I would say, around 60% to 70% at this point. I don’t know that anything would need to be cancelled—we have adjusters in our acquisition and our EPC agreements which would provide a reasonable level of cushion, assuming that the tariff comes in within a certain range. But there’s no question that bids were put in that were predicated on module prices in the low 30s [cents per watt]. Because we focus on [distributed generation], I think there is a bit more room across EPC, developer and financing rates of return to be a little bit more flexible, to absorb the shock.

On the utility-scale side, I don’t know how most of those projects get built at this point, except for the fact that in nine years of doing this, I think this is the fifth tragedy that the solar industry has gone through. And every time, it’s “catastrophic”, and every time it comes back, which I think is a testament to the people in the industry, so I’m optimistic. I think there’s the trade case, and I think it’s further exacerbated by the module supply market taking advantage of the trade case situation before the injury finding went through. It’s an interesting moment in time. I think the market will adapt. There’s a substantial excess capacity on these manufacturing lines that could be opened up, and I think it’s just a momentary blip.

Chris Moore, Orrick Herrington & Sutcliffe: That’s what we’re seeing with our clients, as well. The clients that have modules lined up are actually trying to take advantage of that opening in the market and accelerate their projects. I don’t think anybody’s quite thought about cancelling their projects yet, but they are slowing them down, or stepping them back a little bit to see what happens, so they can adjust to the market—just as the market adjusted to the potential for a tax law change, which is still out there. There may be some projects that were marginal to begin with that might not make it, but I think any project that was a strong project, that didn’t have a lot of hair, is going to continue with some adjustment to deal with the situation.

Jorge Camiña, Allianz Global Investors: We have done three solar deals this year—two of them are greenfield, one is brownfield. The three of them have First Solar technology, so it is worth remembering that their thin film cell technology should not be affected by this discussion—it’s affecting the crystalline technology. So this is definitely an opportunity for First Solar.

Rich Dovere mentioned that the solar industry has gone through this many times. In the past solar crisis there has always been the common topic of revisiting how the U.S. treats Chinese solar imports. But there is probably no more difficult time than now in terms of how the administration is going to treat a trade agreement or a tariff on China, which is important right now with the situation with North Korea. This couldn’t arise at a more sensitive time.

Solar RT Rich Dovere C2 Energy
Dovere, C2: I don’t think there was a question amongst most people in the solar industry that there was going to be a tariff at a certain point. But the interplay between what is going on in North Korea and the absolute need for this administration to garner help from China to resolve this crisis basically means that the best-case scenario for the solar industry is leveraging the North Korean crisis as a way of de-escalating the trade situation. There will be a tariff, obviously, at this point, even if it needs a vote in Congress to make it happen, but I think in the end, the financial shock of it will be manageable, because I think it will be a largely political nod, more than it will be meant to be anything functional.

Vickerman, Silicon Ranch: I think it will be interesting to see how [request for proposal] processes for [power purchase agreements] unfold, because there will be those that don’t have modules, and there will be those that can get modules. RFPs for quality PPAs has been a very competitive market, and I think short-term it will be interesting to see how that plays out in terms of pricing.

PFR: They just announced how many bidders they had in the New York state RFP processes that are in the works at the moment. There were hundreds of bids there, presumably a lot of solar projects among them, so could this throw a spanner into the works of some of those bids?

Vickerman, Silicon Ranch: Yes, absolutely. If you’ve won the project at a price when you thought modules were going to be mid-30 cents, and now they’re not, that will affect your economics and could cause a problem for the project even to get built.

Redinger, KeyBanc Capital Markets: We were already seeing panel prices come off their downward trend. The Suniva decision came at a point when this was just occurring. If we waited six months from now, I think you would have seen higher panel prices anyway.

We were seeing some developers bid projects based on the lower panel prices, assuming no tariff. I believe, on some of those projects that had bid that way, you might find them up for sale shortly. Tax equity could help absorb the panel price increase, and it’s the only source of capital that really hasn’t been squeezed yet. Tax equity continues to get outsized returns relative to the risks they’re taking. They’re still getting 7%, 8%-type yields. They’re equity and they’ve structured these deals to the effect that they’re super-senior to the debt, and they’re getting 400 basis points more than I am!

