Currents Podcast Ep23: Solar Revenue Puts with Richard Matsui, kWh Analytics

Norton Rose Fulbright’s Currents podcast available on iTunes, other podcast apps, and here:

https://projectfinance.law/podcasts/2018/february/ep23-solar-revenue-puts-with-richard-matsui-kwh-analytics/

“Richard Matsui, CEO of kWh Analytics, joins us to discuss the Solar Revenue Put, an innovative new financial product that may change the way solar projects are financed. While the solar industry faces the potential impact of tariffs, we explore how this product can reduce project costs. The first Solar Revenue Put was executed last month by developer Coronal Energy and structured by kWh Analytics.”

Credit Suisse’s Michael Weinstein: Solar Revenue Put can help Sunrun and other residential sponsors to keep solar growing

Originally posted in Michael Weinstein’s Credit Suisse Alternative Energy Solar Snippet, page 3, February 23, 2018.

Higher debt proceeds could also keep WACC lower. ABS proceeds have increased from 62% of loan to value (LTV) for SolarCity’s first solar ABS issued in 2013 to 77% for their last ABS issued in December 2017. Recently, kWh Analytics achieved even a higher LTV of 85%-90% with a Revenue Put that guarantees revenues from a solar project for the life of the asset. Higher LTV and compressing spreads would help offsetthe impact of rising rates.

To offset tariffs, US solar market looks to financial innovations

Originally posted on S&P Global Market Intelligence.

Proponents of two new financial innovations in the renewable power industry are hoping they can soften the impact of tariffs imposed on solar equipment imported to the U.S.

With the Solar Energy Industries Association projecting that the tariffs could eliminate as many as 23,000 jobs and GTM Research analysts estimating the industry could see an 11% decline in installations compared to baseline forecasts, the race is on to find ways to cut costs.

The steady growth of aggregation and fundraising platforms, taken with novel new hedging products and persistent declines in module costs, appear collectively poised to be part of the solution, according to industry participants contacted by S&P Global Market Intelligence.

Back to the future

Goldman Sachs estimates the tariffs will push costs on panels up 10 cents per watt in 2018, triggering a $3/MWh increase to power purchase agreement, or PPA, prices on utility-scale solar projects, which represents a cost increase of 5% to 10%.

The cost impact on residential-scale and commercial and industrial is expected to be less because solar panels represent a lower share of overall costs of installations. The 10-cent-per-watt increase could equate to about a 3% cost increase for residential systems, and a 5% increase for commercial and industrial installations, according to Bryan Birsic, CEO of commercial-scale solar lending firm Wunder Capital, whose platform oversees an estimated $1.5 billion solar project pipeline in 2018.

For some in the solar industry, the impact of the tariffs will simply be to roll the clock back a year or two to when panel prices were higher.

“From a pricing perspective, we just reset to early 2017, lose a year if you will, while gaining some new efficiencies,” Birsic said. “It’s a little more expensive for our customers, but we know what the numbers are now and we can move forward and close deals.”

Deutsche Bank similarly pointed to a reversion back to mid-2016 module pricing, noting that lending conditions in the bank market have improved, particularly for smaller-scale projects versus utility-scale, which may face pressures from a tightening tax equity market due to the reduction of corporate taxes.

Aggregation nation

Matchmaking platforms are emerging as one potential solution for the growing field of Fortune 500 companies looking to satisfy their clean energy goals, a market Goldman Sachs’ analysts expect could spur demand for 50 GW of new capacity in the U.S. between 2017 and 2030.

LevelTen Energy Inc. is among a growing cohort of platforms catering to corporate interest and making it easier to purchase clean energy.

By aggregating the demand needs of several buyers into a single virtual PPA, blending prices among small- and large-scale projects, LevelTen believes buyers can trim as much as 40% of costs from a 50,000 MWh purchase, effectively obtaining the economies of scale of large projects. So far, LevelTen said it had fielded 50 GW of proposed solar projects and 40 GW of wind from U.S. developers ahead of its Jan. 23 launch.

