Energy Finance Report

Elias Hinckley

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Blog Update: The Future of Electricity Markets? Corporations Directly Buying Renewable Power

Posted by Elias Hinckley on 10/6/16 11:08 AM

future of electricity markets

An increasing number of corporations are directly buying from (or building) clean electricity sources. For decades most Fortune 1000 companies did little more than seek to manage costs as they bought electricity and fuel. This model of simply relying on the existing marketplace to meet energy needs has, however, suddenly become outdated. More and more companies are realizing the strategic advantages of sourcing renewable power. Companies that fail to adapt will face serious competitive disadvantages as this trend accelerates.

Several factors are driving this explosion in interest in direct purchases of clean energy. Reasons range from pure cost per kWh purchased, to market and regulatory certainty, to the brand value of reducing reliance on fossil fuels, to concerns over the future of specific markets in the face of a changing climate. Consistent in every one of these motives is an underlying economic case: replacing electricity generated from burning fossil fuels with electricity from wind and solar is a good business strategy.

Read the full article in the September 2016 issue of The EDGE Advisory. Click here.


Topics: corporate procurement, Renewable power

EDGE Advisory: Focus on Corporate Renewables

Posted by Elias Hinckley on 10/4/16 1:24 PM

Co-author Jim Wrathall and Morgan M. Gerard

Sullivan & Worcester, LLP recently released our EDGE Advisory: Focus on Corporate Renewables.  EDGE examines energy macro-trends through articles and expert contributions focusing on market direction, policy updates, and innovations in finance.

EDGE Energy Finance ReportCorporate renewable energy purchasing is one of the hottest topics in clean energy. Corporations and other large institutions are taking control of their environmental, climate, and energy foot-prints.  This new focus on energy includes on-site generation, the traditional power purchase agreements (PPA), synthetic PPAs, contracts for differences and other energy hedging tools as well as green tariffs and negotiated green sourcing with utility providers.  Renewable energy helps corporations achieve cost savings, green commitments, and brand enhancement. Corporate buyers are also discovering that renewable power can be an important resilience tool – protecting against price volatility, regulatory uncertainty, and even physical grid disruption.  Transaction complexity, a rapidly evolving power market, regulatory uncertainty, and some instances of poor execution have however, made deals challenging for new entrants into this market.

This issue of EDGE Advisory addresses these obstacles and focuses on strategies for success in the corporate procurement of clean energy, including transaction structuring; common pitfalls to avoid; the role of environmental attributes; regulatory developments and prospects; and attracting tax equity investment. We are excited to help build solutions for the structural and process roadblocks that can impede progress and look forward to opening a range of related discussions with our readers.  Featured topics include:

  • Energy Transition Driving Corporate Participation in Renewable Energy Purchasing
  • Keys to Success for Corporate Procurement Transactions
  • Market Outlook: Corporate Clean Energy Purchasing
  • Unlocking Clean Energy Value in Dormant Corporate Properties
  • Interview Q&As with:

    • Vince Digneo, Sustainability Strategist, Adobe Systems
    • Shalini Ramanathan, VP Originations, Renewable Energy Systems
    • Jonathan Silver, Managing Partner, Tax Equity Advisors, LLC
  • State Policy Developments and Prospects
  • Financing International Projects

We hope EDGE Advisory will provide helpful intelligence and add value to participants across the market. Please do not hesitate to contact any of us on the S&W Energy team if there are topics of particular interest or further follow up that may be of assistance in your business or investment projects.

Download PDF

Topics: corporate procurement, renewable energy finance, tax equity

Do We Have the Talent to Manage America's Energy Needs- Dialogue

Posted by Elias Hinckley on 10/27/15 10:56 AM

sun energy  craftsmanOur inability to provide enough skilled labor presents real and serious challenges to our ability to meet America’s energy demands over the coming decades. A Deloitte Survey from a few years ago put this in stark perspective with 70% of respondents from throughout the U.S. energy industry answering that given the current labor force, they would not be able to meet their future staffing needs. During 2014, the solar industry created jobs 20 times faster than the overall economy, and labor shortages were a consistent struggle in the boom times of shale oil production.

