U.S.: The California Solar Market in 2011
By Fred Greguras, Palo Alto
The California solar market – utility, commercial and governmental – will be a primary focus for global players in 2011 as growth in the major feed-in tariff markets in Europe slows. I made two presentations on California solar project finance 2011 in early December with an emphasis on the revenue and financing sources and other factors which will drive growth in 2011.
The first presentation was at the Solar Praxis PV Utility conference in Las Vegas and the second at a firm event in Silicon Valley. The powerpoint slides can be accessed here. As a special bonus, the participants were able to hear insights from Don Danh of East West Bank, John Huber of Wells Fargo and my colleagues Dirk Michels and Aaron Schapiro. Participants in the Silicon Valley event expressed optimism over the continuing availability of current financing sources, including tax equity, as well as new financing sources entering the project finance market.
Click below for the presentation highlights:
Successful project finance depends on making the ROI numbers work for investors with a high degree of predictability. The only predictable revenue stream for utility projects in California in 2011 will be payments for electricity under long term power purchase agreements ("PPAs"). For non-utility projects, the California Solar Initiative production based initiative will provide an additional revenue stream for five years at about $0.05 per kWh. Renewable energy certificates ("RECs"), which are bundled with the energy in utility projects, will not be a predictable revenue source for California projects in 2011 nor will the implementation of AB 32 have any impact on financing in 2011 even if there is no litigation over the impact of Proposition 26.
The federal Section 1603 30% cash grant is the single most important financing incentive in California and throughout the U.S. but is not sufficient by itself. Even a temporary expiration will delay new solar project financings. The opportunity for a Congressional extension of this cash incentive beyond December 31, 2010 without any lapse is nearing the end. The results of the 2010 mid-term elections should send a strong message to Washington that the American people want jobs created. Solar and other renewable energy projects create jobs so there should be support in both political parties to continue some federal incentives for solar but politicians may not respond to this logic.
Distributed generation solar projects can be completed faster and are less risky to investors but the numbers won’t add up to satisfy California renewable portfolio standards ("RPS") requirements through such projects alone. The consequences of failing to meet RPS need to be more severe in order to have a meaningful impact on financing. To date, only a tiny percentage of projects are actually producing electricity of those contracted for by the California investor owned utilities. Because of their lower cost of capital, the right to use actual cost factors in cost determinations and the need to meet RPS requirements, there will be more utility financed and owned projects but ratepayer impact will require other financing structures. The financeability of large utility scale projects by independent power producers ("IPPs") remains difficult because of PPA pricing, sheer size of such projects, transmission line improvement requirements, siting and technology risks and other factors. The best business model for developers may be to build, own and sell to a utility once the commercial operation date is visible.
Even after the October 21, 2010 Federal Energy Regulatory Commission decision that permits greater flexibility in the calculation of avoided costs, California Public Utility Commission ("CPUC") tariff pricing will develop cautiously because of the concern over ratepayer impact. The CPUC seems enamored with the reverse auction approach to pricing but this method causes low PPA pricing and makes financing very difficult or impossible for IPPs, particularly for small projects.
Decreased demand and lower pricing for solar modules will likely result in more module vendors being involved in financing projects in 2011 to help create the demand for their modules. While Suntech has withdrawn from project finance, many other module manufacturers are adopting a strategy to assist in financing as a differentiator and to help margins in their sales channels.
Financing challenges require that project developers have a strong working capital position and project execution record which means that larger players will likely become more consolidated, vertically integrated and prevailing in 2011.
The California legislature could create many jobs in 2011 by enacting legislation to compel the CPUC to establish tariffs for solar using a more flexible avoided cost calculation, to require more projects to be sited in California in order to be eligible for RPS requirements and to establish a manufacturing tax credit similar to the successful program in Arizona.
