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Financing Solar Projects in the U.S.

published: 2011-05-26 13:36

As the cost of fossil fuel continues it upward climb, and global warming concerns showing no sign of losing steam, individuals, private firms, and public agencies have intensified the interest and demand for renewable energy projects. As a result, solar project developers must compete with wind, biomass, and geothermal ventures for limited investment capital. At a recent PV convention, Rhone Resch, CEO of Solar Energy Industries Association, made the following statement:  “The biggest obstacle to solar installations today is financing.” 

Utility scale and commercial solar projects require substantial amounts of capital. Solar project developers must identify sources of financing and structure solar energy deals that make their endeavors attractive to investors. Financing solar projects, especially distributed generation undertakings, depend on factors, such as the sales of solar energy, subsidy payments, and tax benefits. Developers must identify financing options to fit their circumstances.

The following financing sources represent some of the most common financing techniques used to finance solar projects in the United States.

Private Equity Financing

Private equity investors come from the ranks of institutional and accredited investors that have the resources to allocate significant sums of money to solar projects, and other renewable energy ventures, over long durations.Private equity financing requires investors to provide the upfront costs for solar projects. In return, investors receive the project's tax credits. Tax equity investors use tax credits reduce their tax liability on taxable income.

Many solar companies use tax equity investors to help reduce the costs for products and developments. Private equity investors usually function as the private funding partner for private market solar firms as a vital component for consummating PPAs.

Tax-Exempt Bonds

Municipal, county, and state government agencies have the authority to issue tax-exempt bonds, which function as sources of financing for solar energy projects. Bondholders do not have to pay federal, and sometimes, state income tax. Issuers can offer general obligation or revenue bonds. General obligation bonds have the financial backing of the local governmental entity that issues the bond. This debt instrument requires voter approval.

For example, taxpayers can grant approval to the local school district to issue general obligation bonds to finance the installation of solar energy systems to make schools more energy efficient. Municipalities may also issue revenue bonds to finance solar, as well as other renewable energy systems. However, the issuer must repay investors principal and interest from revenues it receives.

Tax Credit Bonds

Qualified state, tribal, and local municipalities can issue bonds to raise capital for energy conservation projects. These debt instruments include Clean Renewable Energy Bonds (CREBs) and Qualified Energy Conservation Bonds (QECBs). Issuers have the option of issuing QECBs as federal tax credit bonds or direct subsidy bonds. Federal tax credit bonds allow the issuer to give investors tax credit instead of interest payments. Direct subsidy bonds entitle bond insurers to obtain cash rebates from the Treasury Department to make interest payments.

The Internal Revenue Service award CREBs to public agencies in the order of smallest to largest projects. Several years ago, a group of public agencies in San Diego secured 20 percent of the   CREBs available nationwide, or $154 million to help finance 192 solar projects expected to generate 20 megawatts of solar energy. QECB financing applies to solar thermal electric and photovoltaic projects and works the same as CREBs. Public sector entities issuing QECB or CREB have the effect of 0% interest rate on borrowed money.

Power Purchase Agreement 

Purchase Power Agreements (PPA) refers to a contract between a private solar company and private firm or public entity to purchase solar power at an agreed on rate. The host does not pay for the solar equipment or labor, but allows the solar company to install the solar power system equipment on its property. The solar company also pays for maintenance or repairs. The host agrees to buy solar energy from the private solar company each month at a specific rate per kilowatt-hour (kWh).

PPAs appeal to many customers because it enables them to avoid the upfront costs of solar power systems and the risks associated with solar installations. For developers to make the PPA projects attractive to investors, the PPA must have attributes that make it “financeable.” Developers should prepare for potential investors pro forma, copies of executed purchase power agreements, customer's credit profile, and the technical analysis. Investors also seek assurances the PPA will remain intact for the entire length of the investment.

Conventional Financing

Solar project developers with cash reserves or  access to  conventional financing, such as a line of credit, real estate financing, or capital financing can realize an advantage by self-financing solar their own projects. This option enables a developer to keep rebates, tax credits, or other incentives instead of negotiating them away to tax equity investors. Firms with strong cash flow and profits may find this financing option especially appealing. Accelerated depreciation and tax credits also offer tax benefits that could immediately compensate for the project's costs.

Tax Equity Financing 

According to Energy Investments managing director John Eber, “there are now 16 or 17 tax-equity investors in renewable energy... Most of those are in solar or looking at it, and most are banks.” Solar, and other RE projects, qualify for production tax credits (PTC) in accordance with Section 45 of the Internal Revenue Service (IRA) tax code. This includes the five year accelerated depreciation (MACRS). In addition, solar projects can receive an investment tax credit (ITC) cover by Section 48. The PTC offers a two cent kWh credit.

The ITC provides a 30 percent tax credit for a wide variety of equipment used for the generation of electricity, solar lighting, solar heating and cooling systems and equipment used to heat greenhouses, swimming pools, and solariums. Some other features of the ITC: developers must allocate credits according to partners profit percentage; investors can carry back credits for one year; carry ITC forward for 20 years, take advantage of a five year recapture period. The ITC expires on December 31, 2016. Solar project developers who take advantage of tax benefits -- MACRS, PTC, and ITC, can obtain financing for a sizable portion of their projects' value.

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