Can a policy solution be crafted to educate and re-educate our workforce to meet the changing landscape or our energy economy? Can we design a policy that supports a changing energy landscape without having a clear and broadly accepted national energy plan? Join our conversation on


Topics: Energy Policy, Energy Finance, Renewable Energy

Opening the Small Commercial Solar Market

Posted by Elias Hinckley on 6/17/15 7:23 PM

ThinkstockPhotos-463168037While the solar market has been exploding over the past few years, the small commercial segment of the market, made up of locations like apartment buildings, office buildings, small businesses, factories, warehouses, and hospitals, has been extraordinarily slow to develop. Residential installations, built on standardized transactions and easy access to financing because projects can be pooled based on homeowner credit scores, is red hot as large investors with cheap capital are attracted to homogenous amassed projects and the perception of well-understood credit risk. The utility scale solar market also continues to grow (despite fewer available long-term power purchase agreements) on the strength of declining costs and abundant liquidity in the form of very low cost capital driven significantly by yieldcos.

The small commercial market has been plagued by transactions that are often as complex and expensive to execute as large projects, but these small individual projects don’t carry the economic scale to absorb the cost of complex transaction structure and execution. The standardization that has brought down costs for residential pools has also yet to emerge in parallel form to support the small commercial market. Add to this unrated or high credit risk spread across a diverse set of power buyers, which has kept traditional (and inexpensive) capital sources away from this part of the market. The result is a small and very fractured market segment that has been underserved while the balance of the industry has grown at stunning rates.

These challenges for the small commercial solar market are, however, rapidly being solved and as a result we expect this part market to heat up quickly. Margins in commercial solar remain higher than in either utility scale projects or residential pools. Better transaction processes and models for standardization are being refined, as well as new tools being brought to the market like revitalized PACE programs and novel approaches to managing credit risk. This confluence of opportunity and solutions are redrawing the commercial market and attracting new and cheaper capital. Against these developments, the light commercial segment is about to become the new hot solar market.

Standardization Solves Nearly Everything

ThinkstockPhotos-159299617Standardization and streamlined transaction processes are vital to the commercial market. Limited success in this segment has thus far mostly been with large corporations that would negotiate standard agreements across many sites (these corporations are also typically part of the 5% of investment grade power buyers within the small commercial market). Legal and transaction structuring fees alone have crippled the economics of many commercial-scale projects. Standardization is also critical for accessing cheap financing sources as large investors have no appetite for small single transactions, and consistency of deals and supporting documentation is necessary to aggregate multiple projects into appealing pools for these investors.

Two and a half years ago, the U.S. National Renewable Laboratory (NREL) assembled the Solar Access to Public Capital (SAPC) coalition, which was brought together to build model transaction documents that could be the basis for standardization. SAPC developed a set of model contracts for solar projects, including PPAs as well as lease agreements for third party ownership. Subsequently, the Solar Energy Finance Association (SEFA) was formed to focus on refining these standardization efforts on the requirements of the financing industry for direct investment and access to secondary market options like securitization. The interest surrounding these initiatives has resulted in a real increase in the use of SEFA’s work products in the residential arena. According to John Lochner, a SEFA Board Member, standardization at the light commercial level is certainly happening, but is not yet as evolved as the residential product.

There has also been an increase in other targeted efforts at creating models for standardized projects and process. Companies active in the small commercial market are aggressively working towards consistency in documentation and process on the limited deals that they have been able to execute. One challenge to standardization is that there is a misalignment between the solar provider, the building owner and lawyers. In residential markets documentation is simple and offered on a take-it-or-leave-it basis. Building and business owners view a solar offer as a negotiation, which is typically worked into the execution of the project documents, by or with lawyers from both sides. This is a process made less efficient because the lawyers that negotiate these documents on behalf of solar buyer are generally not well versed in solar projects (and often both sides’ legal support is focused on risk management as an absolute concept and not on the materiality of the solar commitment). This void too is being filled. Understanding of the solar market is broadly improving through an understanding of the common tension points within negotiations, allowing for the development of processes and documents that are easily explained and modified – and a few lawyers (and some competing services) have even begun to take responsibility for owning this part of the process and are providing certainty for both the cost and the production of consistent project documentation.

