Solar Energy Opportunities

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Wind, Solar Farms Are Seen as Havens in Coronavirus Storm
Steady returns in renewable energy attract investors, even as new projects likely face finance hurdles

PHOTO: JACK KURTZ ZUMA PRESS
​View the full article on the Wall Street Journal Here HERE
By Russell Gold
Updated March 31, 2020 11:47 am ET
 
Wind and solar farms are attracting interest from investors hungry for low-risk, stable-yield opportunities at a time of extraordinary market volatility.
 
That interest is a boon for renewable projects, and could give them a financial boost in coming months and years. However, developers could face challenges in getting additional new projects financed and built amid the turmoil created by the new coronavirus.
It might seem an odd time for a renewable-energy uptick, given the economic slowdown and a  historic crash in oil prices that is making fossil fuels cheap. But wind and solar farms experienced a similar surge after the 2008 financial crisis, when investors seized on the projects as safe-harbor investments with yields in the mid-single-digit percentages.

Wind and solar farms have contracts to sell their electrical output to utilities and companies with good credit ratings for a decade or longer, making their returns stable and relatively low risk.
 
“There is certainly some increased interest and discussion around uncorrelated yields, and renewables falls into that category,” said David Giordano, global head of renewable power at

BlackRock Inc.

“As I’m trying to stock my cupboard with canned goods, we have an
awful lot of calls happening.”
 
The increased interest is fortuitous for renewable-energy builders such as Kevin Smith, chief executive of the Americas at Lightsource BP, a solar developer half-owned by British oil giant  BP PLC. On March 12, he signed a deal with banks to finance a $250 million solar project in North Texas, even as the Dow Jones Industrial Average ended the day down 2,352 points.
 
“It was a strange day,” Mr. Smith said. He said he expects to close a further $750 million in solar financing this year, including a large solar farm in Colorado. “I’d like to think that there will be more investors from infrastructure funds looking at renewable markets as a safe haven from the volatility,” he added.
 
Corporations contracted for 46% of the 20.2 gigawatts of renewable energy added to the U.S. grid last year, according to the Renewable Energy Buyers Alliance, a group that represents corporate purchasers. The largest buyers last year were Facebook Inc., Alphabet Inc. unit Google and AT&T Inc. Corporations have been contracting for renewable energy because prices are low and because many have made pledges to lower their carbon
output.
 
“No one has yet indicated that they intend to slow their purchase,” said Miranda Ballentine, the group’s CEO.

Still, finishing existing projects, much less building new ones, might prove difficult. Developers could face some significant hurdles in coming months, including shortages of labor and specialized tax-equity financing. The U.S. industry relies on tax credits.

Renewable-energy lobbying groups are seeking relief from Congress, either in the form of cash grants instead of tax credits, or extensions to allow delayed projects to still qualify for credits. But renewable-energy projects weren’t included in the $2 trillion coronavirus stimulus bill, and it isn’t clear any assistance is forthcoming.
 
For now, deals are continuing. Only 4% of near-term deals have requested delays, said Bryce Smith, CEO of LevelTen Energy Inc., an online marketplace that connects buyers and sellers of renewable energy.
 
“These are long-term investments,” he said. Supply contracts can last from 10 to 15 years.
 
Earlier this month, the Tennessee Valley Authority solicited proposals to build 200 megawatts of wind or solar power. It said it expects to sign a contract with the winning bidder in September.
 
“If you have a project in the chute, and you are working toward a closing in the next week or month, or months, my guess is that those projects get done,” said Paul Gaynor, CEO of Longroad Energy, a Boston-based renewable developer. “For projects that are expecting to enter the finance market in the second half of 2020, I think it’s a total toss-up right now if it gets done.”
 
Once completed, demand for wind and solar farms is as strong as before the spread of the coronavirus, and maybe stronger. In the years after the 2008 financial crisis, infrastructure investors’ appetite for wind farms in particular rose rapidly as they chased better yields.
 
That enthusiasm helped drive the rapid growth of the industry, which took off after the economy began recovering in 2010 and kept rising. In 2009, wind and solar generated 1.9% of
U.S. electricity, according to Energy Department statistics. A decade later, they accounted for 9.9% of the nation’s power.

 
Investor interest in stable yield could again rise and drive additional growth in the sector. A solar farm can generate about a 7% yield, according to several people involved in financing these deals.
 
“Renewable-power generation is largely uncorrelated to oil and natural-gas markets, which further strengthen their overall appeal, and may well be one of the first assets classes to unfreeze,” said Keith Derman, co-head of Ares Infrastructure and Power at Ares Management Corp.
 
