Energy Production Insurance for Your Solar Project, From Swiss RE and kWh Analytics

Originally posted on Greentech Media.

A new insurance product from kWh Analytics guarantees up to 95 percent of forecasted energy production for asolarplant, providing security for solar developers in a regulatory environment where it’s been scarce.

The “solar revenue put” offers backing for a project that makes lending debt less risky for banks. Using its solar asset database, kWh Analytics assesses performance for a given project, setting expected output and putting a price on the risk. If a solar farm doesn’t reach that agreed upon output, the insurer pays for the difference.

“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,” said Richard Matsui, CEO and founder of kWh Analytics. “It allows the banks to feel good and come through.”

With the new partnership, global insurer Swiss RE Corporate Solutions will keep risk from the projects on its own balance sheet. With that backing, projects will be able to get more debt financing at lower costs. KWh Analytics said the product will offset 50 percent of the $0.10 per watt cost of recently announced solar import tariffs. The company recently sold its first policies, for about 40 megawatts at three Virginia solar farms owned by Coronal Energy.

Cory Honeyman, associate director of solar at GTM Research, said the product should give developers more flexibility and assurance in a project’s viability.

“Being able to raise more debt with a lower debt service coverage ratio means more breathing room for asset owners to hit their required returns during the term of a PPA, rather than being overly reliant on post-contract revenue stream,” said Honeyman, 

Matsui told Bloomberg the tool allows project developers an increase of debt between 10 and 15 percent.

Honeyman said the mechanism will be “an important financial innovation” to continue lowering the cost of capital for utility-scale solar projects as power purchase agreement prices continue to decline.

The product could be especially helpful for project owners raising debt project-by-project rather than on balance sheet, because Honeyman said that strategy relies more on project cash flows to meet the requirements of lenders.

Driving down solar costs amidst an uncertain, and even negative, policy environment has become increasingly important as the solar industry moves towards maturity. According to S&P Global, coping with tariffs announced by the Trump administration and other potentially harmful policy developments has essentially pushed the market back a year. GTM Research’s own forecasts indicate tariffs could curtail U.S. nstallations by 11 percent through 2020.

Innovative solutions and new financing tools can help alleviate some pressure on developers to keep moving forward.

“With corporate tax reform potentially putting pressure on sponsor returns, and the tariffs adding another 5 to 10 cents per watt to all-in costs depending on the year, the ability for asset owners to increase leverage means they can eke out slightly higher returns via less required equity and a lower overall cost of capital,” said Honeyman.

Guaranteeing generation could also give solar an edge over other clean energy resources.

GTM Research solar analyst Rishab Shrestha, who previously worked at MAKE Consulting, said that it’s more difficult to offer such assurances for generation in the wind market. Looking ahead, the ability to predict generation with high accuracy could guarantee higher revenues for solar in addition to lowering project costs.

“The value gain I think would be higher if that’s possible,” said Shrestha. “I would imagine that financing costs for solar, which is already more competitive than the wind industry, would become more competitive moving forward.”

Introducing the Solar Put: Insurance for Cloudy Days at the Farm

Originally posted on Bloomberg.

  • Swiss Re provided solar revenue put to guarantee 95% of output
  • Solar put can cut risk, make financing cheaper: KWh Analytics

Insurance giants like Swiss Re AG, with the help of a San Francisco firm, now have a way of guaranteeing production from solar farms — not an easy feat considering supplies from these plants rise and fall with the sun.

The product that at least one insurance company is now offering is called a solar revenue put. It was developed by risk-management software firm KWh Analytics and can guarantee as much as 95 percent of a solar farm’s expected output, according an email the company sent to clients Tuesday. Swiss Re has now sold one for three Virginia projects.

This insurance policy stands to strip away uncertainty surrounding solar projects. With a put in hand, lenders may be willing to offer financing at better terms, driving down the overall cost of a farm, said Richard Matsui, KWh Analytics’s chief executive officer.

“In the solar business, risk is cost,” Matsui said in an interview, and the “cost of capital is the single biggest risk.” Swiss Re referred questions to KWh.

A Floor for Solar

Here’s how a put works: The policy sets a floor for electricity output from a solar farm. The client pays a premium, and if a plant doesn’t generate enough power to reach the floor, the insurer covers the difference. While it may cost about 1 percent of a project’s revenue, it also allows project developers to get 10 percent to 15 percent more debt, at better terms, Matsui said.

Underpinning these puts is a database of historical production from solar farms that KWh uses to predict output from planned projects. It forecasts performance based on specific components inside existing plants, Matsui said. Using this, KWh prices the risk for insurance carriers like Swiss Re.

According Nathan Serota, an analyst with Bloomberg New Energy Finance, a product like this could make clean energy cheaper to finance and bring down the price of solar power. “It’s advantageous to project developers because it allows them to lower their cost of capital, and solar power prices as a result,” he said.

Top 5 Takeaways on Solar Risk Management

Originally posted on SEPAPower.

Risk management is critical to the growth of the solar industry.

Navigating the nuances of solar risk management was the focus of a workshop, “Solar Risk Management: What Is It and Why It Matters to Investors, Sponsors & Asset Managers,” at the recent Solar Asset Management North America (SAMNA) conference in San Francisco.

Kicking off the panel discussion, Jason Kaminsky, Chief Operating Officer of kWh Analytics, provided a basic definition of risk management, drawing from a recent report co-authored by kWh Analytics and the Solar Energy Industries Association (SEIA).