Collectively, these developments are finally producing real standardization across portfolios of commercial projects. This initial success in standardizing the process and documentation will act as a positive feedback loop for the industry – as more projects are brought on line, the ability to standardize, and demand more standardization with potential solar buyers, will naturally increase. The result will be an accelerating reduction in the transaction costs in this segment of the market combined with an expanding pool of potential new investors and lenders.

Tools – Both New and Old – Are Solving the Credit Worthiness Conundrum

ThinkstockPhotos-178976522Very few small commercial projects are associated with a credit rated company as the solar buyer. Defining credit risk, especially in a way that more conservative investors (like banks and other tax equity investors) will accept has also been a consistent challenge for the commercial solar market. This too is changing.

Property-Accessed Clean Energy (PACE) funding allows customers to finance a solar system and pay for it as an addition to their property tax bill. PACE solves the creditworthiness problem by tying the repayment of the solar to property tax, making it much more likely to be repaid than if structured as a separate financing for just the solar property. PACE captured the imagination of the solar industry several years ago, however, Fannie Mae and Freddie Mac, followed by other mortgage underwriters refused to allow PACE funding to gain seniority over mortgages on the associated properties and the concept was dormant over the past few years. Mr. Lochner noted that a number of states have become comfortable with PACE, especially in commercial settings, and that it is a valuable tool where “you don’t have a FICO score or if you aren’t a Walmart.” There are recent PACE success stories, led by Renewable Funding in California and Greenworks Lending in Connecticut, and several other markets have passed PACE initiatives and are poised to grow quickly.

A new credit measuring tool comes from Sparkfund, a Washington, DC based start-up, which developed it’s own software-enabled process for quickly and easily building its own condensed credit scores for small commercial customers. Sparkfund’s program was designed for the energy efficiency market, but can easily be applied to solar financing. This alternative credit review will allow Sparkfund to build pools of credit risk on behalf of solar developers that large capital sources can assess and lend or invest against.

New Approaches Brings New Sources of Money

ThinkstockPhotos-475298006As the commercial space begins to benefit from standardization and better credit management tools, new sources of capital are being attracted to this segment of the market. Zack Lerman of EmPower—a Long Island, New York based solar provider, is seeing a new influx of community banks and credit unions starting to fill the void for both lending and tax equity for small commercial projects. These local financial institutions can lean on long-standing rapports with small commercial businesses, and are increasingly willing to expand on existing relationships to provide financing for well-structured solar projects. Local financiers are very well suited to assess a small commercial solar customer’s ability to pay for the solar facility.

This engagement by local financial institutions appears to be part of a larger trend. Bank of America and SolarCity are working to facilitate smaller and community banks to enter the market by establishing a $200 million program that allows these banks to participate in tax equity pools. The relationship between BofA and smaller investors is facilitated by projects fitting inside a standardized framework while leveraging the local institution’s knowledge of the solar customer’s creditworthiness.

Additionally, several other large investors – including yieldcos, a wide range of financial institutions and some non-traditional solar investors – are exploring financing platforms for the small commercial solar market both as direct investors and with opportunities for aggregating projects and selling these investments into the secondary markets.


Smaller commercial solar is a huge potential, untapped market. Improved processes for standardization, new (or renewed) financing tools, and a wave of new investors are on the verge of opening up this huge opportunity. Because small commercial has been relatively underserved, the available returns for the companies and investors that can win in this market will be better than in any other solar segment, with even larger returns available to anyone that can crack open the secondary market for these projects. The development of this market will have ripple effects throughout the distributed energy and energy efficiency industry as the lessons of how to streamline and standardize small commercial projects are exported to parallel markets.

