Deal Reporter
The scheduled step-down of the federal Investment Tax Credit (ITC) that supports financing of US solar construction is pushing many development-stage solar projects to consider selling over the next year, according to several industry executives and bankers.
Utility-scale projects should already be on the market, while commercial and industrial projects could come available at the end of 2015 or early 2016, according to Stanley Chin, CEO of Clean Focus. “We’re already starting to see it,” Chin said. His company focuses on co-development, investing in late-stage or early construction-stage projects, typically between one megawatt and five megawatts (MW).
According to industry executives interviewed by Mergermarket, the cost to acquire development-stage projects in North America can range from as little as three cents per watt to north of USD 1 per watt, based on the prevailing conditions and incentives of a specific market. Massachusetts, for example, has rolled out significant incentives and commands higher premiums, while those with low rates in power purchase agreements (PPAs), such as California, fall to the lower end.
Under current law, the ITC provides for a dollar-for-dollar reduction on income taxes for eligible expenses on solar projects. If the projects are in operation by the end of 2016 the credit is 30%; if a project comes online after that the credit is 10%. It is a double-whammy for developers, a banker said, because projects will be more expensive and there will be less opportunity for tax equity investors, who are able to claim the tax credits, which aren’t useful to operators of a project that just went online and is likely not generating much revenue at that point.
Developers who do not think they can complete construction of a project in time to receive the full credit will be the most logical targets, particularly smaller developers without track records or ample capital. The banker said valuations will depend a lot on how clear a path there is to a power purchase agreement (PPA) for the assets. Some development-stage projects are shovel-ready, while others are “not much more than land and an idea.”
Innovative Solar in Asheville, North Carolina, is actively marketing some 500 MW worth of projects, according to CEO John Green. He said the projects are all shovel-ready and pointed to several recently sold projects that quickly secured power purchase agreements with utilities such as Duke Energy (NYSE: DUK).
"The people buying now, they have to know what they are doing," Green said. "A utility-scale project takes a year to build and when you throw in the time to close and giving yourself a cushion at the end of next year just in case you have delays, these really need to be sold in the next few months to be pretty sure get the full ITC."
Beaumonth Solar is conducting a sales process, according to previous reports from this news service. Beaumont has 35MW of operating projects and a backlog of another 60MW, according to a source familiar with its plans.
8minutenergy renewables President Tom Buttgenbach, whose company buys utility-scale, development-stage projects, said it is not uncommon for developers to back out of projects because they feel timelines are too tight, often for reasons beyond the ITC step-down. 8minuteenergy bought out a partner on a solar project last year because the partner was skittish about having the project completed in the timeframe called in for in the PPA.
“Some of these projects out there, people really need to get moving on,” added Charlie Kuffner, COO of developer Clean Power Group. “It’s a lot like the 2008 rush” when solar tax credits were also threatened and a similar buying binge began. The credit was later extended through the end of 2016.
The urgency to build also comes as yieldcos — publicly traded companies holding renewable and other assets aiming to produce long-term steady cash-flow — are lowering the cost of capital for solar projects and providing paths for developers to monetize their projects quickly after completion.
“The yieldcos need to be fed and they have cheap capital to make projects happen,” a second banker said.
While the yieldcos would not directly buy development-stage assets, companies such as SunEdison, NRG and others that need to drop down assets can acquire developers with both producing assets and projects to put into their pipelines. Coronal Group, which does not have a yieldco but will consider such an exit in the future, according to President Ed Feo, acquired developer and operator Heliosage earlier this year for both its pipeline of development-stage projects and its operating assets.
Adam Boucher, CEO of solar thermal developer Promise Energy, said he expects that many commercial and industrial-scale solar developers are already making plans to raise capital to finance a building binge next year. Their funding will likely be a mix of sponsor equity, tax equity and debt at the project level.
Industry executives and bankers are hopeful that either the 30% credit will be extended past 2016, a provision will be added only requiring that construction of projects begin by the end of 2016 to qualify, or that the step-down is reduced. But there is widespread agreement that solar developers cannot afford to wait and see if changes will happen.
“I can’t see anything happening until close to the election next year, and November 2016 is obviously too late,” said the first industry banker. “I am seeing some nervousness among developers. We, bankers seem to be certain it’s here to stay, but what [the tax credits] will look like in a couple years is a big question.”