 
Write to Russell Gold at russell.gold@wsj.com
​View the full article on the Wall Street Journal Here HERE

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U.S. Solar Project Basics 
Market Size And Growth,
Structuring the Transaction, Financing the Deal

​Eliot Norman, May 2020

Market Size and Rapid Growth of Solar in the  USA 

You have asked about the California market for solar energy. Let's compare with the French market and the US market generally, including several of its major states. Although California is clearly the leader and accounts for nearly 50% of U.S. solar capacity, today the market is national in scope with most major states in play. The solar developers that we have contact with all design projects for California and other states. This is true even if the developer is located in North Carolina, Virginia or another state outside of California. 

France: installed less than  1 GW of solar in 2019, actually 890 MW.   This is the same as in 2018 . No growth in the amount of installations. Total cumulative capacity for solar generation  is 9.436 G W  (9,436 MW). In fairness to France, the amount installed and going on line could be much larger than 890 MW but for a big backlog of 6.6GW of approved projects sitting in the grid-connection queue. (This may be confirmation of your mention that investors in France have been frustrated by the slow rate of approvals.)  Solar energy in France supplies a small percentage of total electricity demand, 2.5%. 

United States:   The US installed 13.3 gigawatts (GW) of solar capacity in 2019. This figure amounts to a 23% increase in solar installations over 2018. The figure of 13.3 GW installed is  14 times greater than France, although the population of the USA is only 5 times greater than France. Solar accounted for  40% of all new electric generating capacity added to the total grid in 2019. Total cumulative operating solar capacity in the US is now 77 GW. This is 8X the capacity of French systems now operating (9.4 GW).   The United States has now caught up with France, in that the U.S.  also generates 2.5% of its electricity from solar, although this represents a huge increase over 2010 (0.1%). 

A recent Wall Street Journal article had this to say about solar:
 
"RENEWABLE ENERGY LURES INVESTORS." Per the WSJ: "Amid market tumult, wind and solar are seen as low-risk ventures with stable returns." Corporations like Amazon, Facebook, Alphabet (Google) bought 46% of the 20+ GW (gigawatts) of renewable energy added to the grid in 2019.  The growth in corporate solar is recent and growing rapidly. 50% of the 7 GW of corporate solar capacity has been installed just in the last 3 years. Solar and wind accounted for only 1.9% of U.S. electricity in 2010, but grew rapidly to 9.9% in 2019. Of interest: deals in the U.S. solar farm pipeline are getting closed despite the Covid-19 crisis, reports the WSJ. The WSJ concludes: "Investor interest in stable yields could again rise and drive additional growth [in solar]. A solar farm can generate about a 7% yield (and that is after taking a 26% Investment Tax Credit (ITC) against U.S. taxable income). Once completed, demand for wind and solar farms is as strong as before the ...coronavirus, and may be stronger."

National Pricing:  Prices of solar PV installations have declined 36% over last 5 years. Storage: we predict rapid growth in pairing of battery storage with solar. Relatively new, one survey finds that 25% of all residential solar systems will be paired with storage by 2025. And the utility-scale market is now a key focus: over 8GW of commissioned projects, representing 1 in 5 include solar paired with storage. Use of storage should have the benefits of energy grid stabilization, increase reliability and overall reductions in energy costs.

California and other States:  Without question, California, population 40 million, has been the US  leader in solar.  National ranking:1st. Solar installed: 26GW or 3X the capacity installed in France. 20% of electricity in California is generated from solar, 9X the national average. Growth projection: 15 GW over next five years (ranks 1st).  New mandates: all homes built in California beginning in 2020 must have solar. California  has enough solar to power 6.8 million homes. Total solar investment is $63 billion. Solar companies in California include 1500 installers/developers and 560 manufacturers. The huge Topaz Solar Farm, completed in 2014, generates 550MW, enough to power 142,000 houses. That one solar farm represents 60% in size of all the solar projects installed in France in 2019. 