Topics: Energy Efficiency, Energy Finance, Distributed Energy, Solar Energy, Renewable Energy

Opening the Multi-Trillion Dollar Market for Energy Management

Posted by Elias Hinckley on 6/9/15 5:55 AM

Energy management is one of the most important parts of our changing energy landscape. It is a market made up of part energy efficiency, part Big Data solution and part Internet of Things. Energy management will be a multi-trillion dollar industry that will reverberate across industrialized economies. The competitive advantage in virtually every economic sector will be redefined by companies’ ability to manage volatile energy prices. It will change how we consume energy. Significant reductions in energy use are an obvious outcome (with corresponding pressure on energy companies), but even more exciting are the social and economic benefits of being able to preform significantly more work with our existing energy resources.

With the trends towards corporate resilience, sustainability, and social responsibility, energy management has evolved beyond the realm of engineers and energy nerds. The growth of Big Data and promise of the Internet of Things is giving rise to exciting, easily used, and powerful energy management tools. The energy management industry is poised to explode in size over the coming years –affecting every aspect of the economy.

If this is going to be so big, why is the market so small today?

Historically, only facility managers of commercial and industrial facilities, and a handful of individuals that were exceptionally excited about energy use or its environmental impact purchased energy management tools. As a result, the tools were developed by engineers, for engineers – they provided only data, and that was typically raw and unmanageable, as the target audience was assumed to have the necessary knowledge and capability to effectively make use of, and act on, the raw data. Not only was the audience tiny, but also existing technology did not provide a viable way to bridge the gap between data and useful information or, more importantly, action. As a result, the market for energy management tools has been had only a handful of success stories.

What will success look like?

Even as the tools and interest have matured, clear success stories remain few, while stories of high-profile failures abound. What we can learn from these recent stories of success and failure are that four key characteristics will separate winners from losers. These lessons will provide guidance on what the energy management tools of the future will be, who the market winners will be, and how these tools will eventually change how we use energy.

1) Intuitive. As awareness of energy spreads to a larger and more diverse group of consumers, many of whom know virtually nothing about energy, products and services need to become increasingly intuitive to the non-expert. This can be seen in Nest’s success. Designers focused on making the product intuitive. Other advanced thermostats require complex sets of directions for effective use – Nest was designed for obvious use and integrates easily with existing systems. Opower has similarly tapped into intuitive design. Opower’s detailed reports on behavior changes are simple, obvious, and most importantly are easy to integrate into daily life.

As the target user becomes increasingly less sophisticated on energy usage the products and services must become increasingly intuitive. Look for more “plug-and-play” systems that require limited customization and no training, which will integrate without instruction into all of our energy consuming systems and devices.

2) Low/no time-intensity. Energy management is not a primary focus for all but a handful of people even in today’s changing world (and this isn’t likely to change as market coverage expands). The time commitment required to understand and effectively use energy management products or services must be correspondingly low. Nest achieves this low-time intensity through automation: the Nest thermostat adapts and self-programs. Opower decreases the time requirement for its energy management suggestions by providing short, relevant, and easy tips about how changing a behavior will result in energy savings. The company then recommends fast and easy behavior changes.

Products that have failed in recent years, such as Google Power Meter (Google subsequently bought Nest for $3.2 billion) often required residential users to put significant time into observing and altering their energy usage in order to see results, which most people simply aren’t interested in doing. Businesses have been unwilling to adopt products and services that require more than limited and occasional participation, despite the potential value of full-time monitoring in real-time pricing markets.

3) Value. Energy management customers are a diverse group with varying needs, but in every instance a product must deliver value in a way that is easily recognized by the consumer, and often in multiple ways. A commercial or industrial energy management solution must address the vastly different needs of the CFO (cost savings), the Chief Sustainability Officer (environmental impacts), and the facility engineer (the facility running smoothly). On the residential side, segmenting the market and either choosing a single group to focus on, as Nest initially did, or tailoring your service to various segments, as Opower does, also allows companies to address these diverse needs.

As technology allows more advanced control functions, there are additional layers of value that will be realized. Managing energy consumption provides tremendous access to operational data – from simple aspects like use patterns for appliances in a home, to products like those being developed by ECurv, which combines data collection and controls that can substantially improve efficiency, not just of energy use, but for all of a company’s operations.

