Distributed Solar Finance Roundtable 2020
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PFR: To start with, how have your businesses been impacted in the last month or so by the Covid-19 situation?
Paula Zagrecki, Zorya Energy Advisors: In general, work hasn’t been impacted very much at all, but that’s because we’ve had deals in the pipeline that were already moving ahead. We’ve been placing debt and tax equity over the period and anything that was signed and committed to prior to the crisis seems to be moving forward, although the banks are asking about supply chains a little bit more.
The banks are looking at things a little bit more closely, but what has been impacted is new commitments—at least for tax equity. There’s been a pause there.
By the time the markets open up and people can actually stop social distancing, hopefully by July, we can then have all those commitments put to rest and start on new stuff.
James Bowen, Energetic Insurance: I would agree with Paula, in particular on tax equity. Projects that were already transacting before Covid-19 generally have moved along, maybe a little bit slower. We did have some COD delays on some projects due to the inability of the utility to get out for interconnection, and we’ve heard about some construction delays.
But we underwrite credit risk, so that is very different now, because industries like the hotel industry, for example, look very different now. We’re just a lot more cautious, doing a lot more research, really thinking hard about the new risks that we’re being asked to underwrite and that’s been the biggest challenge. Because if we clam up and stop underwriting risk, then we have no business.
Richard Walsh, Madison Energy Investments: Have you had any claims?
Bowen, Energetic: We have not had any claims. Our team has been watching our projects really closely. Basically, for a good portion of our existing deals, the offtakers are closed, so we’re watching that. There’s a mall, some hotels that are closed, but they’re in good locations that should bounce back. But we have had no claims yet.
Scott Lechky, OYA Solar: I joined OYA Solar just over a year ago, and prior to me joining, our company had largely been selling community solar projects at NTP or pre-construction. With me joining and adding two others to our finance team, my thesis was to begin to build some of our projects and eventually own and operate a portion of them as well.
Fast forward to where we are now and I echo everyone in terms of the financing markets. But as we step into procurement and construction, the big question for us is the supply chain, in terms of procuring equipment, inverters, panels. We’ll see what happens in China. Some of our early insights—and we’re still formulating our in internal view—is that China’s coming back, so a lot of the procurement and logistic supply chain issues may not be so much of a problem. But for us, as we get into the construction, it’s going to be whether projects are going to get done in 2020 or slip into 2021.
Walsh, MEI: Fortunately we haven’t experienced any major issues, but we are facing new challenges within multiple aspects of the business. On the debt side we feel pretty good and, fortunately, we have committed capital on the equity side. We have tax equity for this year, but there might be some deals late this year or early next year that will need tax equity, because a lot of the tax equity is unsure of what their tax bills are going to be in 2021 and even this year.
And then on the permitting side, yes, some utilities have been late for inspection, we’ve received some force majeure notices, but for most of those, construction is still ongoing—it was just required as part of the contract. We’re also closely monitoring offtaker risk but most of ours are investment grade so that hasn’t been a problem
Really, the chief concern is six months from now. We haven’t been to see our partners, we haven’t been to conferences, and so it’s hard to know what the impact’s going to be from the folks on the front end. The front end of the funnel of acquisition and development opportunities appears fine for now, but I have to think there will be consequences resulting from the lack of business travel.
Rich Dovere, C2 Energy Capital: From our side, we have a level of comfort on our financial position. However, there has definitely been an impact on the team. We have 20 people in New York and other folks all over the place. Closing the office has been rough from a morale standpoint, as our corporate culture is very integrated, and team members have had to deal with this pandemic on a personal level as well.
On the construction side, we were about to start construction in places where the “stop work” is not necessarily as aggressive. We also have 30 MW under construction in New York and then probably another 20 MW under construction in Illinois. So, in some cases, we’re just waiting. We’re fine in terms of dealing with the supply chain issues. We’re actually seeing some movement on panel prices which should be helpful to mitigate the extra carrying cost of interest expense. We’ve signed small tax equity commitments that we initiated after this got started.
