This article was co-written by Andrew Gilligan and Will Patterson
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This is an excerpt from the October 2017 edition of The SOL SOURCE, a monthly electronic newsletter analyzing the latest trends in renewable energy based on our unique position in the solar financing space. To receive future editions of the journal, please subscribe.
Last month’s Solar Power International (SPI), as always, featured a carousel of different topics, conversations, and ideas from across the solar industry (We’ve always made sure to keep you up to date on them). Amid the many discussions involving the maturing commercial and industrial (C&I) space at the conference were talks of another market that is beginning to rev its engines: the secondary market for operational solar assets. Assets in operation have been sold on rare occasions in the C&I space, but the underlying drivers to create an active market have yet to emerge until now. Given the growth in the industry in the last five years, and the resulting scale in the market segment, investors are taking notice.
Hitting Critical Scale
The most important impediment to a secondary solar market for assets is scale. To date, the C&I space simply hasn’t had the scale for a secondary market for a few reasons. First, it’s important to note that when we’re looking at the potential secondary market, in a way we’re looking 5 years into the past.
C&I solar expanded immensely from 2010 – 2012, increasing from 687MW of cumulative installations to 2.97GW in 2012. However, for the past several years, most of these assets have not been available in the secondary market because the 30 percent investment tax credit (ITC) means that systems owners must retain their ownership stake in a solar project or face recapture. Because of the recapture rule, operational systems realistically become eligible for the secondary market after 5 years.
Now, as we approach 2018, over 2GW of operational assets in the space will have exited (or will soon exit) the recapture period over the last 3 years, finally giving the secondary market some room to move. The clear majority of these projects received investment from either a tax equity provider or strategic investor, which helped increase the standards of the contracts and technical specifications. This means we are starting to enter a period where a larger number of quality C&I solar projects will be outside their recapture period, and there is a good deal of capital interested in acquiring these operational projects and their consistent cash flows.
Looking at the New Market for Operational Assets
The secondary market gives investors a simple and straightforward opportunity to assess their investment. Potential investors looking to purchase operational assets will have access to executed PPA agreements and long-term project performance data that provides them an accurate look at the return they can expect from the solar project’s generation, making the investment relatively safe. Furthermore, since an investor in operational solar assets would likely not utilize the ITC (unless they made significant additional investments), they wouldn’t need tax appetite to fully realize returns. Finally, in certain SREC markets, the most volatile portion of the revenue stream (higher SREC prices) will have been monetized already. This should open the market to a broader array of investors, with potentially lower returns.
From the current owners’ end, the focus becomes finding an investor with a lower cost of capital, whose purchase price will result in a gross profit. Historically, a large number of the transactions that have occurred in the secondary market have been with distressed developers who own a small to medium size portfolio of C&I solar assets but need cash in the near-term and are willing to sell for whatever price they can get. Moving forward, a key to unlocking the secondary market will be investors with lower cost of capital offering existing owners pricing that makes it attractive to sell the operating projects, and given the scale that is now present in the market (highlighted above), we are seeing those sources of capital increase activity.
An Opportunity to Innovate
From technology deployment to PPAs to tax equity structures and more, the solar industry has continued to introduce innovations into the market. In the same way, the secondary market may provide a vehicle for some interesting transactions. In just one example, investors that are buying a portfolio of existing solar assets will have the opportunity to repower them with newer, more efficient technology to increase returns. And, in certain markets, it may be viable to buy an asset, repower, and quickly sell it at a higher value. Maybe HGTV can find a slot for Solar Fixer Upper™.
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Every year the solar industry seems to take a step back in awe to look at how much it has matured and how much more it can accomplish. While this secondary market for assets has been discussed for years, we see it finally starting to develop into a market of enough scale to attract new entrants and continued innovation.
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Over the last eight years, Sol Systems has delivered 650MW of solar projects for Fortune 100 companies, municipalities, universities, churches, and small businesses. Sol now manages over $650 million in solar energy assets for utilities, banks, and Fortune 500 companies.
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