Dovere, C2: I think that’s happening. I think there have been two factors from our perspective. One is that there have been new entrants into the tax equity market in the last 12 months—regional banks, non-traditional players that are pretty aggressive, chasing projects—and the other is that with this case, there’s somewhat of a slowdown in projects. I think you’ll see more aggressive pricing, more favorable pricing from the developers’ perspective, on the debt side, than we have seen in 2017, where there’s very tight tax equity. That would help the industry tremendously.

PFR: That’s very interesting, and we will be talking more about tax equity later. I should note that there are no tax equity investors on this panel to defend themselves. But sticking with politics, there are other legislative issues out there at state and federal levels that could have an impact on the solar market, that are perhaps being overshadowed at the moment by this trade case.

Photo Jorge Camina 2
Camiña, Allianz GI:     A very common topic in the last few years, and I think it’s a critical element for solar development, is the renewable portfolio standards at the state level. I feel like it has been very quiet in the last few years, in terms of new developments, with very few exceptions. In the economics of solar, we tend to talk a lot about what I call the “supply-side economics”, the tax incentives that help developers to reduce that levelized cost of energy. But the reason why utilities enter into those PPAs, which are critical for developing the industry, is only partly the cost of power coming closer to grid parity. Tariffs on imports are not going to help that case. The true additional incentive is really the states imposing on the utilities either a voluntary or a mandatory obligation to increase their sourcing of renewable energy, the “demand-side economics”. The role of tax incentives, the stepping-down of such tax incentives, tends to keep us busy during all these panel discussions, but the reality is that RPS is what is driving the engine of all those PPAs, all those financings. So, more than focusing on, “Oh, is there any new discussion about carbon trading, or a carbon cap?” what has been more quiet is the states coming out with more aggressive and more compulsory RPS, and I think that’s hurting the industry. I feel like we need some of those incentives to make sure that the industry keeps growing.

PFR: That’s a very important point, because apart from the New York processes that are going on at the moment, what I hear is that the utilities, under the current state RPS, are full, as far as renewables is concerned, and some of them are saying they won’t look at procuring more until maybe 2025.

Moore, Orrick: A lot of our clients are coming to us, some new entrances as well as people that have been there for a while, to analyze how the states are moving, and the states aren’t necessarily moving consistently with the federal government. A lot of them are increasing their RPSs, like Hawaii, which has a 100% RPS. As people deal with Suniva, and general financing conditions, and everything else, for planning purposes they are looking to where the RPSs are increased, and where they’re full-up, as you said, and whether or not the political climate in those particular states is going to lead towards pushing those RPSs up.

Dovere, C2: David, you were saying that you negotiated your module supply agreement six months ago—I think the ITC case emerged five months ago, right?

Vickerman, Silicon Ranch: Well, we originally negotiated it in 2015, but we expanded it in Q1 this year.

Dovere, C2: Think about the momentous shift in something that’s only happened in five months, and who knows if Donald Trump will be president in a couple of years? I think American politics has a way of moving towards opposites in certain instances. If you think about the Republican take-back of Congress in 2010, and how quickly the country can move, from a policy standpoint, I think it’s a matter of separating out the strong from the weak in terms of sponsors, developers, capital providers, across the spectrum, who will be here to ride through the various cycles of this.

PFR: A third regulatory and policy point is tax reform. How have sponsors and financiers addressed the uncertainties around the timing and scope of tax reform in financings that have closed this year?

Redinger, KeyBanc Capital Markets: There’s been a 50/50 sharing of risk between banks and developers. Every deal is a little different, but I think, in general, I would characterize it that way. One reason for that is because there’s such a mountain of capital chasing these deals.

Camiña, Allianz GI: I think it is worth clarifying that when we talk about how tax reform is going to impact this business, everyone is making one assumption. There was bipartisan agreement for the last extension of the investment tax credit and production tax credit around the new scale, and so everybody is assuming one thing, which is that tax reform is not going to change or repeal these tax credits.

