By Maud Texier.
Hardware costs for solar have substantially dropped over the past years. Solar module prices have decreased by 70% from 2010 to 2012. The attention is now directed towards soft costs and financing. An NREL study published in September 2013 analyzed the increasing share of soft cost in PV projects. Among those “non-hardware balance-of-system costs,” transaction and financing costs are emerging as one potential leverage to reduce the overall share of soft costs. Beyond existing third-party financing, more complex structures are required to cut down those transaction costs.
Innovative models such as crowdfunding along with tax equity for larger projects have democratized investments in renewables. But the price of financing still remains quite high. New financing structures for clean energy appeared since 2012, such as Yieldco, MLPs, and REITS. All these vessels were actually pre-existing on the finance markets but had never been applied to renewables or energy efficiency.
The first yieldco deal proposing renewables in its portfolio was introduced on the market on July 16th 2013 as NRG Yield. This subsidiary of NRG Energy owns, operates, and acquires renewable energy projects and fossil-fueled power plants. NRG Yield initially raised $430 million through a 19,575,000 share offering.
A yieldco is a company whose shares are publicly traded and dividends are passed to shareholders. The shareholders will typically receive monthly dividend from income generated by the portfolio of projects.
Other vessels such as MLPs and REITs are being discussed as potential financing structures for renewables.
REITs (Real Estate Investment Trust) have been introduced in 1960 to increase capital availability for the real-estate market. REITs are required to distribute at least 90% of their taxable income to investors. This income is then treated as a deductible from corporate-level taxes, hence suppressing a large share of total tax. This structure was made to respond to the shortage of capital in real-estate, therefore 75% of REIT assets must be real-estate or cash and receivables coming from real-estate. The portfolio diversity is then limited as the IRS defines what is considered as real-property.
The first MLPs (Master Limited Partnership) appeared in 1980s to avoid double-taxation on corporate income and individual (investor) income. MLP is a public-traded partnership, which is not subject to corporate tax provided that at least 90% of its income comes from interest, dividend, rental, commodity or natural resources. MLPs have been used for all kinds of businesses and projects. However, electricity is currently not considered a depletable resource or a natural resource, hence renewable energy or energy efficiency projects are not eligible for MLP.
Review and definition of both vessels are in progress at the federal level. The IRS definition of real-estate must be modified to include renewable energy asset in this class and to unlock REIT. MLPs need to be reformed to include electricity as an eligible source of income as well. Additionally, current tax benefits for renewables such as ITC (Investment Tax credit) or MACRS (Modified Accelerated Cost Recovery System) are also in conflict with those systems. Due to the low level of tax generated from MLP and REIT, the tax benefits cannot be applied. An alternative would be to integrate projects whose tax incentives have already been consumed. In this case the portfolio will be only composed of existing projects.
As of today, no ruling enables to adapt those mechanisms to renewables and alternative energy. A bi-partisan bill “the Master Limited Partnership Parity Act,” is still in the senate committee. The IRS has not statuted either on the adoption of renewable energy assets as real property for REITs.
Both MLPs and REITs would give access to substantially lower financing cost, down to 5-6% interest rates, compared to tax equity (8-9%) or private funding (12-14%).
Another alternative is securitization achieved by SolarCity on November 2013 with a $54.43 million financing for solar projects at a relatively low interest rate of 4.8%. The bond will mature in 2026. The securitization typically enables the backing of a large portfolio of assets or projects by small investors through a debt process. The loans are backed by a bank through a Special Purpose Vehicle which issues securities to investors against cash-flow from the portfolio (PPA, etc..).
Crowdfunding also has been a growing segment to finance renewable energy projects. It enables investment from many small, private investors into companies or projects. In April 2012, the JOBS act kick-started crowdfunding by facilitating the process of raising funds. The act facilitates the funding of companies or projects, capped at $1 million, by providing a return on investment.
Overall, the purpose of those mechanisms is to dramatically reduce the cost of financing clean energy projects. As new markets such as solar are maturing, investors are getting more and more confident in those assets and in their cash flows. Also, the ITC is scheduled to be reduced from 30 to 10% at the end of 2016. This missing money will need to be balanced by lower costs. Finance engineering innovation is now critical to unlock clean energy projects on a large scale. This will also require regulation changes and standard processes introduction.
About the Author: As an engineer, Maud dedicated her efforts towards the energy market. She hails from the oil & gas industry, and started her career working in electricity markets. As an analyst on a power trading desk, she studied the market mechanisms that can develop new demand-response models. She has been scouting new technologies such as renewables, storage or energy efficiency for a large power utility in Silicon Valley before joining a solar start-up.
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