Jump-starting the solar undead and improving returns with debt

Debt can be one of the most challenging pieces to secure in the capital stack, and especially for solar projects under 1 MW. This is because renewable commercial banks see these deals as too small, regional banks have investment size and tenor limits that make financing difficult if not impossible, and local banks have limited experience with solar.

 With these obstacles, it should come as no surprise that new solar debt options would be welcomed by the solar community. And, since we launched our $100 million debt fund, we have been rewarded with a wide variety of projects that are strong candidates for debt.

A number of new opportunities and operational projects are in the usual domestic markets, but some strong opportunities for debt have come from less expected places like Ontario and the Virgin Islands — and there are even several safe-harbored 1603 projects. Here are some reasons why the project opportunities are surfacing (or re-surfacing) and how the availability of construction and long-term debt contracts are injecting new vitality into both new and older solar projects.

With a 45-55 cent/kWh feed-in tariff from a credit-rated offtaker (the Ontario Power Authority), Ontario projects are large (500 kW – 15 MW) and cash-rich. Because there is no federal ITC, there is no subsequent need for a tax equity investor. With our debt tenors, which are as long as 18 years, debt financing becomes a straightforward structuring option. Moreover, developers who have sufficient sponsor equity are able to keep a stake in their projects.

Like Ontario, the Virgin Islands offer a feed-in-tariff program with a credit-worthy offtaker. The high FIT rate also allows for cash-rich projects, and cash-rich projects can be levered up more than other projects. For example, we have seen projects in the V.I. that may be levered up, with up to 70-80 percent of the capital stack coming from debt.  This contrasts with less lucrative projects which may only achieve 50-50 debt to equity ratios — and that is assuming they can get past the financing struggle between debt providers and equity investors who compete for seniority in project cash flows.

Last, but not least, we are somewhat amazed to report that we are seeing a number of 1603 safe-harbored projects. Some of these projects were recently built, some are seeking construction financing, while others have recently received Notice to Proceed.  The 1603 projects have a few disadvantages, including higher costs due to outdated panel pricing, lower electricity production compared to projects built with today’s higher-rated and more efficient panels, and risks associated with the possibility of Treasury project cost scrutiny. However, without the need for tax equity, these deals are easier to structure, which makes them well-positioned to take advantage of debt financing and the abundance of sponsor equity. While we hope that these 1603 projects find financing and a 20-45 year lifetime of solar generation, it seems that 2014 will mark the year when 1603 project developers truly have to find sources of tax equity for their new pipeline.

In addition to the more surprising opportunities mentioned above, the new debt options are improving IRRs for new and operational projects and they are also solving critical financing issues for a variety other projects in the U.S., including those that require a tax equity investor. We are currently in the process of conducting diligence on projects to fill a $100 million debt fund.