Tax Equity & Financing in the C&I Markets
Katherine Demetre | Infocast Events
Andrew Gilligan, Senior Director, Investments, SOLSYSTEMS
Andrew Gilligan leads Sol Systems’ solar project acquisition and funding efforts, working with financial institutions and long term asset owners to structure financing for the acquisition and construction of solar projects.
Over the past five years, Mr. Gilligan has overseen investments for over $300 million of equity into solar projects in the non-residential distributed generation space throughout the U.S. Since 2012, he has successfully increased the amount of investor capital deployed into qualified solar projects by an average of +47% each year.
Prior to Sol Systems, Mr. Gilligan completed his education at Georgetown University, where he helped launch Georgetown Energy, a solar energy consulting group.
Mr. Gilligan holds a B.S. in Science, Technology, and International Affairs, specializing in Energy studies, and also a certificate in Business Diplomacy from Georgetown University, where he graduated magna cum laude.
Infocast: Please briefly describe how Sol Systems is playing in the Behind-the-Meter C&I market?
Andrew Gilligan: Sure. We are a developer and financier of these projects. So we will pitch customers. We’ll go to customers that are using electricity and propose that they enter into a power purchase agreement with Sol Systems. If we’re successful, we’ll then build and finance the project and work with investors to get capital for those assets. We’ll also sometimes buy other Behind-the-Meter projects that developers have started to develop and will take over from them. If potentially they need help finishing development or just a developer with the larger balance sheet, and then finally we do often aggregate solar ability credits from a lot of Behind-the-Meter C&I projects across the East Coast really. So really just focus on how we can deploy more solar in this Behind-the-Meter space through development and then your own developer and other developers projects financing those projects.
Infocast: For this market, what business models and strategies are you seeing market players deploying now and what’s the rationale for it?
AG: The development model is one that’s fairly straightforward. It has been around for the past decade in terms of offering a power purchase agreement to Behind-the-Meter customers that have electricity and putting solar on the roof or on their parking lot. I think the different business strategies has been what you’ve seen frankly probably fail is some larger companies like SunEdison and Solar City tried to become national developers and national players and when all the RRPs and being 15 or 20 markets at once, take over a large share of the market and then probably what’s had more success frankly in terms of profitability is developers that are offering the same type of product. So it’s still just a power purchase agreement to save the customer maybe 10% to 15 % of electricity bill but doing down more of a local or regional basis and only focusing in one or two core markets and staying nimble installer. So there are two different ways to do solar development, you know, try to become a national large player versus a local, regional one even though you’re offering similar products. Then you also see some developers really focused on, “Hey, I’m only interested in getting power purchase agreements and projects that I can finance,” or some developers focusing on hosts customers that will buy the system or maybe smaller deals that are harder to finance but usually higher margin. So you can either go after the deals that are going to be easier to finance or maybe some more off-colored ones but then you can create higher margin. Those are few different things that are happening in terms of business models.
Infocast: Right, and PPAs, they’re seemed to be kind of the most popular still, right?
AG: YEs, I definitely would agree with that. PPA is the most popular as opposed to cash purchases and then there’s community solar and virtual PPAs or contract for differences. Essentially they are still the idea that a customer is signing up to buy credits or electricity subscription in a multi-year period or a longer term, and then you can finance those cash flows but community solar and virtual PPAs such as contract for differences allow you to do that without having to have a solar necessarily located on campus right or adjacent to the user of electricity. So that allows potentially for more customers to use that model.
Infocast: How do you see the market landscape shaping up in the future; consolidation of players, still fragmented with lots of smaller local players, a market dominated by utilities with existing customer relations or something else?
AG: A couple years ago, you’d have thought the consolidation was the natural answer as, you know, the SunEdison and others, the world got bigger and there was just larger and more sophisticated developers but that hasn’t really proven to be–the market is not getting any more consolidated right now. You do have some national developers out there but no means are there two or three developers that are dominating the C&I solar market. Rather, you have a number of tens of developers frankly that can achieve success. For the near-term that’s how the market will remain relatively fragmented with some players such as the Sol Systems that will be able to bid on national RFPs but I don’t think those smaller local players are going away. If anything they’re having getting more success and then more access to financing. So I don’t think consolidation. In terms of the utilities, I also don’t think that the utilities are going to take over because they have these customer relationships. A lot of times utilities end up only in some solar C&I but it’s usually only after solar developer has actually won the customer over and got them to sign the contract. So while utilities are certainly active, I don’t think they can succeed without more nimble solar companies that are better at selling to customer.