There’s a little bit of commentary on debt markets in terms of movement of pricing. We’ve heard people talking about 100 bps, but realistically it’s moving 50 bps. For the investor side of things, there is in fact a lot to do now, because you’ve got to triage and get through everything. It’s making sure that we’ve got something to do six months from now.
PFR: The theme that I keep hearing about is tax equity. That has always been an issue in C&I solar, but it is being highlighted even more now. What have your experiences been on the tax equity side? Are investors leaving the tax equity market?
Dovere, C2: It’s important to understand the functional sequencing. There will always be people paying taxes. It’s not that tax equity is going away. The issue is a sequencing one, where, typically, in order to get construction financing closed, you would need to get a tax equity commitment at the outset. So, again, if you’re thinking six months down the road, you need a tax equity commitment now in order to get those projects developed.
There’s also another way. You could just make an election to equity-fund, to the extent that you have those resources, and move projects forward. We have a bunch of lenders who are willing to work with us, but it will ultimately come down to the balance sheet of the sponsor.
In terms of the ability to leverage tax equity, the ability to have projects in inventory in the fourth quarter will prove to be very valuable. People are going to pay taxes either in the fourth quarter or they’ll pay taxes next year, and then inevitably, somebody will call you and say, “I need to fill a hole of XYZ,” and those that have projects at that time will be able to do that.
This is a strategy we’ve employed basically for the last five years. You’re not going to end up in a position where there isn’t going to be a need for the tax credits from your project. What may happen though, is you end up in a position of waiting to have projects placed in service for a little bit longer, but we have been able to take advantage in those scenarios.
Zagrecki, Zorya: I agree with Rich. You have to have the tax equity commitments to get the construction financing, so it’s kind of a house of cards, or dominoes. I don’t think it’s going to be an issue of not having tax equity, but everybody’s pausing because they’re trying to figure out what their tax equity appetite is going to be for this year.
Even though people will be paying taxes, with a slowdown in the economy, especially depending upon what their core business is, their income may be a little lower this year, so their tax appetite might be a little lower.
On high-value C&I solar, it’s not that hard, because in those high-value projects even if equity doesn’t get their 80 cent development fee, maybe they get a 30 cent dev fee and they’ve got to share a little bit more with tax equity. But if you’re looking at North Carolina, for example, where load-serving entities dominate, those are not hugely high-value projects, so tax equity’s getting very picky.
In the Southeast, they are going to find it a little bit more difficult to find tax equity, at least for the next three months.
Bowen: Energetic: I’m curious to know whether there’s a chance that the high-value projects could just forego using tax equity at all, if it starts to dry up significantly and profits are really affected in the corporates and banks that would normally invest the tax equity. Are there projects that will pencil out without tax equity?
Zagrecki, Zorya: I think there probably are some projects, but I don’t think there are huge numbers of projects. Frankly, if this hadn’t happened, and the market were going as well as we thought it was, there was probably a point where companies would be needing some of that tax equity for their own income. So we can keep some of those credits and carry them forward, but it’s got to be some of those super-high-value projects. If the project can support 60% debt, and if you’re used to putting in 10 -15% equity, you start choking on that extra slot that tax equity had been taking.
Lechky, OYA: We’re new to the tax equity market and where we’re going to notice it most is in pricing. We’re still able to talk to a lot of people that are interested and say they have capacity; of course, in the last few weeks, that has really been all over the place. So a lot of volatility. But where it will likely hit us in our first few projects is in the overall cost. If where we want to be, long-term, is constructing, owning, operating, unfortunately for us, it’s probably a near-term hit to get access to the tax equity market.
Zagrecki, Zorya: A lot of tax equity guys are claiming to be interested and saying, “Yes, we’re open. Yes, we’re interested.” When you ask for the commitment, that’s when they pull back. We have projects that we need tax equity for now, that we need to start construction on now, and at that point they say, “We are interested, but in three months.”