Some of the other major  states:  Texas: Solar installed 3.4 GW (ranks 4th). Percentage of electricity from Solar: 1%.  Growth projection over next 5 years: 13GW (ranks 2nd).  An example of a large Texas installation is RE Roserock LLC, completed in 2016, capacity of 160MW, FEDEX is powered by a 2MW solar farm, and the Alamo Solar Farm 5 has a capacity of 95 MW, enough to power more than 10,000 homes. North Carolina: 6.15GW; national ranking (2nd); percentage of electricity from solar, 5.73%; growth projection over next five years: 4 GW (ranks 5th). Virginia: although it is only 17th in terms of installed capacity, shows growth projections of  3.8 GW over the next 5 years (6th nationally).  This growth will also be fueled by new state legislation mandating use of solar. The local utility, Dominion Resources,  has committed to 3GW (3000 MW) of utility scale solar in operation by 2022, equal to 1/3 of the current solar capacity of France. Amazon’s large Virginia solar farm, built in 2016, can generate 80 MW of electricity and other corporate projects are being rapidly built. Florida ranks 5th in the country in terms of installed capacity and growth projections call for 8.9 GW of solar over the next five years. In Texas state laws reduce or eliminate property taxes for solar installations and legislation is pending to prevent the utilities from charging fees to solar customers that other similarly-situated customers do not pay. 

Conclusion: the market for solar is national in scope. However, legislative incentives and penalties imposed upon utilities for not generating at least of some of their electricity from solar vary from state to state, requiring analysis of the market on that basis. This is true even though the federal law allowing a 26% ITC  is uniform throughout the United States. (In addition to this ITC, some states also offer tax credits.) Thus, in evaluating the financial viability of a project, it could make a material difference in which of the 50 states the  solar system is located.

Solar Energy Project Basics in the USA: Structuring the Transaction 

To evaluate a developer’s solar project for purposes of investment, there are several models to consider.

A  typical model. In the case of  a typical  XYZ corporate buyer of a  2MW solar system for its warehouse,  the parties may choose a “ third-party power purchase agreement (PPA)” type transaction. The warehouse may have as its goal reducing electricity prices, going “green” and using renewable energy but does not have any interest in buying and operating its own solar system. The warehouse is in the warehouse business, not the solar photovoltaic system business. 

Under this model the warehouse would, however,  host  the solar system on its roof or  on top of its parking garage. The system would actually be owned and operated by a solar investment company  (e.g. like Cubico www.cubico.com). The warehouse would agree to purchase all its power from the solar system at a set KW per hour rate. The role of the developer would be to design and build (or have built) the system to the point of MC (mechanical connection),  negotiate the interconnect agreement with the utility operatin the electric grid, obtain all the permits for the system’s operation, and negotiate the PPA with the warehouse. 

A variation of this model is for the developer to lease a rural farm on which it will install the solar panels and sell the electricity to the warehouse and to other users; or to one huge corporate user that requires 25MW or more. In our example, the warehouse would still enter into a PPA with the developer and later ultimate owner who would buy the system or the special entity that the developer sets up to build the system. Under this “third-party PPA model”, any tax credits or other financial benefits derived from ownership (now 26%) would flow to the third-party owner. 

Due diligence. Key documents to evaluate in making an investment in or partnering with a developer who is going to design and build a  solar system include: The lease agreement that the developer enters into to install the solar system on property owned by someone else; The EPC (engineering, procurement and construction) contract; the PPA between the purchaser of solar energy  and the solar system owner; the Operations & Maintenance (O&M) Agreement; and the Interconnection Services Agreement (the last mile, allowing the system to be connected to a private or public utility that maintains the “grid”.  Increasingly, an investment decision will include review as well of the storage technology that will be paired with the typical solar PV panels or farm. Finally, careful review is required to see whether the deal proposed is consistent with regulations and takes advantage of the incentives (tax, financial, environmental, etc.) and restrictions in  the laws of the state where the project will be located. 

Financing Requirements of Developers: 
An opportunity for Foreign Investors 

In a typical project the Developer requires cash at various stages of development to be able to begin and complete the solar PV project. The project will thus go through various steps. Because of cash needs and the relatively high costs of financing interconnection fees, leasing of land and construction, a developer may be interested in alternative sources of cheaper debt and/or an equity partner that can share in the risks and rewards when the project is sold. 

Let’s walk through an example to better understand the opportunities and risks for an outside investor. 

Universal Solar (the Developer) learns of an opportunity to develop a 25 MW solar farm to generate electricity in California for a new R&D and engineering headquarters for Apple. The total cost of the project, including the panels, financial, legal and other costs, based upon current estimates of $1 per watt or $1 million per MW is $25 million. Just 25 miles from Apple,  there is a  large  almond farm that is going out of business due to lack of water and lack of migrant labor. The owner of the almond  farm is the favorite uncle of the CEO of Universal Solar.  The CEO sees a golden opportunity to help his uncle and Universal Solar. 