So the discussion is how a lower tax rate is somehow potentially going to hurt the solar business. The ITC itself is a tax credit—it is not affected by the tax rate. So the main impact is on depreciation. Right now the headline is at 20% for corporate tax rate [the Republicans revealed their tax reform framework, including a proposed reduction in the corporate tax rate from 35% to 20%, on Sept. 27]. Let’s see where we end up. But there’s talk as well about taking full depreciation of capital expenditure on day one. Before, you had accelerated depreciation at the rate of 35%, and now you may have day-one depreciation at the 20% rate. You need to do the exercise of actually modelling this, but there are some offsetting factors moving in opposite directions that could result in a limited impact.

Vickerman, Silicon Ranch: I would add that, in theory, tax reform and reduction of the tax rate reduces the pool of available tax equity in terms of dollar amounts, but I think that’s offset by, as we were saying before, new entrants, particularly regional banks and some non-traditional providers. We have really seen an increase in the number of participants looking for tax equity, even for 2017 still, and aggressively for 2018.

PFR: What kind of companies are they? Obviously, they need to have U.S. tax liabilities, that’s number one. And it’s mostly been financial institutions, which suggests they need a degree of sophistication, and banks, obviously, have been financing renewable projects for a long time, so they know how to do it.

Vickerman, Silicon Ranch: That’s right, and some of the banks have invested in tax credits off their own balance sheet, but have also brought in some of their clients, and helped them come up the learning curve, and so they’re able to effectively increase the pool of available capital. As opposed to that non-traditional provider of tax equity going direct to the deal, they’ll sometimes partner with a financial institution that’s got the experience.

Moore, Orrick: On some of our deals, in advance of tax reform, people are assuming in the models the tax rate is the same for this year, but next year and going after, it will be lower. And what that does is affect the size of the tax equity investment. People are planning upfront for lower tax equity investments, and covering in other ways, by additional back-leverage, or we’re seeing strong entrants into the market on the cash equity side. There coincidentally happen to be a lot of players that are looking to get into the cash equity side, and there’s potentially opportunity there for people to come in and take some of that investment that was previously going to the tax equity because of the reduced tax rate.

Redinger, KeyBanc Capital Markets: Are you seeing any cash equity buyers that bring their own tax equity?

Moore, Orrick: I would say, generally, no.

Redinger, KeyBanc Capital Markets: Because we are. We’ve seen three entrants come into the market, both cash and tax. It’s a powerful combination, because those players, there’s no friction cost, they don’t have to separate the tax equity out and sell it. If they wanted to, they could dominate, because if you come in with an attractive source of cash equity, and you’ve got tax, it’s a powerful combination. It’s actually presented some weird structuring issues for us. It’s almost easier to separate it, because sometimes the tax and cash guy have different incentives. You put them together and there are some weird structuring things that you need to think through, because they’re almost at odds with each other at some point, even though they’re the same investor. They could decide to take pain here to get their tax benefits over there.

Photo Chris Moore
Moore, Orrick: If you’re representing sponsors, you’ve got to look at the situation where your cash equity investor may interfere with your ability to do something with the tax equity investor, with the idea of squeezing you out, in a sense. You have to watch for places where there are conflicts of interest between the cash and the tax equity, so that you’re not caught in between the two.

Redinger, KeyBanc Capital Markets: But combining them, the ones we’ve seen, the way they’re looking at the market is they get all their money back in the first three years, and so they’re able to be more aggressive on bidding for projects.

PFR: Very interesting. Does anyone have anything else to add on tax equity?

Redinger, KeyBanc Capital Markets: Looking forward to it going away in two and a half years.

Dovere, C2: It’s never going away. A 10% ITC is still not nothing.

Redinger, KeyBanc Capital Markets: That’s a good point.

PFR: So, it’s maybe not going away. Moving more onto the debt side, what is driving the recent increase in institutional debt entering the utility-scale solar construction and term debt space? Jorge, those are your clients, right?

Camiña, Allianz GI: Yes, and actually I have to give credit to Andy on this one, because the first two deals that we have done, in terms of back-levered institutional debt, were actually in partnership with KeyBanc. We did a wind deal called Balko Wind and we did a solar deal called Moapa, and both are back-leverage, where KeyBanc was supporting those executions with us. We have now four back-leverage institutional deals, and I think we’re truly happy, and I want to say this in a humble way, but it’s the reality, somehow to have pioneered this space, because institutional investors typically have not been involved in back-leveraged debt. And I think it’s the result of a few things.