Infocast: How do you think that the US 201 Solar Trade Case is currently impacting the market?
AG: Not negatively, certainly whenever it was first announced that Suniva were lobbying the ITC and then the initial positive ruling from the ITC that the price of panels has gone up from mid-30s. Thirty cents is a lot for solar panels in Q2 to now mid-40s, even high 40s. So, you know, if you’re developing a C&I solar project and your margin is 15 to 20 cents a watt and suddenly the price of panels has gone up 10, 12 cents a watt you’re losing half your margin if not more on some of these current projects. I don’t think that’s been good for the profitability of developers. Furthermore it’s hurting some deals that are now getting ready to close because panels may or if they’re not the U.S. already are knocking to get here by the end of the year, there’s uncertainty as to in the structure who wears the tariff risk. So if the panels get delivered in January and President Trump puts a tariff on all panels starting in January who takes on that price increase, so it’s also making it harder to close deals that don’t currently have panels. So it’s all those things higher prices and market uncertainty or transactional uncertainty. I think you’ll see you know less megawatts get done because of it and probably developers, you know, they have not a–not a successful year because of it.
Infocast: If tariffs are imposed, how is that going to impact the market in the future? And you talked a little bit about this year and in early 2018 but in the longer term, how do you think it can impact if tariffs are imposed?
AG: If they are imposed then obviously the problem of higher prices does not go away and what I think will happen is you’ll see retreat from some of the newer markets we’ve been developing in such as especially in the Midwest where solar costs have come down far enough that Solar is now cost competitive with other sources generation like gas and wind. You’ll see a retreat from those markets because with the tariff and with the economics of solar don’t work and you’ll see a lot of developers focus on Massachusetts or DC or the Northeast, mid-Atlantic, maybe California- some states that have incentives or higher electricity prices or can be a little more resistant to higher costs. So that’s less project and a bit general less solar will happen, right? I mean it will certainly hurt the market definitely in the utility scale. Residential is probably the most protected and in some ways given their margins but it will cause a reduction in the number of megawatts deployed and a retreat away from the markets that are a little tighter and on price and newer and a retreat back to some of the–just a few olds state markets.
Infocast: Do you see or expect a shift to happen to more system purchases rather than PPAs in the market?
AG: Yes, I do. I think somewhat in residential, you’ve certainly seen it. As the cost on a dollar per watt basis come down for solar is no longer intimidating to buy, 100 kilowatt system doesn’t cost $500,000 maybe now it costs $150, $200,000 and so it’s not as a big expense for companies and they can certainly finance it especially we’ve seen a lot of municipal entities and municipal utility or municipalities that have access to low-cost financing, look at the economics and think, “Hey, it’s actually a pretty good deal just for me to raise some issue bonds and raise money at a low interest rate and then use those proceeds to purchase a solar system. It looks pretty good.” So I do see a trend towards that. All I want to say the majority of deals we still expect to be PPAs especially once you get above 1 megawatt or so. But I think more and more there is a market for customers just be comfortable with the technology, the cost to come down, and see that there’s a benefit so especially sub-1 megawatts deals you see more cash purchases nowadays than you did a couple years ago.
Infocast: Do you see more sponsor equity coming into the market?
AG: Yes, there’s already a lot of sponsor equity frankly. The sponsor equity by itself has never been the constraint. I’ll say tax efficient sponsor equity is sometimes low limited. Also tax efficient sponsor equity that takes a 35, 40-year view in terms of predicting revenue from the system. So post PPA still building in some healthy assumptions about revenue after the PPA expires. Those type of sponsors are still valuable because they’ll allow you to be competitive and they can take on some of the depreciation losses and value post revenue but generally there is a lot of sponsor equity and more and more continues to come in the market because whether it’s infrastructure funds that have been more conventional fuels or oil and gas historically or insurance companies or like the stable cash flows. There are a lot of investors out there with a lot of money that now see solar as a market that’s big enough to attract their attention and frankly the investments has done well, the technologies works, the customers pay their electricity bills. So there’s definitely interest in owning these assets and owning the cash flows.