4) Desirability. Consumers (including corporate consumers) buy products and services based on appeal. While Nest benefited significantly from customers who wanted to try out a cool new product (developed by former Apple designers), a better example, especially as we factor in changing demographics in the energy consumer market, may be “gamification” – adding a gaming element to new technologies. Simple Energy has been able to increase the amount of time its users spend thinking about energy by introducing an element of competition among friends. These consumers wouldn’t otherwise have cared about how they use energy, but Simple Energy makes the energy usage choices engaging and cool. Eventually an energy management company will create a full-blown Prius-effect, where a product becomes desirable simply for the transformational effect of the product within society.

What happens next?

With today’s information security challenges, consumers have begun to exhibit significant anxiety about giving up information, which will certainly grow as they relinquish control of energy-consuming systems. These concerns have come out in both residential settings, with privacy concerns over something as innocuous as a smart meter, and in commercial settings, where customers have resisted automated demand response because of concerns over the inability to opt-out and the impact on everything from product quality to looking bad in a VIP visit. Much of this will be solved through better tools (to allow simple consumer over-rides), better data and system security, and education. But these concerns will be an important and growing influence the market (a Microsoft executive acknowledged this at a recent EIA conference, noting that with energy data they could determine not just that your television was on, but what program you were watching).

The energy management industry is ripe for the application of design thinking and human-centric design principles – to drive new products that are intuitive and easy to use, while providing multiple layers of value and tapping into the desirability that will excite consumers. As energy management companies capture and evolve these concepts the industry will accelerate into a period of explosive adoption and growth, creating massive potential for market success and public good.

Article republished from the Energy Collective.

Special thanks to my co-author: Therese Miranda-Blackney is currently in Rwanda solving low carbon energy finance for Africa and is preparing to return to the University of Michigan to complete her MBA/MS as an Erb Institute Renewable Energy Scholar. Previously, Therese worked with Deloitte Consulting in energy management and at EnerNOC.

Photo Credit: Data and Energy Management/shutterstock

Topics: Energy Security, Energy Efficiency, Distributed Energy, Energy Management

The IMF Just Destroyed the Best Argument Against Clean Energy

Posted by Elias Hinckley on 5/21/15 9:03 AM

IMF.jpgFor more than a decade, fossil fuel supporters have insisted that new clean energy technologies like wind and solar are far “too expensive” to replace our traditional fossil fuel dominated energy industries. A recent report published by the International Monetary Fund (IMF) has put a price on the direct and indirect subsidies that support fossil fuels as a counter argument to the renewables are “too expensive” message.

The numbers are staggering. The expected subsidy for fossil fuels during 2015 is projected to be $5.3 TRILLION – for one year! This means that approximately 6.5% of global gross domestic product (GDP) will be dedicated in 2015 to just subsidizing our use of fossil fuels. Or as The Guardian pointed out in its summary of the IMF report, taxpayers are paying $10 MILLION per minute globally in subsidies for fossil fuels.

The idea that fossil fuels benefit from both direct and indirect subsidies has been around for years, but analysis has generally been done in pieces (some of it done very well – Nancy Pfund and Ben Healy at DBL Investors published an excellent analysis of direct subsidies in the U.S. a couple years back) or without complete data robust enough to stand up to critique. The IMF report looks at direct incentives, local pollution and public health effects, climate changes, and a host of other costs to arrive at its projected subsidy number.

IMF’s numbers are already being attacked. UK climate economist Nicholas Stern questioned the report for vastly underpricing the cost of climate change, and Brad Plummer at Vox outlined some of the odd items that arguably shouldn’t have been included in the calculation. Regardless of whether the IMF report gets to exactly the right number, the report provides a very credible starting point to argue over the right value to place on fossil fuel subsidies, and will be a baseline to begin rethinking the right pace for our global transition to clean energy.

According to the report, the largest subsidy will be for coal, largely because of the enormously underpriced effects of emissions and other environmental costs on public health and local resources – although the global climate impact is very significant as well. A real world demonstration of these costs can be seen in China right now with its massive build-out of coal generation rapidly coming to a close and the nation making a hard pivot towards clean energy in the face of deteriorating air quality and spiraling health costs from pollution.