They don’t want to say no. Nobody wants to say no. They want to be there. When they’re open, they want you to come back to them. So there are some that are open, but for very specific sectors. Everybody has said, “We’re interested,” and then when it’s down to brass tacks, it’s been quite frustrating. I feel like I’m dialing for dollars every day.
Dovere, C2: I don’t know how you could have a high-value project for tax equity that also supports that much of a debt advance. It could be high-value in terms of high credit quality, size and simplicity of deal, but that does not necessarily go along with a huge amount of cash flow. So, the ability to apply so much debt doesn’t usually end up in the same project.
The tax equity risk dynamic has always been such that, while people like investment grade, this, that and the other, they’re really not taking any of that payment risk. So, to the extent that there’s a payment cash flow stream that is simplified or a project that is easy to get into, that will definitely be part of it. But in terms of developers making a decision on whether or not to keep the project, Paula, to your point, the difference between putting a 10% check in versus a 60% check is that, if you are a developer that has raised capital, you probably have not raised it, as a developer, to be infrastructure capital.
If you’re a group like Rich Walsh’s, backed by an infrastructure fund, then writing a larger check for an infrastructure-like return is probably more feasible.
But if you’ve raised private equity or higher-cost money, you’re probably not going to be able to make the return just on a cash basis by increasing your net equity position from 10% to 40%. The economics of the projects are not there.
I actually think it’s a good opportunity, ultimately, to look at the developer business model as a whole. We were very proud of ourselves when we got the company started for doing the first 40 MW as a small team. That’s really not the hard work. The hard work is doing the next 40 MW while onboarding the first 40 MW, and then doing the next 100 MW and so on and so forth. We’ve gotten through that pain and suffering, but I ultimately think it’s an opportunity for developers to really look at the business model of owning some of the assets, which has been an attractive notion. People hear about what it is to have the annuity of the cash flow, but it’s not attractive when you’re in exactly this type of moment. That’s the whole thing about development. You can make a lot of money in fees when everything is good and working well. But when it isn’t working well, you end up in this position where you’ve got to come up with a lot more cash and continue to pay people and run the business.
I do think that there is an opportunity for a level of reordering of the market, taking folks who are the developers, folks who are owners, and then reconsidering the market in a political environment without the same level of federal incentives for renewables on a go-forward basis.
Developing the internal equity knowledge and asset management and building a balance sheet to provide the indemnities with less than three years left in order to maximize the ITC may not necessarily be worth all of the time and effort. So there might be a level of reprioritization of business models and that could drive a market rationalization event.
PFR: Rich Walsh, can you respond to that?
Walsh, MEI: I’ll start with the realignment. That’s a good point, and something we have been thinking about for a while. We may come at it from a (seemingly) selfish angle, because we want to own the assets. But we do think there’s value in the developer doing what they do well and the owner doing what they do well and focusing on that. There are opportunistic times when a developer wants to own; maybe to build the balance sheet up because they’re thinking of selling in the next year or two. We’ve certainly seen that. But I do think a lot of people over-engineer that model. The developer will spend six months going to get tax equity and then getting this perfect construction facility and then lining up the takeout or playing sponsor themselves. But then it never happens the way you set it up to happen. So we are big believers in “do one deal” and then, if the deal works like that, then you can build off of that. But trying to just guess how the six months is going to be—especially when you have five different counterparties involved, multiple law firms, consultants, bankers, independent engineers—is way more challenging in practice.
So, yes, I couldn’t agree more with what Rich said. There are times where it makes sense. Maybe it’s the college you went to, and you want to own it. Or maybe it’s in the town where your company is, or you have a little bit of taxable income you need to offset. But more often than not, it is challenging to vertically integrate while also achieving scale in the C&I solar sector.
Regarding tax equity, we’ve talked to everybody that has claimed to be a tax equity investor in C&I, and the party line from all the banks—and this goes for lending as well—is: “We’re just going to lean into our current relationships.” They don’t ever want to say they’re out of the market, and you can’t really call their bluff, so you have no idea if they’re in the market or not.
