Solar Energy Industries Association (SEIA) has recently merged with Solar Energy Finance Association and created the Solar Energy Finance Advisory Council (SEFAC), a new entity with the goal of facilitating wide-scale solar deployment by providing better access to capital.
This is a significant move in encouraging more solar development in the United States, as it addresses head-on the most significant financial deterrents currently facing solar developments.
The organization has two goals: (1) to reduce the cost of capital required for developing solar energy projects and (2) to increase the deployment of solar energy across the country.
This initiative will especially help smaller entities, which struggle to attract new investment because they have such small portfolios, but the ripple effects will benefit the entire industry. This reduced cost of capital, in turn, will help shift our overall energy portfolio toward cleaner energy and lessen our dependence on fossil fuels.
Clean Energy Finance Forum spoke with one of the leaders of SEFAC, Michael Mendelsohn, senior director of project finance and capital markets at SEIA, to discuss the program and its goals.
CEFF: Can you describe the process for developing this initiative?
Mendelsohn: We had a vision of opening up capital for wide-scale solar deployment, recognizing that access to capital was one of the biggest hurdles in deploying solar.
We started with a series of conversations with different parties to explain what we were up to. The conversations varied depending on the type of organization we were working with.
Some of our first discussions started with many of the contacts we already had and expanded the stakeholder network naturally, including contacts at the National Renewable Energy Laboratory (NREL) and the United States Department of Energy (DOE).
CEFF: Are there particular types of capital that are targeted in this initiative?
Mendelsohn: We have focused on tax equity and debt capital, which in turn can facilitate construction equity.
CEFF: What are currently some of the most common concerns investors have in regards to solar energy development? Are these concerns accurate or overstated?
Mendelsohn: One of the most common concerns investors have is the risk to the off-takers or power-purchasers and their credit quality.
If the off-takers aren’t financially secure, their contracts to purchase the energy generated by the project will likely be unfulfilled.
It is typically easy to sell to big, public companies, but most other companies are not rated this way. And that can become a major risk, since the entire project is predicated on a contact to sell the energy that is being generated.
Power-purchase contracts are a huge investment for the off-taker, often over a 20-year period. So concerns that the contract will be terminated early [are a problem] for investors, especially if there are changes in ownership of the property or facility and if tax credits or other subsidy programs don’t last the duration on the contract.
This is particularly a concern for facilities under triple-net leases which produce split incentives.
Other concerns include unanticipated changes in aspects of the project or environment – such as changes in technology capabilities, transmission capacities, and regulatory requirements.
And, of course, there is always a concern that the project will not produce energy as expected.
CEFF: Can you elaborate on the main similarities and differences in financing solar at the residential, commercial and utility scale?
Mendelsohn: Much of the difference between solar at the residential, commercial, and utility scale is tied to the credit quality of the off-taker. Residential solar historically required high FICO scores by stable homeowners, but recently has become more available to middle- and lower-income homeowners as well as renters via community-solar programs.
The trend has been similar for commercial solar; some of the first to acquire solar were major chain retailers and large public companies who bought solar energy generated offsite, but this has now paved the way for smaller commercial and industrial customers.
Utility customers are stable and often hold monopoly positions within a market, which allows them to earn money by raising rates. Investors don’t doubt that major utility companies will be able to fulfill their purchase contracts. There may be some concern, however, over whether the developer can construct the project at the proposed price, given the scale and complexity of some of the larger utility projects.
CEFF: What are the most pertinent “tension points” in regard to debt and tax equity that complicate solar finance? How, specifically, does the program address them?
Mendelsohn: One of the biggest tension points the program addresses is the sustained ownership required for the first five years of the project per Internal Revenue Service (IRS) regulations.
Both debt and equity want to assume the first-in-line position for repayment.
If there is a problem with the asset, namely that it is not producing energy as intended, neither wants to be in the position to assume more risk.
There is a natural tension point here, as the IRS can institute a “claw-back” if the project isn’t producing the energy it was supposed to – and require payments from investors who had benefited from the investment tax credit and/or depreciation schedule.
CEFF: Have there been any major challenges in launching this initiative so far?
Mendelsohn: We have had a great deal of interest from a number of different stakeholders. This has been exciting. But we have had to work through several iterations of a governance and leadership format before we can begin to dive into projects.
Now that our governance structure is finalized and up and running, we are well poised to dive into specific projects and begin to see the benefits of all our hard work.
CEFF: What are some of the first action items for the initiative?
Mendelsohn: One exciting project we are working on is to provide guidance on how to develop a portfolio composed only of solar assets.
We are applying a number of portfolio asset management techniques to the solar market, such as balancing the volume from any specific project developer and avoiding concentrated risk so that if one asset fails the entire portfolio isn’t affected.
This concern will dissipate as solar continues to grow more generally.
We hope to have a better story to tell next year!