The vast portion of the remaining fossil fuel subsidies will be to support petroleum. More petroleum subsidies will be in the form of direct supports, especially among oil producing countries, but the indirect costs were again significant (and curiously the report seems to leave out military costs dedicated to maintaining regular supply of crude to global markets, which have been long identified as a very significant subsidy).

Governments around the globe are struggling with the practical and economic realities of an accelerating energy transition away from fossil fuels, as well as the incredibly challenging politics surrounding these markets. The presence of a well respected financial institution, like the IMF, measuring the enormously ignored, but very real, costs of fossil fuel use will be important in shaping these discussions.

This report alone won’t end the constant claims that clean energy is “too expensive.” There have been remarkable declines in the cost of wind and solar power over the past decade. Add the breakthroughs in storage, electrification of vehicles, and promises of economically competitive new nuclear technologies (which will accelerate when investors have a clear and accurate price target for these alternatives) and the pace of global change could be revolutionary.

By putting hard data on the real price of the energy status quo (a lesson being lived in real time by Chinese authorities facing massive new costs from its overzealous coal fleet expansion), the report allows us to seriously consider the economic reality of the currently distorted and inaccurate marketplace. A better baseline, even a remotely accurate one, combined with the economic reality that clean energy has become stunningly more economic over the past decade, should re-write the fundamentals of the discussion about our energy future.


Topics: Carbon Emissions, Thermal Generation, Energy Policy, Energy Finance, Renewable Energy

North Carolina Utilities Commission Maintains Key Power Purchase Agreement Terms for Solar Investments

Posted by Elias Hinckley on 2/10/15 4:48 AM

Co-authors Jim Wrathall and Jeff Karp

The North Carolina Utilities Commission (the Commission) recently entered an order in its biennial rate proceeding rejecting requests by Duke Energy and other utilities seeking to alter standard contract terms that are vitally important to solar developers and investors in North Carolina.

North Carolina has been a booming market for solar over the last few years, currently ranking third in the nation for energy investment. In February of 2014, Duke Energy issued an RFP, which ultimately committed the utility to purchase $500 million of independent distributed energy in North Carolina. Much of the past success (and future prospects for investment) are founded on the Commission’s standardize contract terms and rates for power purchase agreements, which have provided certainty of economic returns over 15 year time horizons.

But shortly after issuing its 2014 RFP, Duke and other NC utilities sought Commission rulings that would reduce the standard PPA term from 15 down to 10 years, and reduce the eligibility from the current 5 megawatt project ceiling down to 100 kilowatts. Fortunately for solar developers and investors, the Commission rejected Duke’s arguments, finding that the current standard contact term of 15 years and availability to projects up to 5 MW are well supported and appropriate.

The contrast between Duke’s actions before the Commission and its market initiatives seeking to grow distributed energy is reflective of conflict within the utility industry broadly and within Duke itself. Many utility executives have recognized the need to embrace new technologies and business models and support the financial mechanisms supporting their deployment. Others, such as Duke CEO Lynn Good, view distributed generation as a direct competitive threat, and are not hesitating to use public commission proceedings in efforts to protect their profit margins.

We expect this debate will continue and intensify in proceedings throughout the country as utilities continue to react to shrinking revenues and perceived competitive threats. In the meantime, solar developers in North Carolina at least will have a reprieve and ongoing PPA certainty for the next few years.

If you have any questions about the Commission’s ruling, or other distributed energy resources policy matters or transactions, please contact any of the members of S&W’s Energy Finance practice.

Special thanks to Morgan Gerard who assisted in the preparation of this post.

Topics: Energy Policy, Energy Finance, Distributed Energy, Solar Energy, Renewable Energy

Congress Extends Energy-Related Tax Provisions Through 2014 – Punts on Longer Term Certainty

Posted by Elias Hinckley on 12/24/14 1:29 PM

Co-authors Jim Wrathall and Van Hilderbrand

Last Friday, in the final hours of the 113th Congress, President Obama signed into law H.R. 5771, the Tax Increase Prevention Act of 2014. The U.S. House of Representatives and the U.S. Senate passed the measure on December 3 and 16, respectively.