A lot of the corporates are trying to tie sustainability into their tax equity, but they’d much rather write one check for a 100 MW project than do 50 2 MW projects with us. We’re starting to see if we can pull people into C&I, more as a back-up plan.
Dovere, C2: The comment you’re hearing has much less to do with the project and much more to do with the sponsor. Ultimately, with the tax equity, you’re paying their legal fees anyway. There might be a little bit of work that’s done by their internal asset management team to look through it, but, realistically, the more difficult the deal is, the more it costs you as the sponsor. It doesn’t actually cost the tax equity investor all that much. There is an annoyance in terms of planning. The difference between a 100 MW deal and 50 2 MW deals is that maybe ten of them aren’t placed in service and the tax equity investor can’t plan for it.
The people that have a balance sheet can weather a storm, in terms of continuity, but also just to be able to support the tax equity indemnity. What does it mean that banks are leaning into their existing relationships? They want to deal with the publicly-traded IPPs. They don’t really want to necessarily deal with folks that don’t have a large balance sheet.
PFR: Do you think there is any likelihood of legislative help, on the cash grants or anything like that? How likely is it to happen? And even if implemented how easy will it be to access that?
Zagrecki, Zorya: On the cash grant, it’s a lovely idea, but given that the federal government has been decimated under the current administration, I don’t think there are people in the Treasury Department that could actually manage that program. So maybe you have it, but when do you get it? Three years from now?
PFR: How about origination? Has that been impacted? Are you still seeing demand from offtakers? Or has that also tailed off?
Lechky, OYA: There’s been a lag with people attending conferences and your traditional pipeline for deal origination and M&A. We’re really focused on developing what we have in our pipeline because that’s something we can control. We’re busy in 2020, I just don’t know what that’s going to translate into in 2021, ‘22 and ‘23.
PFR: James, as an insurer, this must be not the worst time for you?
Bowen, Energetic: It’s not the worst for us, because there is more uncertainty around offtaker credit quality and our credit insurance product can be the solution that developers need to obtain project financing. I am in the position of talking to a lot of different developers, and something I’m concerned about is whether businesses are still looking to transact in solar. For the most part, unlike residential, where I’m hearing there’s a lot of problems, it seems like, especially for negotiations that have already started, businesses are still able to work from home, they’re still able to continue transacting, and the value proposition of solar still exists. I suspect that perhaps we will hear even more of the argument that solar-plus-storage or microgrids can help with resiliency.
Greenfield projects are still being transacted upon. Where we’ve been getting a lot of increased calls is in operating projects, just because people are looking out three, six, 12 months, and they’re not sure how secure their offtaker PPA payments will be. Some of their offtakers might have closed, and they’re not sure what the credit situation is going to be. And they either want to shore up their existing cash flows or they are looking forward to a refinancing event, perhaps to take advantage of interest rates.
Walsh, MEI: James, do they normally call you for the refinancing or do people actually take a proactive look at their portfolio and want to just feel better about it?
Bowen, Energetic: Mostly, it’s been driven by the financers, so a bank calling and wanting to shore up their existing portfolio, and working with their development channels to do that. I would say it has been predominantly transaction-driven, but some of it is about shoring up existing cash flows.
Dovere, C2: On the origination side, as far as corporate PPAs go, C2 does have development business in doing bilateral corporate contracts with our key accounts. The downtime has actually helped move a couple of those forward, which is exciting. The thing that we’re trying to deal with now is, we took a sizable safe harbor position at the end of last year, and a lot of that was predicated on an M&A strategy—would we be buying projects? Would we be developing projects? We’re going to have to now carry that equipment load and the associated carrying costs for probably at least another 12 months longer than we expected. We’re still seeing a fair amount of inbound M&A, as this period is encouraging people to be more aggressive about their internet outreach.
