Large-scale solar sector players in the US have until recently relied on a mix of funding from government and banks to go with the money they contribute from their own pockets. But times are changing as the sector searches for around $6.9 billion a year in financing annually until 2020, according to research from Bloomberg New Energy Finance in the US.
While solar PV moves closer to grid parity, third-party financing is altering the landscape and a steady flow of institutional players are entering the fray. And the refined business model, which has seen leasing options become popular as customers look to avoid upfront costs, is seeing new financing vehicles take over, including project bonds.
The US solar sector has experienced dramatic growth over the last few years supported by plentiful cheap finance. This low-priced capital has meant asset financing for solar PV projects in the US reached a record $21.1 billion last year. But the two major sources of this finance are about to dry-up. The first is the cessation of the US Department of Treasury’s 1603 'cash grant' program and Department of Energy 1705 loan guarantee program. The second is that
Europe’s debt crisis is piling the pressure on European banks, long the biggest funders of clean energy projects in the US. And with Basel III regulations edging closer, the ability of banks in every corner of the globe to offer long-term asset financing will be reduced.
So given that the US government has scaled back incentives for the solar sector to just the 30 per cent investment tax credit and the eurozone financial crisis is refusing to drift calmly away into the night, innovation in financing has become crucial.
Welcome to the sector
While the banks may be offering more unfavourable terms in terms of loan timing, loan size and wider spreads, interest rates remain near historic lows, drawing institutional investors into the sector as they seek stable, long-term assets and diversification. Pension funds*, insurance firms and investment banks are getting more involved, the latter’s enthusiasm highlighted by last week’s announcement from Goldman Sachs that it was looking to be a party to $40 billion worth of investment in clean energy (which will include investments in solar).
Yes, the Goldman Sachs decision may have had a hint of PR point scoring about it, but the world’s most closely watched investment bank labeling renewable energy as one of the biggest profit opportunities since emerging markets stood out in 2001, says a lot.
Goldman isn’t the only major Wall Street player getting engaged in the sector, with Warren Buffett also having significant links to solar after a utility backed by the world renowned investor (MidAmerican Energy Holdings) bought a $2.4 billion, 550MW solar farm in California last December.
MidAmerican’s financing of the project was no doubt helped by the Buffett name, but how it successfully went about securing finance raised both eyebrows and sector hopes. A $1.3 billion bond offering with the first part of it, $700 million worth of bonds, heavily oversubscribed. Indeed, it was oversubscribed to such an extent that the company chose to lift the first raising to $850 million and could really have raised it by more.
Beyond the Buffett example of project bonds, other new financing plans have seen the use of:
-- Asset-backed securitisation;
-- Public market vehicles;
-- Long-term equity stakes from pension funds;
The sharp declines in solar costs and a greater understanding of the industry are also significant factors in driving wider interest in the sector. And as the industry becomes simpler for investors to understand, the future for financing is destined to become much more complicated as illustrated in this Bloomberg graphic below.
Potential evolution of US solar financing. Source: Bloomberg New Energy Finance.
Similar to the strategy employed by AGL here in Australia for its wind farms, energy companies and power project developers are stepping back from long-term ownership of power projects. Instead they provide technical and management expertise to convert a potential power project from a high risk to low risk proposition and make their money from development fees and on-selling finished projects to pension/superannuation funds.
These pension and mutual funds are uncomfortable with high levels of risk, but at ease with tying-up large amounts of money in long-life assets where they provide stable long-term incomes that fit the needs of superannuants.
The end result may be a more complicated assortment of financiers, but it ultimately provides lower costs of capital. According to Bloomberg this should enable the US solar sector to remain robust without government cash grants and loan guarantees.
*Pension funds are the US equivalent of super funds.