First, the industry is more mature now, in the sense that 10 years ago, when you talked about solar, people would look at you, saying, “Is that bankable?” And now it’s considered one of the safest asset classes an investor can put their money in the U.S. It’s what I call the “bondification” of the equity space for institutional investors. Even though my product is debt, it helps a lot when you have an equity investor that sees solar as a de-risked asset, and they’re willing to be very aggressive, with their equity returns somewhere between the return of a bond and the return of private equity. Those types of investors have been putting very low cost capital in. And one thing that they like to avoid is refinancing risk. When you are locking in a very competitive cost of equity, you don’t want the moving part of interest rates, you don’t want to have to refinance in year 10 and find out that the return on your 25-year PPA is massively affected by the debt.

And the other thing is that we have done the work. There are a few serious investors out there, and we have done the work of going through, understanding the issues of the back-leveraged transaction, working with the sponsors and convincing them that this is real, and we can deliver that solution. It’s a great time to lock in interest rates—people have been saying for a while that this is the last chance to get a great coupon. The reality is that we have very strong appetite from more people who are seeing this as a real option. That wasn’t the case one year ago. One year ago, in sponsors’ minds, there was only one option, which was go to the bank market and get your back-leverage loan there.

Redinger, KeyBanc Capital Markets: Yes, so you have this massive U.S. renewable market that’s been financed mostly by banks, and the institutional guys have just been slower to get up to speed. Allianz got there because Jorge actually worked in our industry. He was in the renewables side [at Santander] and he went to Allianz and basically said, “Guys, you’re missing the boat. The U.S. renewable market is a really attractive asset class on a risk-adjusted basis, that we should look at putting our capital towards”. What’s lagging is the rating agencies, I still think, are still a little behind in understanding this asset class, and I think they haircut the bank financing models too heavily. However, I think they’re under tremendous pressure to figure out how to reduce those haircuts, because if they can’t get up to speed faster, they’re going to lose out on a large refinancing wave that’s coming in the next couple of years.

PFR: And the institutional debt market, is that always going to require an investment grade rating?

Camiña, Allianz GI: Yes, I think overall, the type of capital that makes sense for these deals is investment grade capital, because otherwise it wouldn’t be accretive for the returns of the equity investors.

PFR: So, no merchant solar projects?

Camiña, Allianz GI: No, but it is interesting, because now that you mention merchant, I feel like the rating agencies are still much more comfortable with merchant risk than back-leverage, and to me that’s something I don’t really understand.

PFR: That is interesting.

Vickerman, Silicon Ranch: What kind of tenor are you seeing on the institutional debt side?

Redinger, KeyBanc Capital Markets: In some cases, all the way out to the end of the PPA. And then, to Jorge’s point, Fitch Ratings has just changed their rating methodology, and they actually will now consider a couple of years merchant past the PPA. We actually got a deal rated recently, with a merchant piece, investment grade, from Fitch. So, it’s strange they are more comfortable with merchant than back-leverage. But they are catching up. They’re starting to change their methodology. Typically we think contracted wind and solar projects are low investment grade. The rating agencies also think contracted wind and solar projects are investment grade but only after applying haircuts to the bank financing model. The result is a project with a low investment grade rating will have a lower debt amount allowed than in the bank market. The pricing is pretty much on top of each other, so it’s not a pricing issue in the institutional market, it’s a sizing issue.

PFR: In terms of the universe of investors, are these kinds of transactions limited to the traditional private placement investors that have been involved in that market for a long time now? I believe there have also been quite a few foreign institutions getting involved in solar finance in the U.S. as well.

Redinger, KeyBanc Capital Markets: I think it’s all of the above. There’s just so much capital out there, it’s a mix. Everybody from foreign investors to your traditional private placement guys.

PFR: David, have you placed any debt with institutional investors for utility-scale project finance?

Vickerman, Silicon Ranch: Yes.

PFR: And what has your experience been?

Vickerman, Silicon Ranch: We try and diversify by structure and by financial provider, so we’ve done deals in the bank market and we’ve done deals in the institutional debt market as well, and those investors are doing term out to just short of the PPA term.