Infocast: Is the flow of tax equity into the market sufficient to meet the demands of the moment?
AG: Yes, it is at this moment. Historically there’s been less tax equity than sponsor equity of course and so that has been more of a limiting nutrient in terms of the capital stock for the financing but that’s no longer the case, partly because these banks and insurance companies A, their solar tax equity investments have done well and so usually they have more money to spend, the current players and want to keep growing their scope of business and then B, other entities have seen success and have got comfortable with solar investment class and so you’ve had new tax equity participants come in to the market over the past couple of years especially with the ITC extension back in the 2015. And so there’s actually a good amount of tax equity available right now. And so we’re even seeing tax equity investors who a year or two ago wouldn’t have done this type of project or would want more scale before they sign up or are saying, “Okay. We’ll accept that.” And, “Yeah, we’ll do this size project.” So there is a good amount of tax equity available currently in the market.
Infocast: Is credit worthiness an ongoing challenge in the market? Do you see any solutions developing to tackle the challenge?
AG: Credit worthiness for the host customer is a challenge and understandably. If you’re banking on 20 years of someone paying the electricity bills, it’s fair to expect that they have good credit. I think solutions are solutions being developed. I think that the most obvious one is almost a chicken-egg problem. Once you get operating data about customers paying their bills for solar C&I projects then that becomes easier to convince financing about projecting out expected default frequency et cetera but obviously to get that data you need to be able to build and finance the system. So a little bit of chicken and egg but I think there is now at least several portfolios with customers that don’t have a publicly available investment credit rating that are doing well and have been able to receive project finance. So there’s a good data points that, you know, lenders are still looking for some credit but maybe half of your portfolio or even doesn’t have to have a publicly rated investment grade credit rating as long as you can still demonstrate some strong financials. So I think there’s progress and there’s no magic solution or, you know, magic silver bullet but there’s this continual progress. They’re getting more comfortable with credits non-rated. So then of course the things like pace and other mechanisms that can work well for customers with poor credit but I think it’s–long-term, the best thing is just to continue to get lenders and financier is comfortable with non-rated entities and that’s happening albeit somewhat slowly.
Infocast: Tax Reform, it’s been kind of a newsworthy topic this entire year. If we do get tax reform, what kind of impact do you see on the market?
AG: Yeah, it’s a good question. I think we do probably expect tax for having at this point but who knows? I don’t think it will have too big an impact. I mean the way when areas people are concerned and is lowering taxes generally is good for business at very fundamental level and, you know, you won’t be taxed as much on the income from your–from your solar project. But, you know, there is some thought that that drives up the tax equity market a little because if coming to paying less taxes and they have less and less dollars they need to offset with ITC investments. As I said, we think the tax equity market is currently oversupplied and there’s a lot of interest in still invest in solar so we’re not too worried about that and then the other concern is, you know, in the actual models or the actual structure of these deals, the tax equity investor returns won’t be as strong because the depreciation losses they receive won’t be as valuable. If you go from 35% to 20% corporate tax rates and, you know, a million dollars the depreciation losses goes from worth 350K or 200K but I think again like there’s enough juice new deals, enough interest in tax equity that you can still get the returns to work for everyone. And as long as that–and I’ll say, this is all [inaudible] [0:16:11] as long as the actual investment tax credit is 30% and that tax rates stay in place and most people assume it will since there’s bipartisan support and it’s getting phased out over time, as long as they’re in place actually we’re not too concerned about tax reform. And I think that the industry will handle it fine.
Infocast: Do you want to share anything else about Sol Systems or anything that I haven’t given you the opportunity to share?
AG: It’s interesting time for the industry with, you know, a lot of growth the past couple years but now some political headwinds via tax from the lesser extent but do yarn first stuff going on obviously the module situation and then the fact that a few larger companies maybe haven’t succeeded at least in residential and C&I as originally is forecasted a couple years ago. So despite all this growth, there’s I know, you know, each developers aren’t having, you know, doing amazing right now. So it’s going to make sure you time to figure out what type of developers do well in which type of market. And I think everyone assumes the market will overall grow but who are going to be the winners within that? So it’ll be interesting to see.