Zagrecki, Zorya: I agree. We haven’t seen any slowing in my clients at all. In fact, it’s gotten a little bit stronger. I do think that pricing has changed a bit. If you’re buying a mid-stage or late stage or even operating asset, the pricing was pretty harsh, the returns were pretty low. So pricing has improved a little. But what is really interesting is that these pipelines are still moving, but when we go back to the supply chain discussion, tier-1 panel manufacturers in January were saying, “Sorry, we’re full. Go somewhere else.” And now they’re coming back and calling and saying, “We have panels. Do you need panels?” So there’s some contradictory information in the market, and it’s going to take a little while to really shake out and to see where we’re going to be. Some of these pipelines might be 2021 and not 2020.
Dovere, C2: On the pricing point, it’s interesting to hear that, because the approach that we took on this was that we have mandated capital that we are investing. Our return hurdles haven’t gone up, so the only difference in pricing for developments is whether or not we want to take advantage of the situation. So, yes, you can price in a little bit of the risk associated with the carrying costs or tax equity or things like that—that’s not as material—but what we’ve said to any of the development partners is, we’ll look at your deal, but for us, we’re not going to transact at this moment in time on individual projects, or we’re not going to participate in processes. So if you want to work with us, we’re very happy to work with you. But, for us, it was just a thing about our team—doing the bid process letters and running 15 different models when we’re competing against 20 different people for a couple of megawatts’ worth of deals —I just wasn’t going to do that to my team. So the approach that we’ve taken is we actually will preserve pricing and will continue to price as we were, but it has to come in the same way that tax equity is looking at this, within the context of a relationship. Understanding what is happening to my team, I cannot put the burden on them as a manager or as a colleague or as somebody who cares about them, to continue to throw darts at the board. We have very specifically sought to not adjust our pricing, but to adjust who we’re working with.
Zagrecki, Zorya: But, on that point, it was less a question of winning, before, but of being able to win a few deals now, with your hurdle rate and your pricing, as opposed to taking advantage of the situation. I don’t think that’s happening with people I’m working with. I do think it’s happening with some tax equity providers.
PFR: James, where are you seeing the highest risk pockets at the moment, in terms of offtaker credit quality, and what measures are developers and lenders taking to prepare for that?
Bowen, Energetic: I have a nice little cheat sheet diagram that I can share. It is a very simple chart that shows high, medium, and low stress by sector post Covid-19, that I’ve been using, plastered on my wall. We were underwriting a theater before Covid-19. That’s clearly going to be more challenging now as a sector going forward. Places where people congregate like entertainment venues are challenging.
PFR: Cruise ships?
Bowen, Energetic: Cruise ships we have not done. Some sectors were obvious, but we’re looking at other things that were more speculative or difficult pre-Covid, like grocery stores, which have been distressed as a result of online disruption—some of the grocery store chains have suffered in terms of ratings—but maybe that’s a better sector. The one big one is the general tourism industry, because we do have a lot of projects that are related to that industry, whether through hotels or amusement parks. That is an area I really want to pay close attention to.
PFR: James, you’ve been having conversations with tax equity folks, and they’ve been interested in looking at risk mitigation tools, isn’t that right?
Bowen, Energetic: I hear from tax equity that investment grade offtake is becoming even more important. In the partnership flip context, they have not historically been so concerned with cash flows as much as recapture risk. Post Covid-19 they really just want offtakers to be investment grade, and that’s putting some constraints on what deals are eligible for the large tax equity institutions.
On the sale-leaseback side, that is a market where—we just did our first sale-leaseback transaction—and that’s a market where cash flows are important, because that’s what makes the lease payment. That is somewhere where we’re going to see a lot of increased business. But it’s also an applicable tax structure for the C&I market, where it’s a little bit more conducive, from my understanding, to these smaller and medium-sized C&I projects. In general, when we started this product a couple of years ago, we were really focused on unlocking debt. We didn’t realize how important it would become for tax equity.
Tax equity is probably more than 50% of the product requests this year. There is an oversupply of debt, and debt can be a little more flexible than they were before. But tax equity is in short supply, and therefore they can command whatever terms that they really want.