PFR: So you appreciate having a diverse investor base, per se?

Vickerman, Silicon Ranch: Yes, absolutely.

PFR: We’ve talked about tax equity already, but we haven’t tackled whether solar projects that are hitting their flip dates under existing tax equity deals are an opportunity for refinancing. People are talking about maybe even inserting mezzanine tranches in projects that still have a useful life, but have run out of tax credits.

Redinger, KeyBanc Capital Markets: I think it’s a big opportunity. I think the bank market might be challenged to keep those loans on their books, because those are the exact type of opportunities that the institutional market can be really aggressive with. It’s the exact type of opportunity that the institutional guys would prefer, versus getting involved with the tax equity early on. I think it’s part of the reason the institutional market is turning on. They see this big wave of seasoned projects, after the flip date, coming online, and that’s right in their power alley.

Camiña, Allianz GI: Stepping into the shoes of the institutional investors, if you want to look at the opportunities to get exposure to the energy market in the U.S., you have to bear in mind that, for example, in the oil and gas space, midstream is very attractive, but a lot of that paper is going to the listed MLPs [master limited partnerships]. And when you look at power, it’s very difficult to find contracted gas power generation. Most of it is merchant, so it’s non-investment grade. Everybody would love to find transmission deals, but there are very few transmission deals—most of that is done on the balance sheets of utilities. When you look at what is left that has long-term contracts, renewables is the natural space. There was a record level of activity from the mid-2000s through 2015 or ’16. There’s a massive portfolio of construction loans that converted to term debt that is on the balance sheets of the banks. So all of that is going to be refinanced, and that’s a massive opportunity for Andy to place some of that in the institutional market, and for institutional lenders to find exposure to the sector.

PFR: So you’re saying that banks, if they’re able to do this, should be tooling up to be placement agents?

Camiña, Allianz GI: Yes, because they have the experience, they have the assets in their portfolios, they know the assets, they know the sponsors, so it makes a lot of sense.

Redinger, KeyBanc Capital Markets: The only speed bump I see in this wave coming is the back-end hedges that were put in place five years ago. They’re probably out of the money, so you just have to deal with that sometimes, depending on the deal.

PFR: What hedges are those?

Photo Andy Redinger
Redinger, KeyBanc Capital Markets: So, when banks make these loans originally, we required the developer to hedge the front end, which is the six-to-seven-year bank deal, but we also required them put execute a forward starting swap to hedge the interest rate for the back end, because banks weren’t willing to take that interest rate risk. So there’s a back-end hedge on all of these bank deals that has to be settled when they come up for renewal. And rates were higher back in those days, and our rates now are lower, so a lot of times these hedges are going to be out of the money. You could refinance the amount you need to settle the hedge in the new deal, but the hedges will have to be settled. And that does present maybe just a speed bump. The sponsor might say: “Let’s just roll it in the bank market. I don’t want to deal with the $2 million out-of-the-money check I need to write to the bank to get to the institutional market.” It’s solvable. It’s just some noise that you may have to deal with.

PFR: Since you mentioned interest rate hedges, moving on to hedge products, I have been hearing about sponsors looking to finance solar projects, primarily in Texas, on the basis of power hedges instead of PPAs. We’ve already talked about how, with the states’ RPSs full, and the utilities full up of renewables, there are fewer PPAs out there. Have any of you been involved in talks about hedged solar projects, or do you have any thoughts on whether this would be a viable model?

Redinger, KeyBanc Capital Markets: If you look at the wind deals that were done with power hedges, the vast majority of them don’t have bank debt on them, because usually there’s some basis risk in those deals, and it’s a risk the bank market has had a hard time getting their heads around. Potentially we’re in these deals for 18, 20 years, so when you begin to think about basis risk, the crystal ball gets real cloudy.

When I think about solar, it’s the same. Sure, it could work. Why wouldn’t it? I think the hedge providers would prefer to hedge solar versus wind, so it makes a lot of sense. Why wouldn’t you hedge solar? It’s more predictable, and I think easier to hedge, I just think we’ll have the same issues though, there’s that basis risk.

PFR: If it’s easier to hedge, does that mean—I think most of the wind power hedges have been 13-year hedges—would they be able to go longer with solar?

