Energy Finance Report

Secondary Market Looks for New Tricks After Yieldco Hiccup

Posted by Administrator on 2/23/16 11:37 AM

Republished from Solarplaza by Jason Deign & Susan Kraemer

Solarplaza.jpgUS investors are questioning what measures could stimulate the secondary market for PV now yieldcos have lost their luster. Solar investors are looking for new formulas to boost the secondary market after yieldcos, the most popular vehicle to date, took a beating last year.

“In the US market you are limited to how you can access the secondary market because of the tax recapture rules,” said Elias Hinckley, who leads the energy group at law firm Sullivan & Worcester’s Washington DC office. These “can claw back the tax credits claimed on the project if it is sold within the first five years of operation,” he said. “This limitation means that transfers are all of equity interests that represent the later years of operation or debt.” Consequently, “we have seen some securitized debt transactions and some similar structures into the private markets on the debt side for both utility-scale and residential portfolios,” Hinkley said. Similarly, “we see a healthy amount of activity in the private markets for the equity pieces, but other than the yieldcos not much on the public market side." 

"I do think there is a huge amount of available institutional capital looking at these kinds of assets because the profile of a proven operating solar asset is a very appealing stable infrastructure investment.

Such investors “are still learning the market and looking for consistency in asset pools at scale,” said Hinkley. Standardised contracts could be an important way to achieve that consistency, according to Jigar Shah, founder of SunEdison. "Secondary markets only happen when there is a certain standardisation that occurs with projects," according to him.

Shah’s current firm, Generate Capital, aims to standardise financing documents for sustainable firms so it is easier for secondary market players such as insurance companies, university endowments and general pension funds to become involved. That could cut the cost of solar financing, since secondary investors typically charge less for finance.

And by restricting the loans to just one standardised contract, regardless of technology, Generate Capital could also make a large group of sustainable startups more attractive to a secondary market, with its lower cost finance. It can do this by conglomerating multiple smaller loans with the same standard terms and conditions. In order to sell seamlessly into a secondary market, loans have to be standardised with no variations.

"You might be issuing million-dollar loans in a primary market but the secondary market generally is buying $100 million at time, so they are buying 100 of your $1 million loans at a time," Shah explained. Not everyone is convinced, however. Benjamin Cohen, chairman and chief executive of T-REX Group, a renewable energy finance analytics vendor, said: “In theory it would help, but nobody’s going to adapt [their contracts].

"SolarCity is not going to change their standard documentation to be the same as Sunrun.

Instead, Cohen said the use of technology platforms could help bring greater transparency and efficiency to secondary market transactions. T-REX Analytics, for example, helps fixed-income investors analyze, assess and price the risk associated with renewable energy investments. Nevertheless, Hinkley said there could still be a role for standardized contracts. “In the small utility style, commercial and industrial distributed solar, and virtual power-purchase agreement markets it would help a great deal,” he said.

“Consistency will lower transaction cost and make it easier to consolidate pools of assets for future investors. We spend a lot of time working towards this consistency, but so far success has been limited to relatively small pools of assets.”

Solarplaza organizes international high-level conferences and exploratory trade missions in both established and emerging markets across the globe. With a track-record spanning five continents, twenty-four countries, thirty-seven cities and a total of over seventy events Solarplaza is a pioneering industry inspirer

Elias Hinckley and Benjamin Cohen will both be speaking at the Solar Asset Management North American conference, on March 16 and 17 in San Francisco. Register now for your early bird discount.

Topics: Solar Energy, Solarplaza, Solar Rooftop

Solar Storm- Net Metering in Nevada

Posted by Joshua L. Sturtevant on 1/29/16 2:13 PM

Co-author Morgan M. Gerard

Battles over net energy metering (NEM) policy are currently raging nationwide, and are only expected to intensify in the face of the recent investment tax credit (ITC) extension. NEM, a state statute-Solar_Storm_.jpgbased policy incentive that allows small generators of electricity to sell their excess generation into the grid typically subject to an overall cap, has been a great contributor to the proliferation of residential rooftop solar. It has also stimulated commercial and industrial-sized facilities in some locations, particularly those jurisdictions that allow for the slightly more complicated ‘virtual’ net metering approach. 