PFR: That’s a nice segue into debt. I wanted to just get a read from our developer colleagues here, do you see margins on construction and term debt going up at the moment? How much and for what assets?
Walsh, MEI: On a lot of behind-the-meter stuff, we’ve definitely seen spreads go up a little bit. But we do feel good about the lender we are working with now. It has been as close to business as usual as anything has been for us.
Lechky, OYA: From some of the conversations we’ve been having, base rates have come down, but it’s the credit spreads that are the issue. A couple of the lenders that we’re talking to, the big thing for them is trying to understand what the credit spreads are going to do. That’s the biggest concern that I’m hearing.
Dovere, C2: Fifty basis points. It’s a 50 bp difference in terms of spread from what we priced a month and a half ago.
Zagrecki, Zorya: Really? Because I haven’t seen very much increase on the spread. It may just be the banks you’re talking to versus some of the banks I’m talking to. But I’ve found that the requirement is for much higher structuring. It used to be “Boom, boom, done,” and now people are looking into every single corner. And much more talking about differences in loan-to-value and what sort of equity might your sponsor have, even though it’s non-recourse project finance.
PFR: Have you seen any kinds of new types of deals that lenders have grown increasingly comfortable with? And what are they still a little uncomfortable with?
Walsh, MEI: I’d like to hear Scott’s opinion. We’re doing some community solar, and I can just give our quick take—the C&I community solar deals are good, though we haven’t dipped our toes in the residential piece, yet. And on the SMART [Solar Massachusetts Renewable Target] assets, we had to do a lot of coaching in that program to get lenders comfortable with some of the adders.
Lechky, OYA: The one thing that we’re having challenges educating people on is what subscriber risk looks like. In New York, the market is eventually moving toward consolidated billing, where that will just all run through the utility in one bill. So that will remove a lot of the subscriber risk issues of two bills. i.e. one bill to OYA and then one to ConEd, for example. So, that really streamlines things, and that’s going to change the whole cost-of-capital dynamic in New York. It just takes a big piece of the risk out of the equation of trying to deal with individual subscribers, whether it’s demand-metered or non-demand-metered resi and C&I subscribers. This really simplifies the market.
Walsh, MEI: It’s not like a POR [purchase of receivables]-type thing with the utilities, right? They’re just doing it administratively? They’re managing it, but they’re not taking on any risk, right?
Lechky, OYA: Yes, that’s my understanding.
Dovere, C2: If we could get a POR-type program, that would be wonderful. We have a bunch of the New York community solar stuff and we’re doing it with resi. The deals that we were working through were the ones that we had started prior to COVID-19 delays. There’s a different challenge with community solar, especially on the resi side.
All of these groups were talking about customer acquisition. Realistically, the way that they were doing customer acquisition is that they were asking retail energy guys who were going door-to-door to do customer acquisition. I don’t think anybody is knocking on their door these days, so there’s a major drop off in that business. So, to the extent that you have other aggregation channels, there is more thinking that has to go into the community customer acquisition side of resi.
You’re going to see a lot of those businesses that, at least in my mind, didn’t deserve to exist in the first place, probably go away. But that is ultimately going to be one of the major paradigm shifts in how this is going to work. People are going to want to save money these days, but how that is going to be done? It’s going to be a lot more web and ad-based, but also, the value of strategic relationships, in terms of customer acquisition, will be really important.
PFR: Do you see the C&I and community solar debt market remaining the domain of regional banks and specialty lenders? Or do you think we’ll see the larger global banks also getting into the space maybe next year and going forward?
Dovere, C2: CIT Bank did a deal with True Green Capital last year, so there are larger banks that are doing it. If you think about it, those are the deals that really should have the equity participation. If you have tax equity coming in for 35% to 40% of the costs, then you have a NYSERDA rebate for another 30% to 40%, then there is material capability to limit your debt exposure. It is an appropriate place for there to be equity participation and its subsequent equity upside. So maybe the debt ratios end up becoming lower, which may actually end up being one of the major reasons why, on the community solar side, it probably isn’t going to be the best product for a lot of the larger banks, simply because the net LTV, or ratio-driven debt, is going to be a relatively small amount. So you need to do all these megawatts in order to get in 10% to 15% debt, maybe a little bit more, when realistically it needs to be thought of differently, in terms of what the capital stack participation should look like.