Camiña, Allianz GI: I don’t think so, because the way the providers of these hedges look at them is not so much based on the technology of the project, it’s more based on how they hedge that commodity risk, and how they offload it. And they do that using the gas derivative market as a proxy. They have liquid references in the five-to-seven-year window and then they take a view longer, and that typically means ten to 12 years. Beyond that, it’s very difficult, because they have to take a very directional bet that they cannot offload in the market.

The challenge really with solar and hedging is the following: In wind, the main reason people do hedges is to raise tax equity, because essentially the equity is taking a merchant return on those deals. They typically hedge to P99 or similar cash flow, and their return is based on merchant between P99 and P50, or the actual case. So, for solar, with the typically higher levelized cost of energy, it is difficult to make those hedges deliver an acceptable equity return in a 10-12 year period, making your return completely merchant and reliant on the tail of the useful life of the asset. So I see that as a challenge.

Dovere, C2: When we’ve had these conversations, it was really around two smaller, five-ish, ten-ish megawatt deals. When we would go out and quote the hedges, they’re so low that we’re not seeing how it’s even economic to do it in the first place.

Vickerman, Silicon Ranch: Having looked at some of the opportunities in Texas, we’ve seen some of the hedge pricing down there. I don’t know that it works economically for the sponsor. It’s great we’re talking about hedges for solar, but the price they’re offering them at, I just stop there. I don’t know how you make that work unless you get very low cost of equity.

Moore, Orrick: I’ve seen a lot of sponsors looking for it, and they just haven’t been able to find something that works economically.

PFR: Let’s move on to different kinds of project, and different scales of project, different kinds of offtake, and different technologies, such as battery storage. How has the financial model behind residential solar evolved?

Redinger, KeyBanc Capital Markets: We’re involved in the residential space. Quite frankly, when we look at where the opportunities are, we think residential solar provides the biggest bang for the buck on a risk-adjusted basis. There are fewer banks pursuing it, there’s less competition in pricing, and returns are good relative to the risk. It’s attracted fewer players, and the players that are in it, I think, are reaping the rewards. Recently, we have seen an increase in the number of banks looking at the sector, but it hasn’t been this massive wave we’ve seen in the other areas of solar.

Dovere, C2: Are you seeing a slowdown as people move towards direct ownership? Are you seeing fewer PPAs?

Redinger, KeyBanc Capital Markets: We’re definitely seeing the model move, depending who you talk to. I’ve heard some people say it’s all moving that way, to ownership. We’ve definitely seen some movement there, but the vast majority is PPAs and leases. But the loan piece is definitely gaining market share.

PFR: What sort of growth are we seeing in community solar, and what are the implications of those kinds of projects for project finance?

Redinger, KeyBanc Capital Markets: That is definitely one of the more active areas. Several states have put out new programs, New York in particular. There also have been several community solar projects that have been financed. I think the big challenge is dealing with non-rated offtakers, the residential component if any, and the rate at which the price escalates in subscription agreements. Structuring around that can be challenging before it really begins to affect pricing and structure.

Moore, Orrick: We also have been seeing a tremendous amount of activity in that area. Not so much the financing yet, but structuring the PPAs to try and address it, so that they will be financeable. Particularly in California, there are rules encouraging community aggregation. We’ve seen one project get financed, but it was part of a portfolio of assets, so it wasn’t really a true community aggregation project.

Redinger, KeyBanc Capital Markets: The key for us, and I think for a lot of people, is getting comfortable with the non-rated subscription agreements, residential component if any and most importantly the price escalation built into the subscription agreements. If you’re escalating at 4% a year, and the utility rate doesn’t move, you’re going to be very quickly…

Dovere, C2: …out of the money.

Redinger, KeyBanc Capital Markets: Yes, out of the money. So, we are very sensitive to that escalator, and I really think once you get into it and you understand it, that is the primary risk. Because, yes, people sign contracts, but if one day your price ends up being higher than the utility rate and they leave you, are you really going to go and pursue them? Some of them are schools. Probably not.

Vickerman, Silicon Ranch: So you prefer flat, fixed, for the term?

Redinger, KeyBanc Capital Markets: Sure. I think we’d consider something sub-2%, but anything north of that, for us, anyway, it’s hard.