However, as solar has gained greater market penetration, utilities have increasingly pushed back against NEM. As with many issues, the arguments on both sides of the NEM debate are complicated. Opponents, typically utilities, claim that NEM policies shifts pro rata grid costs from solar customers onto the rest of their rate-paying base. They also argue that the rates being paid to the small producers are too high. NEM advocates, on the other hand, claim that these arguments are overblown, and are merely smokescreens promoted by utilities more worried about embedded monopoly powers than pro-rata grid costs.

Even in jurisdictions where support for the practice remains, such as New York and Massachusetts, debates are occurring over the value of solar, grid cost sharing and caps, suggesting that the net metering of today may not look like the net metering of tomorrow. In other places, proponents are undermining net metering policies by using a ‘death by one thousand cuts’ approach, where benefits are chipped away to the extent that policies are rendered functionally moot.

Perhaps nowhere has this latter approach more prevalent in recent times than in Nevada where clashes have occurred at the legislative level, in front of the Nevada Public Utilities Commission (NPUC), and have more recently spilled over to the courts.  After the NPUC surprisingly voted to enact changes which would essentially render the current NEM regime unviable, residential solar customers filed a class-action law suit on January 12 against their utility alleging, among other things, that NV Energy is seeking to monopolize energy production by crippling the solar market. They also allege that rising rates have caused net metering customers to experience a 40% cost-hike. 

How did the debate over NEM in Nevada get to this point?

Nevada has been one of the fastest growing solar markets in the country in recent years, particularly in the residential space. Rapid growth allowed the state to reach its 3 percent solar net metering cap in August of last year, leading the NPUC to extend payments under the old program until the end of 2015 to buy time to evaluate next steps. However in December, the NPUC voted to cut net metering payments by half while simultaneously raising the fixed fees for solar customers to around 40% by 2020. Additionally, the NPUC is applying these changes retroactively, which distinguishes actions in Nevada from those in other states that have altered their net metering, and means these new prices will apply not only to new solar customers, but to existing customers as well. 

This decision was met with significant backlash by local solar companies, customers and advocates and even gained the attention of the three major Democratic candidates for the 2016 presidential election. As a result of the decision and a general lack of support for solar, three major solar companies have decided to pull back significantly from Nevada. For example, Vivint suspended its plans to expand into Nevada right after the August cap was reached, but continues to release statements condemning Nevada’s continued actions as a barrier to it ever deciding to reenter the state. SolarCity announced on January 6, 2016 that it was ceasing operations in Nevada, thus eliminating more than 550 jobs and closing its newly minted training center.

Sunrun has also declared its exit from Nevada citing the actions of Nevada politicians, the NPUC and NV Energy. Additionally, on December 24, 2015, the Nevada Bureau of Consumer Protection filed a petition with the NPUC, explaining that the new ruling “is not consistent with the Governor's stated objectives of SB374 or the governor's initiatives and focus to increase jobs and employment for Nevada residents. Now, solar customers have joined the fight by filing the class-action suit with similar allegations against the NV Energy.

Potential Ripple Effects

In the wake of the extension of the ITC, many believe that debates in the solar space will take on a distinctly local flavor in the years to come. In the absence of an extension, it was likely that solar projects would have had difficulty attracting low cost capital.  However, with federal incentives secured, many believe that solar in general, and the residential market in particular, are set to explode over the next few years.  Although the credit extension will likely positively impact solar development, it has also made battle lines clear and has provided ammunition for opponents of rooftop solar who will now strategically pick at other incentives, arguing that the extension has rendered them unnecessary. Nevada provides a good, early example of this.

It is also true that as more distributed solar comes online, grid management policies will need to be reexamined to ensure both fairness and continuity of service. Recent battles at state utilities commissions have resulted in favorable outcomes for proponents of solar. However, if the NPUC ruling is a sign of the times, it is possible that it could be a bumpy road ahead, particularly in states nearing their NEM cap. 

Topics: Distributed Energy, Solar Energy, ITC, Net Metering, Net Energy Metering, Investment Tax Credit, NEM, DG, Distributed Generaton, rooftop Solar, Rooftop PV, NPUC, Solar Rooftop, Solar Roof, Nevada, NV Energy, Net Metering Battle, Nevada Public Utilities Commission

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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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