Not all of LevelTen’s project pipeline will get financed and built on the back of aggregated PPAs, but the introduction of the marketplace itself is seen as enhancing price discovery for PPAs, which in turn will continue to facilitate demand, and potentially help reduce soft costs.

“The top quartile of projects are very competitive,” LevelTen founder and CEO Bryce Smith said, pointing to a broader misalignment of the buyers and sellers in the market, rather than tariffs alone. “When we mobilize that capacity, we’re going to see a lot of solar get built because that PPA is the final straw.”

“By aggregating data from all these developers in the market, the best projects will rise to the top, projects with the lowest cost of capital,” Smith added. “Just bringing clarity to the analytical process and allowing customers to see every project in the market will allow buyers to get off the sidelines and actually execute on these PPAs.”

Hedging innovation

While securing PPAs remains a chief priority for solar developers, the roll-out of the industry’s first revenue hedge signed between kWh Analytics Inc. and Coronal Energy announced on Jan. 30 may offer yet another pathway to uncovering cost efficiencies.

The hedge itself has been placed on a trio of solar projects in Virginia totaling about 40 MW and guarantees up to 95% of the assets’ projected revenue based on average output, according to kWh Analytics. The hedge is backed by an undisclosed global insurance house rated AA- by S&P Global Ratings, which will warehouse the risk on its own balance sheet, kWh Analytics added.

kWh Analytics believes that the hedge can support additional debt on a project by insuring its revenue streams long-term, thereby slimming the need for costlier equity and trimming project costs overall by about 5 cents a watt, offsetting about half of the new import tariffs.

“This product pays for itself because you’re able to unlock so much more debt, and get the banks so much more comfortable with these assets,” Richard Matsui, CEO and founder of kWh Analytics said, noting his team has quoted more than 1 GW of solar in the last month. “Putting a floor on 95% of expected energy production creates value, because it’s the same way hedges in the gas-fired world work to firm up the revenue, it allows the banks to feel good and come through.”

Response to the hedge, dubbed “Kudos,” has been strong so far, attracting several lenders ascribing a 1.1 to 1.15 debt-service-coverage ratio, or DSCR, to certain new projects, shifting down from a previous 1.35 DSCR benchmark, as a result of the guaranteed revenue stream. That means the margin between the project’s hedged revenue is moving closer in line with the amount needed to make debt service payments.

“If unit costs go up in one part of the project, the first thing that any sponsor is going to do is ask how do we wring the costs out of some other part of my project to make the numbers work,” Matsui added. “If you can get more debt on the deal, that can make it pencil very quickly.”

Solar Getting Credit Where Due? Financing Options Expanding Despite 201

Originally posted in Julien Dumoulin-Smith’s Bank of America Merrill Lynch Alternative Energy Report, February 6, 2018.

Despite the clear headwinds from a rising yield curve of late, we note continued focus on bringing costs down through a variety of methods including increased leverage as financial firms get more comfortable with the risk profile of solar, which we see as consistently viewed as lower risk.

For example, we see kWh Analytics’ “solar put” option as one example of both the comfort level around solar increasing as well as one method to offset the pricing increase from the 201 tariff. While the ‘solar put’ is still relatively small (30MWac) in the larger picture, we highlight the comfort of insurance companies in underwriting cash flows from solar projects at the P50 production level, which is a key turning point for the industry to lever up further. With about 70% advance rate on Solar historically and a 1.15x debt service coverage ratio, we see the involvement investment-grade credit insurance companies as helping to spur a further cost decline (5 cents/watt on the revenue put alone) and higher leverage metrics for an asset class which should have relatively de-risked production levels versus other power assets.

We see the revenue put as merely the latest example of the industry adjusting processes to bring costs lower, offsetting at least part of the 201 case.

Julien Dumoulin-Smith, Research Analyst, MLPF&S