Dovere, C2: We own about 10 MW of community solar in Massachusetts that’s operating, and we’re in the process on about 30 MW additional, and that ranges from Colorado to Minnesota and New York. And the way that we are really viewing the world is that this is going to be like your cell phone plan soon. You’re going to have T-Mobile-like offers to buy out long-term contracts in community solar, and I think it’s just a matter of years, a couple of years, before that happens. In Minnesota, for example, with the Xcel Energy program, which has its own quirks, we are very sensitive to what other projects are permitted, or in the program in the area, and what are the constraints to be able to originate. Because even if a flat PPA is out of the money, you never want a PPA that’s underwater, no matter what. And getting it financed has been a conversation on fundamental principles, saying it’s not feasible that power rates would drop below a certain amount, and then really being able to show the regulatory construct of being able to bring new customers in, in the event that a customer drops off, and so on.

But we also see it as the end of residential solar, to the extent that you could not have panels on your house anymore, but still get cheaper solar electricity. Why would you want somebody drilling holes on your roof? Obviously, early adopters have been helpful on the residential solar side. But with community solar, you’re getting the benefit of a utility-scale build, and the pricing associated with it. I think it has the possibility to be highly disruptive to residential solar models.

PFR: This will be the final topic, but an important one of course: the integration of battery storage into solar projects, and how that’s shaping the market. Maybe if we start with the developers first, and whether you’re seeking to do that, and how you found that?

Vickerman, Silicon Ranch: We’re evaluating three separate projects, two of which are with existing clients on facilities that we’re about to build, where they are looking at storage as a way to shift load to peak time. Obviously, if you combine it with a new solar facility, you can take advantage of the ITC, and so I think where we’ll get to is how does this impact the financing? But we’re literally right in that analysis now.

Dovere, C2: Because most of our projects that have had conversations around storage are on the commercial scale, I’d say our biggest challenge is the customer not knowing why they want storage. Is it time-of-use adjusting or is it reliability, or something in between? We’re actually, at our own cost, going to be adding storage to probably around 5 MW of our C&I deals, so we can see how it performs. For the scale of projects and the types of customers we’re going after, we find it to be a much more difficult sales conversation than solar already is. We definitely see it as an opportunity, but we are waiting for the client market to dictate what they want that opportunity to be.

PFR: Lenders are at different stages in the process of getting comfortable with financing storage. Some of the higher-return credit fund managers have already done deals. Where is KeyBanc?

Redinger, KeyBanc Capital Markets: There are a handful of banks, like anything new, that are open to financing storage. We’re wide open. It’s just that the numbers have to work. We’re comfortable with the technology, we just haven’t seen a deal where the math works. The storage costs X and the revenue produced from the project doesn’t support paying for the storage.

Photo David Vickerman
Vickerman, Silicon Ranch: Storage is not just one thing. There are different technologies, and I don’t think that has necessarily been solved. Lithium is leading the way, for sure, but in some applications, lithium is not the best answer. And that’s an evolving story. There has not necessarily been a definitive answer on what technology to deploy, as it is application dependent.

Camiña, Allianz GI: There are also different models to compensate for storage. We definitely are very interested in a model that has more capacity payments and less arbitrage between off-peak and on-peak hours. We would like to see more RFPs that pay for that storage through capacity payments. We are seeing developers, for now on a smaller scale, exploring this, thinking: “Is this the tool that is going to give me the edge to get the next PPA? Can I squeeze the economics a little bit, so I can be more aggressive on the PPA bid?” So I think, right now, it’s unclear how this is going to play out, but again large developers, active players are definitely exploring this as a source of winning deals.

This article is for general information purposes only and does not consider the specific investment objectives, financial situation, and particular needs of any individual person or entity.

KeyBanc Capital Markets is a trade name under which corporate and investment banking products and services of KeyCorp and its subsidiaries, KeyBanc Capital Markets Inc., Member NYSE/FINRA/SIPC, and KeyBank National Association (“KeyBank N.A.”), are marketed. Securities products and services are offered by KeyBanc Capital Markets Inc. and its licensed securities representatives, who may also be employees of KeyBank N.A. Banking products and services are offered by KeyBank N.A.

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