Zagrecki, Zorya: Right now, this is a great test of community solar, because a lot of the bigger banks are very uncomfortable with the residential portion. But they’ve done it. MUFG has closed community solar facilities, but there is always the question of what happens if there is some major disruption. Are we going to have larger defaults? This period would be actually a very interesting time to see whether defaults have increased. I don’t think they will increase, because people need power while they’re staying home. If you can show that community solar is resilient through a crisis, you’re going to be able to have a few more banks come into the space and get a little bit more comfortable with it. I do think that community solar is actually way easier to finance today than it was three or four years ago, because you can see track records.
ING has been doing deals, CIT has been doing deals, Rabobank, MUFG, they have been coming into the space, and the hope is to go to those guys. But you have to have a balance sheet. You have to have some serious megawatts under your belt for those banks to be interested in your product. So you go to the regional banks and build your balance sheet, build your portfolio, and then you can move back to New York for your debt.
Dovere, C2: It’s important to distinguish the unfortunate reality of the community solar stuff, which is that, while homes need power, they get the power, but under the current billing regime, what they’re getting actually are credits on a bill that they have to pay separately. They’re getting the service, they’re getting the commodity, one way or another, and I agree that it’s probably a moment in time to prove it out, but unfortunately this is the type of thing where they need power, but they don’t necessarily need credits—which you’re still billing them for. And in the scheme of the waterfall of bills that people are getting, I worry that you probably will see a lot of people who will just ignore the bill.
Bowen, Energetic: I’m actually really curious about that trend in community solar, because as we move towards potentially on-bill financing—but also just in this COVID-19 situation—if people have no penalty for stopping paying community solar, and they know they can also not pay their utility, and because there’s all these governors’ orders that they can’t shut off the electricity, wouldn’t the rational person just not pay anything?
Dovere, C2: That’s exactly the point. And it’s not only the rational person! What you’re seeing is, this is not just community solar. This is energy market-wide, with retail energy providers as well. You have small businesses that have signed retail energy supply agreements that the government is now telling them they don’t need to pay.
PFR: To what extent in the last year or so have you seen more standardization in C&I solar finance?
Walsh, MEI: I’ve written about this before. I don’t think it will ever standardize. We are starting to see more imitation, at least across states with policies that try to look like one another, and that makes the leases more closely mirror one another, and the PPAs or the subscriber agreements.
But if you’re a county in Maryland, you’re never going to have the same procurement laws as a county in California. They are utilizing the same procurement contract they use to pave roads or do anything else. They shove in solar, just change it around a bit and the end result is really clunky. You’re never going to see organizations like Amazon or counties or governments shape the procurement to match up with the SEIA standard or anything like that, I don’t think.
But you are starting to see the folks that don’t have really strict procurement guidelines becoming more comfortable using the SEIA-form PPA. At least we’ve seen a lot more of those. Investors, too, have had to evolve. A few years back, our position was: “Here’s our PPA. If you want us to finance it, use it,” and then it slowly bled into, “Okay, we’ll have to just look at each one.”
PFR: Let’s talk about sponsor equity, platforms and M&A. Paula, I know that you do this for a living, but how do you tell when there is a good fit between two teams when there is an M&A deal? What have you learned and what are the lessons that you can share?
Dovere, C2: I can answer that. It’s when the price is right. That’s usually when there’s a good fit.
Zagrecki, Zorya: I completely disagree. That’s absolutely not the right answer, because when the price is right it works out for a little while, but then the cracks start forming, and as soon as there’s a problem, the issues escalate. There’s a lot of value to emotional intelligence and being more about the matchmaking, and the emotional fit, and that people get along together. We all know that in the teams that we work with, if you’ve got somebody who isn’t quite fitting, it is very disruptive.
