Financing in the solar industry offers many opportunities and challenges. Along with many other facets of our economic infrastructure, solar is going through substantial changes. The opportunities presented are the result of 1) greater overall acceptance and demand for renewable energy 2) decrease in price of materials and 3) the increased governmental support through incentives for renewable energy including the 30 percent Federal Investment Tax Credit (ITC).
Key to taking advantage of today’s opportunities is the ability to overcome challenges both general to the economy and specific to solar: the overall illiquidity in credit, the lack of tax appetite by both major and regional funding sources to take tax credits, and the limited term lengths of credit structures.
As director of commercial finance for Clean Power Finance, I speak to solar and renewable energy professionals everyday regarding projects in need of financing. There is demand for a variety of products ranging from tax leases, municipal and non- profit financing, purchase power agreements, and in some cases, capital leases. With nearly 20 percent of the national solar dealer marketplace using Clean Power Finance services as part of their sales process, we hear the frustration when the current market inefficiencies nearly grind an industry to a halt. These are “shovel ready” projects that will start producing jobs and energy savings in a matter of months not years.
In order for solar to be widely adopted, a number of things need to occur in concert:
1, Thaw in the credit market - For solar to maintain its steady growth and for the overall return of economic vitality, banks must begin lending again. This is not unique to the solar industry and this thaw is necessary for any return to economic vitality. There are a large number of solar transactions in the pipe and plenty of excellent credit available at very attractive prices. But unless there is incentive to lend again and some of the uncertainty passes, the industry will remain handcuffed.
2. Return of tax appetite - Many previous tax financing players lost their tax appetite in ’08 and are uncertain about ’09. The most common structure used in solar financing is the tax lease, where the very substantial tax benefits can be utilized by the lessor who can pass on very low rates to the lessee and match the energy savings with the lease payments. These substantial credits can allow a “lender” to book negative yields.
3. Increase in term lengths - As a result of credit tightening, banks have reduced maximum terms to five or seven years. To match the energy savings produced by the solar installations and become an attractive option over the cost of doing nothing, the term required is a minimum of 10 years. Because of the 30 percent ITC, five years MACRS and upfront utility rebates, the principal exposure of solar leases runs off very hard and there is substantial amortization in the first five years. This produces a steep principal amortization early and a long thin tail in later years, which does not increase risk substantially. There is also an opportunity for yield enhancement with longer terms.
4. Government actions - The epicenter of the American economy in Washington D.C., the US government, should be investing in clean energy infrastructure. It was infrastructure development, notably in the transportation sector, which brought America out of the Great Depression in the 1930s. Infrastructure spending can be targeted in a way that develops those sectors of the economy that produce long-term gains. In some cases, notably on national infrastructure, the government spends our money better than we do. An economic stimulus package aimed squarely at revamping America’s energy infrastructure produces a multitude of benefits. One, it would reduce our dependence on foreign oil. Second, it would help create a new sector staffed with high-tech and skilled worker jobs. Third, it would give America a chance, after what has been a comparably long period of drought, to be seen as a world leader on issues pertaining to climate change.
The most effective and quickest move the government can make is to monetize the current Investment Tax Credit. The stimulus package would allow the Department of Energy to issue grants or rebates for the ITC. This would expand the number of lenders who would participate in financing solar projects and allow the upfront cost to be “bought down,” aligning debt payments more closely with energy savings.
5. Industry cooperation - In my prior involvement with the United Association of Equipment Leasing, I learned that the cooperative exchange of best practices improved conditions for all. The current frozen conditions in the market seemed to have chilled this type of exchange in the solar industry. The reality is that if we as an industry, the solar manufacturers, distributors, integrators and finance partners, don’t collaborate to work towards a more streamlined and simple solution we are going to be part of a failure with economic and environmental consequences. We need a standard approach that is easily understood and universally accepted by all the stakeholders.
Having spoken to a wide variety of participants in the solar field, I know there are a lot of very smart and motivated people working on these issues. We all need to become part of the solution. Let’s find unique ways to work together and build long lasting and intelligent alliances. And lastly, let’s work towards simplicity. Probably easy for me to say as a relative newcomer to the solar space, but veterans in the industry won’t earn, nor want, all the business if there isn’t a simplified process. By associating and cooperating, I promise we’ll all benefit immensely.
The opportunities and challenges in the renewable energy fields are immense. This is a unique time for our economy and our environment. Van Jones, in his groundbreaking book, “The Green Collar Economy”, lays out a viable plan for solving the biggest issues facing the country – the failing economy and our degrading environment. We cannot continue business as usual. Green industries, such as solar, provide green jobs and triple bottom-line business which balance profit, people and planet. I look forward to participating in this new future.