by Brian Willis
Progress in solar financing is at the heart of the solar industry’s growth. Since the initial passage of the solar investment tax credit (ITC) back in 2005, and its extensions since then, financing has been the greatest boon and greatest hurdle of the industry.
On the one hand, you have companies like Sungevity and Solar City that offer customers a straight forward leasing option that allows them to save substantial sums on the upfront costs of PV systems and only charges them for the electricity they use. All this at a cost that is frequently less than what customers are paying the utility for the same juice. Accounting wizardry in the form of venture funds and bank agreements has makes this model possible and profitable.
On the other hand, you have major commercial projects that fine it difficult to find financial backing from independent investing firms and banks because of a perceived “newness” risk and lack of initial liquidity. The solar leasing companies listed above have first class CFO’s that are able to procure funds from banks by agreeing to higher interest rates and using their ITC credits to sweeten the deal. The old 1603 program helped in the interim when the tax equity market would barely accommodate even that trade off.
Naturally, as the economy improves and companies demonstrate that solar can give investors solid returns with a reasonable degree of certainty, the situation will improve for large-scale developers. But what several companies in San Francisco are doing may bypass that wait with the strategic use of the Real Estate Investment Trust tool.
Bloomberg’s Andrew Herndon wrote an article titled, “Solar Costs to Fall as REIT Emerge as Source of Funding,” which provides a rundown on what the probable future of solar financing entails. For background, REITs are usually formed to develop commercial properties like shopping centers, but Renewable Energy Trust in Capital Inc, lead by Moody’s Investors Service chief executive officer, has asked the IRS to classify solar farms as a type of “real property” so this financial tool can be applied to solar farms.
As Herndon explained in the article, REITs returned an average of 28 percent in 2012 and are popular as tradable stakes in developments that cut the cost of capital for developers. If solar developers where able to use this tool and apply it to promising projects that were unable to find funding, it would be a whole new ballgame. Imagine solar developers having the option to bypass banks and appeal to knowledgeable, upper middle class or wealthy investors?
Historically, REITS have owned and operated income-producing properties that pay investors dividends. They serve as an excellent tool to diversify investment portfolios that are split prudently between stocks and bonds. Herndon wrote that, “The format [of REITs] has evolved to provide funding for other industries including timber, data centers, mobile-phone towers, power lines and natural gas pipelines. The common denominator is that all are tangible assets that generate steady income over a long period of time, and photovoltaic power plants fit that mold.”
Applying REIT’s to the solar industry will help bring more capital into the industry and open up new investment avenues for energy investors interested in substantive investments with great liquidity. Discussion of the capital “bottleneck” that hampers growth in solar industry has been ubiquitous in recent months and this financial tool can be one, among many, that can open more space for capital to flow into the industry. The IRS may issue its first decision on solar REITs this month.