And when you have disruptions in the market, where you’ve got to come together and figure it all out, it works a lot better when people really value each other as opposed to just valuing the money that you can put in your pocket. I do actually think that you might take a lower price, but at the end of the day, when something goes wrong, you’re not getting totally taken in the shorts. Whereas, if you take the highest price, value will be extracted on the back end.
We’re in a crisis, and people are getting sick, and people are having issues. I’m working on some things where people are trying to take advantage, and I’m working on some things where people just all come together and work it out as a team. And we all know which one is going to work better at the end of the day. Maybe it’s just because I’m a woman and I have a bit of a different view that it’s not the all mighty dollar at the end of the day, but if you try to make matches that just don’t actually fit, you’re grateful when they don’t close. Over time, I have seen that companies where values align have more successfully worked out the issues that invariably come up, not just with Covid-19, but in the industry in general.
PFR: Wrapping up, how do you keep legal fees down?
Bowen, Energetic: We’re in the insurance industry, so that’s pretty hard to do. We have about seven different lawyers for different things, but I would say that when we were a pure start-up with zero money in the bank, we came up with some interesting negotiations with lawyers to either postpone fees or come up with some other ways of getting around that. Now that we’re funded and making revenue, it’s about really having a lot of clarity and clearly scoping out work, setting caps and regular check-ins and not letting the clock run. That is really hard to do. It takes a lot of effort, but it’s really just a lot of brute force.
Zagrecki, Zorya: If you have the right lawyers, you can keep your legal fees down. Lawyers who take a commercial approach aren’t going to look at that last risk and don’t go down those rabbit holes.
If you can do repeat business, that’s the easiest way, right? The first credit agreement is painful, and somewhat expensive. The next one is half the price, and the next one is another haircut off of that. If you can standardize, you’ve just cut your legal bill in half.
Walsh, MEI: Paula’s spot on with the repeat business. I was just going to say good partners help a lot, because we don’t bring in legal unless it’s for financing. A lot of developers bring in legal in every deal, but with the majority of ours there is no external counsel. Any debt or tax equity financing, usually requires external counsel so you’re going to have them there.
Lechky, OYA: For us that’s kind of an easy one. We hired Bernadette Corpuz as general counsel last year and that was probably one of our first really big specialized recruits. We took over six months to find the right candidate, because it was a pretty big investment to decide to do stuff in-house, and decide what work that person is going to be doing, versus what you’ve got your external counsel doing.
Part of Bernadette’s task is to negotiate legal bills down a little bit. But it’s also, for her, finding the right law firms to be doing the right work, as opposed to going with the one large firm that does everything. Leveraging her relationships to potentially find the boutique firms that are not only cheaper, but also with the expertise, capacity and willingness to devote senior resources to our engagements, where necessary. So for us, it’s as much about Bernadette finding the right lawyers as it is finding the right firm.
Dovere, C2: I don’t know that I agree with all of what’s been said. On the corporate side of things, you can hire in-house counsel, which should be able to drive that cost down. On the project side of things, realistically, yes, there are certain tasks that can be done internally. When we’re doing our EPC agreements or PPAs, we can manage that internally. But realistically, when it comes to financing, we have not ever seen, even on repeat deals, the efficiency derived from the second or third agreement. That’s largely derived from the fact that we’ve never found lawyers on the other side that—when we’re on the hook for the bills—are necessarily interested in being all that charitable. You end up in a position where it’s just smarter to book it as an expense in the deal and make sure it’s appropriately budgeted for. I literally did three tax equity deals with two different investors using the same law firm, using the same documents, and there’s just usually an amount of money that people are expecting to make on a deal, however many deals there are, especially when each project has its own nuances, which is often the case in D.G. From our experience, the most expensive thing in the market is the cost of bad advice, and so it’s a consequence where we may be guilty of over-investing in some of these things, but we think it’s the right thing to do.