The law retroactively extends several key business tax provisions through 2014 that had expired at the end of 2013. In particular, the bill provides a one-year extension through the end of 2014 for the federal energy production tax credit (PTC) and a developer’s option to pick the 30%investment tax credit (ITC) in lieu of the PTC. Additionally, the extension lengthens by a year the period where a project is automatically treated as having been continuously under construction, which may provide some relief for larger and more complex projects that may not be complete by the end of 2015.

Although this is great news for projects that began construction in 2014, the bill was disappointing to industry advocates who had lobbied for a longer extension to provide more market certainty for companies looking to invest in future renewable energy projects. Most wanted at least a two-year extension to spur investment and create jobs. Instead, Congress merely kicked the proverbial can down the road into 2015, and will likely be in a similar posture this time next year facing a last minute deal to address these same energy-related tax provisions.

A flurry of activity is underway to either meet or strengthen the case for meeting the two different safe harbor tests, with developers either trying to get adequate activity underway to meet the start of physical construction or the 5% of project costs committed to tests in the remaining days of 2014. With only days left in 2014, it would be quite difficult, but not impossible for a developer who has not broken ground to “start construction” and qualify for the tax credit. The simple act of procuring the necessary permits to allow for meaningful on site construction likely limits this option, but there are select opportunities to meet this test in the waning days of 2014. Alternatively, despite very tight timing, there is a real opportunity to get contracts executed to meet the 5% commitment test. In either case, a developer hoping to make use of the extension needs to be aggressive, but careful in meeting these tests before the end of the year.

If you have questions regarding the PTC or other financial renewable energy incentives, please contact any of the members of S&W’s Energy Finance practice.

Topics: Energy Policy, Structured Transactions & Tax, Energy Finance, Solar Energy, Renewable Energy, Wind

How to Prepare Your Solar Portfolio for Securitization – Part Two: Key Challenges

Posted by Elias Hinckley on 10/1/14 4:47 AM

Co-author John Frenkil

As we noted in Part One of our series explaining how to prepare a solar portfolio for securitization, we originally published a variation of this post as an Industry Current in Power Finance & Risk.

This post discusses key challenges for securitizations.

Key Challenges

The solar industry will need to manage several challenges before entering the market with ratings high enough to attract the lowest cost capital (ideally higher than the A to AA range expected of the initial solar securitizations).

· Scale and Geographic Diversity. For securitization to work, assets must hit a critical mass and must be pooled from over a geographically-diverse area, such as numerous states in different regions. This reduces the risk that regulatory regimes and market forces will materially effect the value of solar assets in the pool.

· Standardization of Asset Structures and Documentation. It will be absolutely vital to manage the structure and supporting documentation of assets in a far more consistent manner than has historically been done in the industry (with the notable exception of certain retail aggregators over the past couple of years). Pools will need to be standardized in order for underwriters and investors to have comfort in the underlying revenue streams without needing to consider a diverse range ownership structures and contractual terms.

· Off-take Risk. Most residential solar sponsors manage off-take risk by limiting their eligible pool of potential customers to homeowners with a minimum FICO score. For sponsors selling power to commercial and industrial (C&I) customers, off-take risk is managed in a less standardized way, which makes the C&I solar asset more difficult to securitize. A recent report shows that 25 leading corporations in the United States have installed a total of 445 MW of solar facilities, so sponsors are managing off-take risk by installing solar on multiple sites of large rated and creditworthy counterparties.

· Technology Risk. Distributed solar asset revenue streams have tenors of 15 to 20 years, but there is currently less than 10 years of historical data upon which to rate the performance of most solar panels. Passage of time and improved operating data will enable further de-risking of solar securities.

· Sponsor Risk. Sponsors are still relatively new to the market. Even leading sponsors who are likely to securitize their assets such as Solar City, SunRun, Sungevity, and Viridity have been operational for less than a decade. One way to overcome sponsor risk is to take the approach that Solar City is pursuing as it prepares an initial securitization – i.e., put in place a backup service agreement to ensure that if the sponsor is not able to service its agreements, there will be a well-rated, larger company to take over.

