Creative financial engineering unleashes solar power
One of the working assumptions about distributed sources of electricity like PV is that they should be owned by the homeowners and businesspeople living and working in the buildings where they are installed -- "Power to the People". But it has become clear that not everyone can afford to own solar panels and, in fact, some many not want the responsibility of owning and maintaining them.
By taking advantage of financial tools including "power purchase agreements" and "third party intermediaries" solar panels are rapidly becoming available and affordable to those interested in taking steps to reduce their carbon footprint. (GW)
INNOVATION is driving a boom in solar power, but some of the most compelling advances are taking place in financial engineering rather than photovoltaic technology.
Solar power is simple, clean and easily installed, but manufacturing solar panels is expensive, which is why this energy source is out of reach for many residences and businesses. Lately, however, solar power companies have discovered that they can attract more buyers if they act as financial intermediaries as well as suppliers of equipment and systems used to generate electricity from sunlight.
The new financial techniques allow the solar companies to separate the capital expense of the systems they sell and the tax benefits that accrue to the buyer from the final costs of the electricity produced. In doing so, the solar companies have made it possible for more corporations and even some homeowners to kill two birds with one stone: doing good for the environment while cutting the cost of the power they consume.
Creative financing “tears down the Berlin Wall of capital-cost barriers and opens up a floodgate of installations,” said Julie Blunden, vice president for public policy and communications at the SunPower Corporation, one of the solar equipment manufacturers that has taken on the techniques. “If a company is looking at putting a system on more than one roof, they don’t have to worry about installation costs or the expiration of tax incentives. All they have to look at is the energy cost.”
The new financial methods are propelling the recent surge in photovoltaic solar power installations. Some 148 megawatts of solar capacity came online in 2007, up 46.5 percent from the 101 megawatts installed the previous year, according to the Solar Energy Industries Association, a Washington trade group. Including isolated solar installations — that is, those not connected to the power grid — the 2007 total was 190 megawatts, a 35 percent increase over the 141 megawatts of solar power installed in 2006.
Using a “power-purchase agreement” model, or P.P.A., companies like SunEdison L.L.C. and SunPower take on the cost of installing solar panels on customers’ roofs. In return, customers pay the solar power company for the panels’ output, generally at a lower rate than they would otherwise pay.
SunEdison first used the P.P.A. model, also called a solar power service agreement, in March 2004 when it installed solar panels on the roof of a building in Edgewater, N.J., occupied by a Whole Foods Market. Since then, it has installed 93 systems, most for large retailers, using the agreements.
The power purchase model is also attracting bankers. In November, Morgan Stanley agreed to provide $190 million to finance solar projects being developed by SunPower. In January, SunPower struck a deal with G.E. Energy Financial Services that requires G.E. to buy five solar power projects in California for about $50 million.
“The lesson,” said Thomas H. Werner, SunPower’s chief executive, “is there is a very competitive market for financing systems in the United States with lots of high-quality investors looking to participate.”
Goldman Sachs is also financing solar power, as are Wells Fargo and MMA Renewable Ventures, a unit of Municipal Mortgage and Equity, which says it has arranged financing for $300 million worth of solar energy projects.
“The P.P.A. model is becoming the dominant model,” said Edward Levin, vice president for global capital markets at Morgan Stanley. “It is no longer a plausible business model for a solar developer to sell panels to a property owner or corporation.”
The market for commercial solar power installations is not based solely on environmental concerns. Solar power is exploding because of “pure economics,” said Barry Neal, director of environmental finance at Wells Fargo.
Companies like Wal-Mart and Kohl’s are turning to solar power because “they can actually reduce their electricity costs, particularly in states like California and New Jersey,” where electricity rates are high and rising, Mr. Neal said. Those states, which also offer generous incentives, account for about 85 percent of solar installations in the country.
California’s Million Solar Roofs program includes incentives that could translate into an $8,000 rebate for a typical home solar system. New Jersey’s solar incentive program has been so popular — the state went from six solar installations in 2001 to 2,712 at the end of 2007 — that it has run out of money. It is moving from cash rebates to rebates in the form of certificates that can be bought and sold to help companies meet required emission reduction levels.
Besides state incentives, there is a federal investment tax credit worth up to 30 cents on the dollar. For bankers involved in solar power, these credits make the deals more profitable than cash returns alone would. Mark McLanahan, vice president for marketing and strategy at MMA Renewable Ventures, said that the credits mean that companies like his can charge less for electricity under the power purchase contracts.
Credit quality issues make the residential market harder to crack than the commercial market. SunPower works with home builders to install solar panels on new homes and with New Resource Bank in San Francisco to offer second mortgages to finance solar installations on existing homes. But credit issues must be resolved before this market can take off, executives say.
There are several possible solutions. One being watched is a city-run program developed by Berkeley, Calif. Under the plan, Berkeley pays homeowners to install solar systems and then recoups the cost through a 20-year addition to their property tax bills.
But repackaging risk does not eliminate it. Under the solar power purchase agreements, the buyer — the retailer, the homeowner — takes the risk. “They are making a big bet” that the price of conventional power stays high, said Severin Borenstein, director of the University of California Energy Institute.
Photovoltaic solar power is “incredibly expensive,” he said. “It isn’t economic, and you can’t make it economic through financial engineering.”