It’s tough to get large-scale solar deals done in 2017, but there was no palpable haze over the crowd of financiers at Renewable Energy Finance Forum this year.
Sure, volatility still defines many sectors of the solar market, the U.S. pulled out the Paris climate agreement and the federal government is skeptical of intermittent renewable energy resources. But the speakers and audience at REFF-Wall St. were focused on the opportunities in front of them, and those are plentiful.
Corporations in the drivers seat
“You can get a great price if you can get something done,” Ray Henger, SVP of M&A and structured finance for sPower, said of the falling rates in solar. He also noted that non-traditional drivers, including the C&I sector and even community choice aggregators are starting to drive new deals.
“At some point it needs to be the customer demanding solar — like MGM,” said Yuri Horwitz, CEO of Sol Systems. “It’s munis, corporations and other large entitles that are making the decision to go solar or wind,” he said. “If your are involved in finance and want volume, you have to look at [contract for differences], synthetic PPA swaps and remote PPAs. You need to get comfortable with these.”
Michael Silvestrini, president of Greenskies Renewable Energy, told financiers that are interested in getting deeper into C&I, there is a need to find efficiencies when putting together the complex transactions that can involve multiple off-takers and locations. “To limit structural complexity, we’re asked to bring fully executed contract to financiers,” he noted. “So it’s a little clunky. We’d like to wash, rinse and repeat.”
Valuing the merchant tail of renewable energy
“Financial innovation is happening in equity,” said Henger. “The piece people argue about is what’s the value of the asset at the end of its hedge?”
That is an open argument, one that makes Dan Benoit, chief investment officer for North America at Brookfield Asset Management queasy. “We struggle with this question,” he said. “I don’t think we’ve found the magic bullet.”
Margins are already thin in the rest of the merchant generation business, and with falling prices, a good answer on how to make money on projects once they get to the merchant tail after their initial contract is hard to find. “It’s a tough business and it’s getting tougher,” Tom O’Flynn, EVP and CFO of AES Corporation, said of the merchant business.
Beyond merchant solar, repowering contracts are a topic that’s warming up in the wind industry, although not many are happening just yet. Earlier this year, GE announced it repowered 300 turbines in a deal with NextEra Energy. Once people work through technical and tax issues, “I think they’ll come fast,” Kevin Walsh, managing director of renewable energy for GE Energy Financial Service, said of future repowering deals. Brookfield Asset Management and AES said they have not executed repowering contracts in the U.S. yet, but are keeping an eye on opportunities.
The tax conundrum
The issue of PTC and ITC reform was mostly a non-starter. “There is little appetite with the House and Senate to revisit wind and solar phase down schedules,” Greg Wetstone, CEO of the American Council on Renewable Energy, said about potential for the ITC and PTC to be revisited, after speaking with members of Congress and White House staffers.
Even so, there are still questions that need to be answered. There is not yet clear guidance for solar in terms of which projects will be granted safe harbor under the ITC and PTC. For wind that uses the PTC, the IRS says as long as a developer has excavated a foundation at the site, that’s enough, said Katherine Breaks, managing tax director within tax credit and energy advisory services at KPMG. As for solar-plus-storage guidance from the IRS, “[it] would be helpful,” said Walsh, “but I’m not hopeful.”
Another potential tax issue is any change to the corporate tax rate. “In the upside down world we live in, corporate tax rate reductions are a bit of a mixed bag for renewable energy,” said Breaks. She noted that because wind and solar can get a five-year tax write off, “a major component of tax equity return is the write off of these losses.” Therefore, any reduction in the corporate tax rate would be a reduction in those returns. “Developers will have to grapple with, ‘where do we find the cash to fill that hole?’” she said.
If the renewable financiers in a New York midtown ballroom are any gauge, however, developers will not have to grapple with that question any time soon, if at all. When one moderator asked the room how many saw tax reform coming this year, not a single hand went up. When the question was pushed out to 2018, only a few raised hands could be counted amongst a few hundred conference attendees.