Solar stocks rallied in recent months as markets stabilized and recovered from oversupply and regulatory uncertainties. Bloomberg reports that the clean tech and renewable energy industry saw a 22 percent growth in the second quarter this year with increased spending by investors. Other analysts report that photovoltaic module manufacturers saw a turn-around from declining revenues to steady increases in sales and growth.
The recent trend for bullish sentiments in the solar and renewable energy space can be attributed to the increase in secured and financeable projects. In Massachusetts, large-scale solar projects are taking prominence in the shape of third party owned assets that operate and sell power to local municipalities. This represents a drastic shift in recent trends to lead the market away from private projects to secured government hosts and users.
In a world of uncertainty, solar project investors look for strong and secured cash flows that negate market risks. For example, two major sources of revenue exist for any given solar asset. The first is the sale of electricity, which can be hedged and contracted in the form of long-term power purchase agreements (PPA) with a municipal buyer. The municipality benefits greatly from heavily discounted energy and the investors have a secured cash-flow on their produced energy commodities. The biggest risk to a PPA is the counter-party default, where the buyer can no longer purchase and use the energy produced by a solar power system. This risk is negated by the credit worthiness of a municipal entity.
The second form of revenue comes from solar renewable energy credits (SRECs), which are susceptive to volatility due to changing regulations. In order to secure SREC prices, solar investors are able to leverage the stability of the PPA with a private company in exchange for forward contracts. Currently, more and more larger corporations (Fortune 100) with a “green image” are buying SREC forwards to supply the necessary underwriting requirements to satisfy institutional lenders and banks. None of these options would be possible without the strength of the risk-averse environment solar is currently experiencing with municipal projects.
Another value-added benefit of municipal solar projects is the certainty of land control. Typically, these large ground-mounted arrays are built on municipally owned land that is leased to the solar investors. The land lease to the municipality is very favorable and secure in the aspect that the risk of foreclosure on the property, or a default by the landowner, becomes negligible.
In the past, the buzz and bubble of solar put municipal projects on the back burner. Most developers did not want to spend the necessary capital on securing public bids. Additionally, municipalities were not experienced in structuring these long-term commitments, and lacked knowledge and understanding on how to successfully craft and project with the investment community. Given the prominence and the proven economics, however, municipalities are on the active pursuit of renewable energy in their local communities. The third-party ownership structures have proven again and again their concepts and are now being replicated across the commonwealth.
Despite today’s good solar news, failure rates for public bids have left a sour taste in the mouths of many municipalities. The failure resides not with the municipality, but with the developer’s ineptitude on securing financing. The general message in previous years has been, “If you build it, they will come,” which has caused numerous projects that were awarded bids to be left un-built or abandoned. The trend should be the reverse. Since the investment community for solar has matured, many are willing to commit conditionally in advance to support a public bidding process. This action has allowed municipal projects to be given financial support prior to awarding bids to developers.
The solar industry is experiencing renewed growth, even amid regulatory uncertainties. This growth can be attributed to a new risk-averse strategy that has been brought over by the investment community. Developers are now part of a complete stack that works together with matured financing partners. It is now the time to further this integration model by developing successful projects with municipalities.
Tom Wu is CEO of Invaleon Technologies Corp.
