But that needs to change, said a panel of experts at Solar Power Colorado, the Colorado Solar Energy Industries Association’s annual conference (COSEIA) last week. The panelists said that going forward, the solar industry will have to get away from tax-equity incentives and embrace financing that opens it up to more potential financiers.
Most recently, the U.S. solar industry’s growth was bolstered by the 1603 Treasury Grant program, which officially ended at the end of 2011.
“The 1603 grant program was enormously successful,” said Kristian Hanelt, senior vice president of renewable capital markets with Clean Power Finance. But the program is at an end unless Congress extends it. “That has drastically reduced the types of capital that can really monetize all the various benefits out there that you get from owning solar.”
Without 1603, financing is limited to tax-equity at this point, and only about three banks are interested in taking on such debt, according to Hanelt.
“Right now we're in a period of evolution where it will be interesting to see how well the market will adapt to this reduced number of funding sources,” he said.
The market and industry should remain relatively steady until the second half of 2013, according to Hanelt. That’s because many companies hedged against the anticipated end of 1603.
Michael Mendelsohn, a senior financial analyst with the National Renewable Energy Laboratory, is looking at how to expand access to project capital at lower cost. Tax-equity markets are currently limited to $5 billion to $10 billion.
“Really there are trillions of dollars that are essentially excluded from renewable energy finance, and a lot of that is because we use tax credits and appreciate the benefits,” he said. The credits allow investors to reduce their taxable income by accelerating the depreciation of such systems, enticing them to invest in renewable energy. “That makes it essentially an illiquid investment. Our tax credits sort of limit how much we can access this additional capital.”
Tax-equity financing incentives are set to dry up somewhat in 2017 when the Investment Tax Credit falls from 30 percent of the project’s costs to 10 percent.
“We as an industry want that to happen. We want to get off of this tax subsidy that's really limiting [our ability to access capital],” Hanelt said.
Mendelsohn and his team are looking at a number of other ways to finance solar projects, including securitization, real estate investment trusts, limited partnerships, and how to bring in capital into the market.
“We’re looking at what can be done easily through rule changes or congressional changes,” he said.
The complexity of tax-equity arrangements also adds a lot of cost to the financing of solar projects.
“If we have no financing costs, then we're really at grid parity already with dollar a watt installed,” Mendelsohn said.
One way to increase access to capital and financing is to develop a clearinghouse.
“You could sell your project into a central clearinghouse that could allow you to sell off little parts of your projects to investors,” Mendelsohn said.
That could bring out more banks and private investors, creating instruments like bonds.
“Where investors are expecting something like a 4 to 5 percent [return rate] instead of 10, 11, or 12 percent [return rate] required by tax equity. So securitization really has this potential to expand the market,” he said.