· Market Risk. There is also the risk that solar energy might be less economical than traditional energy sources during the tenor of the asset. Sponsors will need to find ways to convince the capital markets that their solar assets will continue to generate electricity at a price that is competitive to traditional energy, or find other ways to ensure that market risk won’t jeopardize the value of the asset. While hedges on the aggregated pool of assets may offer a short-term solution, the duration of any available hedge (generally 3 to 7 years) will typically be much shorter than the tenor of the asset.

· Regulatory Risk. In order to facilitate the growth of solar securitizations, government agencies will need to update regulations, such as disclosure and liability rules. Also, assignee rights under government energy programs such as net metering rules may need to be updated to ensure that investors in solar securitizations are protected against risk of obligor default. The government may also provide credit enhancement through various methods, including loss reserves, or investments through entities like a government backed “green bank” program.

In our next article in this series, we will discuss issues with standardizing agreements.




Topics: Structured Transactions & Tax, Power Generation, Energy Finance, Distributed Energy, Solar Energy, Renewable Energy

How to Prepare Your Solar Portfolio for Securitization - Part One: Introduction

Posted by Elias Hinckley on 9/22/14 1:26 PM

Co-author John Frenkil

As with our series on Hedging Strategies for Power Contracts, we will offer a series of posts explaining how to prepare a solar portfolio for securitization. We originally published a variation of this post as an Industry Current in Power Finance & Risk.

In the residential solar space, with less than 1% market penetration among credit-worthy homeowners, there is significant room for growth in the industry. The capital added to the market by securitization has, and will, accelerate growth, geographic diversity, and standardization across the solar industry and this will in turn drive significant consolidation among players old and new at all levels of the solar industry’s supply chain. This securitization process and its impact will not be restricted to the U.S. and will expand to markets abroad.

This post provides an understanding for how these securitizations will come together and what some unique challenges are to solar securitizations.

Why Securitize?

As state and federal support for renewables shrinks, the industry must find ways to continue to reduce costs, and access to less expensive capital will be a vital piece of this process. The use of solar securitizations (also called "asset-backed securitizations" or "ABS") will enable the solar industry to access a much larger and more diverse investor base, which will eventually help to reduce the long-term cost of capital to a likely range of 3% to 7%, compared with the 8% to 20% rate required by some project finance equity and tax equity investors in the current market.

The U.S. Department of Energy estimates that securitization will lower the levelized cost of energy by between 8% to 16%. For investors who seek to exit portfolios of solar assets or remove the assets and accompanying risk from their balance sheets, securitization will increase liquidity for solar projects and free-up cash to make additional investments.

How Securitization Works

Securitization gained popularity in the 1970s with home mortgages in the United States and has since expanded to other income-producing assets, including credit cards, shipping containers, and aircraft.

In the most basic form of a solar securitization, the holder, or “originator,” of a portfolio of solar assets identifies and isolates contracted revenues from a series of solar projects. The originator then bundles the contracted revenues into a “reference portfolio,” and sells the revenue stream (but not the physical solar asset itself) to an issuer, typically a special purpose vehicle (SPV). The SPV then issues a tradable, interest-bearing security to investors in the capital markets. The revenues generated by the reference portfolio fund a trustee account that passes through payments, either fixed or floating, to the investors in the new security. These investors are senior to equity investments and for stable income producing assets like solar projects represent a relatively low risk investment.

In order to obtain an investment-grade rating for the securitization, as required by the investors best positioned to buy long tenor fixed-rate securities, such as pensions and insurance funds, the sponsor will need to develop a large enough portfolio with geographical diversity and a credit worthy source of underlying revenue (the buyers of the solar electricity).

In our next article, we will discuss key challenges associated with securitizations.


Topics: Power Generation, Energy Finance, Distributed Energy, Solar Energy, Renewable Energy

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The Energy Finance Report analyzes developments in energy finance as well as provides updates and perspectives on market trends and policies.

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