American Idol Eat Your Heart Out: DOE Gets Wonky With Solar “Finance Idol”
Back in June, the Department of Energy convened 700 participants at their “SunShot Grand Challenge: Summit and Technology Forum” held in the Denver Convention Center. This event was meant to be the first in a series of DOE “Grand Challenge” events, with the summit focused on the DOE’s solar power capacity growth and cost reduction targets driven by their SunShot Initiative.
At the event, the DOE admirably got a little cheeky with their deep dive session centered on driving down solar PV financing costs, nicknamed “Finance Idol.” The DOE invited about 30 applicants to give three-minute “elevator pitches” to a panel of solar finance industry judges in a fun atmosphere in front of an audience of about 200. The panel consisted of First Energy Finance’s David Arfin (a father of the now ubiquitous “solar lease”), Dave Graham, founding partner of GreenStart, and Nat Kreamer, CEO of Clean Power Finance.
Obviously Arfin, Graham, and Kreamer were “Idol” judging neophytes, having not dutifully adopted the practices of the legendary “Idol” judge Simon Cowell. (In other words, they were consistently respectful, honest, and helpful in their quick assessments, completely failing to belittle or bring participants to tears.) Even without the spectacle of grown-ups crying, it was an entertaining and informative event for those comfortable with financing wonkiness.
Three solar PV solution areas seemed to be common:
- Improving accuracy in pricing of risk. Simply put, investors currently require returns that are too high for the actual low risk that solar PV presents.
- Improving agency alignment. Deals are often killed because the parties do not have the same return on investment targets and participation timeframes, nor alignment with current business models.
- Improving liquidity and lowering cost of capital. Distributed solar PV is mostly financed by developers and tax equity. In other industries, capital is usually accessed from broader capital markets.
Here are two intriguing pitch topics:
1031 Like-kind Exchange
What is it? The U.S. Internal Revenue Code section 1031 allows trading of like-kind assets (like a building for a building) within 180 days of initial sale without absorbing any capital gains taxes up to the equal value of the assets traded. Today, owners of real estate as well as oil, gas, and mineral extraction interests and equipment use 1031 exchanges. Exchange markets exist that help asset swappers find each other.
Why is this meaningful for solar? Many of the funds that provide financing behind newly popular solar leases for residential projects and increasingly so for commercial building projects are set up to accommodate both developer and “tax equity” investors. (See my prior blog) for more tax equity details). In many of these structures, the majority ownership of the system either “flips” back to the developer or is bought-out from the tax equity investor by the developer after several years. Developers, however, don’t really want to own the systems; they want to monetize them. Having an exchange may (a) allow for an easy way for developers to sell their projects (albeit not-tax free) while other exchange users could use it to swap projects (tax-free); and (b) potentially enable forward sales so that developers could monetize their systems now, instead of waiting six or so years for the flip or buy-out.
What’s the catch? Greater legal clarity (via IRS letter ruling or legislation) is likely needed for solar PV assets to be eligible for 1031 like-kind exchanges.
Real-Estate Bundle of Rights
What is it? Owning land inherently features an owner’s “bundle of rights.” These rights empower owners to sell, dwell on, develop the land or buildings, use it for agriculture, restrict access, and to perform other activities. These rights can be sold off / given away by the land owner, often in the form of easements, for cell tower installations, land conservation, utility lines and pipelines, or opening up community access all while retaining ownership of the remainder of the rights. These rights are available to individual and corporate landowners.
Why is this meaningful for solar? Commercial buildings often have short, individual owner holding periods (~five years) before the owner sells the property to a new owner. This turnover makes third party financing of solar challenging when such financings are based on long-term (15 or more years) lease/power purchase agreement payment periods. If an energy holding can be carved out from the other rights held by commercial building owners and used or sold off, then the holder of the energy production rights (perhaps coupled with a rooftop easement) could execute long-term contracts that are in line with the business model.
What’s the catch? Energy Producing Retail Realty, Inc. claims to have set up the intellectual property and ownership structuring to ensure the viability of this energy production rights model. However, this is a new model for solar PV that could cause legal consternation or other building modification and access right concerns for early adopters.
Yours truly also threw his hat into the ring and pitched the yield company (“YieldCo”) concept discussed by Bloomberg New Energy Finance and Keybanc, albeit with a twist.
A solar YieldCo is a company that provides its owner(s) steady dividends from solar projects, but doesn’t necessarily develop projects. Bloomberg proposed that YieldCos could be how developers sell off their assets after tax equity is out of the asset. My suggestion was that YieldCos be set up as a non-bank lending company for initial project financings, providing debt either into PV project funds or as direct loans to homeowners. The advantage of this YieldCo approach would be in driving capital into new solar PV projects with the YieldCo financing potentially offered into public markets (perhaps via business development company (BDC) registration), thus accessing the larger pool of low cost capital available in those markets.
The DOE proved it could have a little fun and also generate clever, solutions-oriented ideas in an open forum—kudos to them. The DOE intends to post some of the “Finance Idol” pitch presentations, so if you consider yourself a solar finance wonk (if you’ve read this blog this far, you might have the telltale symptoms), look for them on the SunShot website. Some of these new, complicated ideas just might make the cost of PV substantially more economically viable, something we all can appreciate.