1. Universal Solar sets up Fruit Solar LLC and negotiates a favorable lease with his uncle to install solar panels. To save the farm from bankruptcy, the CEO agrees to deposit upfront  $1 million to secure the long-term lease at $250,000 per year. 

​2. Fruit Solar LLC negotiates an interconnect agreement  with  Pacific Gas & Electric to buy all the solar to be built on the almond farm.  PGE will require a new substation to be built to handle the 25MW at a cost of $6 million and requires Solar Fruit LLC to pay an upfront fee of $6 million to sign any interconnect agreement.  
 
3. Fruit Solar LLC estimates that it will take another $1 million to obtain permits, finish the design work and get the project ready to build. Fruit Solar LLC 
  
4. Fruit Solar LLC can apply to a Solar Financing Company for a development loan. Typically, the financing for 2 years  will be on a recourse basis against the assets of Universal Solar at an interest rate of 9.5% or more. On this project, the loan amount would be for $8 million.  At 9.5% that means roughly $1.5 million in interest payments over the 2 year term.
  
5. Armed with the solar development loan and the interconnection agreement, Fruit Solar can go to Apple and negotiate a Purchase Power Agreement at $.10 kilowatt per hour or in that range for a 25 year term, with the usual clauses providing for cost of living indexing for inflation over time. 

Once the PPA is in place, which with a sophisticated customer like Apple, will be a tough negotiation, Fruit Solar LLC, with guarantees from Univesal Solar, LLC, its parent company,  can obtain a Mini-Perm type Construction loan from a commercial bank. Before the commercial bank will commit on the  Mini-Perm Construction type loan, it must be satisfied that the developer is creditworthy, experienced, has proven “bankable” technology and components, has addressed all the underlying real estate issues, and has a substantial customer, namely Apple who has signed the PPA.  The bank loan will be used by Solar Fruit LLC to finance the actual EPC (engineering, procurement and construction) phase of the project, usually at an interest rate again of 9% or more. The loan can have a fixed term, paying principal and interest; or a balloon payment with a floating interest-only payment during the life of the project. The loan amount in our example could be as much as $17 million, with a 2-3 year term.                                                                                                                                                                       
6. Most developers will contract-out the EPC work. A few may do their own EPC. Commercial bank financing in the form of a construction or mini-perm loan could be obtained, again at high interest rates of anywhere from 8% to 12%. 
  
7. When the project is ready to go on line, having reached the end stage of  Mechanical Completion, it can be sold to a third-party like a Cubico. Typically, that agreement will be negotiated during the EPC phase.  Cubico can purchase Fruit Solar LLC along with its fully assignable Interconnect Agreement and PPA; or just purchase the key assets. A company like Cubico will want full ownership and cannot sell the project for five (5) years so that it can take advantage of the federal ITC (26%). 
  
8. Let’s assume in our example that Cubico buys Solar Fruit LLC for $35 million and takes ownership of the solar farm. It will sell the power at the price in the PPA (10 cents per kilowatt hour). Its actual cash cost will be $25.9 million after application of the ITC of 26%. Cubico  can expect a long-term return of 7% of more on the solar electricity sold to Apple 
           
The Investment Opportunity in this type of Solar Deal.

The opportunity for a foreign investor at the project stage is to become a partner  with the Developer in the Solar Fruit LLC project.  For Universal Solar, a 50% investment from a French investor  of $4 million to $12.5 million could  eliminate or reduce financing costs from the solar finance company and commercial bank. It would share the risk but also the rewards of the ultimate sale to Cubico for the investor, a $12.5 million purchase of a 50% share in Solar Fruit LLC  would yield $17.5 million upon the sale to Cubico, a return of 100% Assignment of the lease of the farmland on which the 25MW of PV panels are installed could also be part of the deal. 

Another alternative would be to finance the project at lower interest rates than can be obtained by Solar Fruit LLC in the United States and take a smaller equity stake in the project and smaller participation in the profits upon sale to Cubico.  There a number of project debt and project equity options that could be explored for the investor and negotiated with Solar Fruit LLC, the project developer. 


Conclusion

This example is but one of many. There are a number of variations. The one constant, as reported by the Wall Street Journal, is that long-term 
Purchase Power Agreements (PPA) with utilities and corporate buyers continue to attract investors looking for lower risk and stable returns. 

For more information, please contact us at TRANSATLANTIC Partners LLC. 

Eliot Norman
President
Eliot.norman@transatlanticpartners.org
https://www.transatlanticpartners.org
+1.804.721.7851.