A panel discussion on solar risk management at SAMNA featured (left to right) Jon Previtali of Wells Fargo, Jason Kaminsky of kWh Analytics, and Jonathan Roumel of Spruce Financial. (Photo courtesy of Solarplaza)

“The responsibility of the risk manager is to identify items that may lead to the financial deterioration of an investment, and proactively work to resolve these situations,” Kaminsky said.

Representing banks, solar developers, and risk management firms, the speakers provided insights into the evolving field of solar risk management and the challenges ahead. Discussion varied from the many functions and stakeholders involved in solar risk management, to how banks — key stakeholders in solar projects — assess project risk and performance

Key takeaways are discussed below.

1. Risk management begins at origination and continues throughout the life of the project. While origination — that is, lining up prospective investors — is sometimes viewed as separate from risk management, the panelists stressed that market leaders take a comprehensive and more holistic view of the two. At the end of the day, risk management is about making sure the institution doesn’t lose money, and that begins with matching a project with the right investors.

“There are two steps to risk management,” said Jonathan Roumel, Vice President of Operations at Spruce Finance, a firm working in solar and energy investments. “Step 1 is to invest in a quality asset to avoid or minimize risks up front. Step 2 is to efficiently manage that investment throughout the life of the asset and effectively mitigate risks which do arise.”

Jon Previtali, Director of Technology and Technical Services for Renewable Energy & Environmental Finance at Wells Fargo, also stressed how banks may approach underwriting technical performance risk in-house. He discussed the value of high-quality technical due diligence, particularly in situations where warranties may not be actionable. Accelerated lifetime testing of solar modules may also be conducted to reduce the risk of latent defects.

The panelists also agreed that risk management should not be viewed solely as a back-office function. Investors, sponsors and owners will all benefit from the understanding that risk management continues beyond the initial phase of investing in a solar asset.

2. Bank compliance is a team effort. Simply put, compliance is about ensuring that a bank’s internal processes are in line and operating within investment requirements. Teams — and often, teams of teams — must coordinate with each other to succeed in meeting various compliance requirements. According to Lan Sasa, Assistant Director of Project Management in Renewable Energy at U.S. Bank, banks interface with numerous internal and external stakeholders. The list includes internal asset management and performance teams, internal tax and accounting teams, internal credit committees, internal and external auditing groups, internal senior executives, and regulators.

Lan Sasa of U.S. Bank at SAMNA. (Photo courtesy of Solarplaza)

Furthermore, these various teams serve respective purposes and may have different areas of focus. For instance, while a bank’s origination team may be chiefly concerned with their developer relationships, a bank’s risk management team will likely be chiefly concerned with the financial health of the solar project. The group leader for renewable energy investments is responsible for making decisions amidst such competing considerations, and continuously requires high quality information to react quickly.

3. Problems will occur; surprises should not. Bank auditors are an inescapable fact of life for anyone working at a bank, including the teams responsible for solar investments. Given that an entire team is tasked with monitoring the fiscal health of these complex financial organizations, data transparency is a critical building block for any risk management strategy. If all of the data related to an asset or investment is not centrally located, latent problems can evolve into serious issues that can, in turn, lead to increased scrutiny.

Previtali of Wells Fargo noted that generally in bank contexts, “surprises are not well received.” But, one audience member asked, how do financial institutions respond to the occasional, but unavoidable surprise, such as the recent Sonoma wildfires.

Kaminsky from kWh Analytics reported that U.S. Bank recently used his company’s risk management software to get same-day information on how its investments were affected by the disaster. Without such a database of record, senior management at the bank would have waited days or weeks until all the developers were able to collect the required information and report back to the bank. Such situations again underline the need for high-quality data.

4. “Those who hold the risk should understand it best.” This project finance maxim continues to hold true and, during the workshop, was cited to explain the complex structure of solar finance deals. While banks have considerable experience and know-how about solar power plants, they still tend to structure their investments to limit their risks to those that they understand best.

Previtali noted that Wells Fargo, as a tax equity investor, is naturally exposed to risks pertaining to the tax credit. “Tax attorneys are our high priests,” he said. “We don’t do anything without their blessing.”

Risk related to the potential for underproduction, once foisted on lenders, is now increasingly held by insurers that back the Solar Revenue Put, a product that guarantees a certain level of revenue for a project, even if it underperforms. Firms that have a competitive advantage to assume specific risks are said to be its “natural owners.” Insurers are increasingly confident in their actuarial understanding of solar production risk, enabling them to be the natural owners of the risk.

5. Data standards are being developed to support risk management, reduce market inefficiencies, and lower costs for consumers. Clearly, in the increasingly complex field of solar investment and risk management, stakeholders and teams across the field need real-time access to accurate, consistent data. Until recently, however, a lack of data standards in the sector had created inefficiencies and increased risk.

SEPA’s Aaron Smallwood provides an update on the Orange Button Initiative. (Photo courtesy of Solarplaza)

Aaron Smallwood, Senior Director of Technical Services for the Smart Electric Power Alliance (SEPA), updated the workshop audience on the Orange Button Initiative, a standard for solar project data that has the backing of the U.S. Department of Energy’s SunShot Initiative.  Calling the initiative “an opportunity to help our industry mature,” Smallwood reported that Orange Button is now widely supported by leading solar industry groups, including SEPA, SEIA and the SunSpec Alliance.

Essentially, Orange Button provides a standard taxonomy — that is, a set of categories and classifications — for defining the standards to be used to measure a project’s production and other key operational metrics. The standardized data can reduce time, cost, and inefficiencies, said Previtali of Wells Fargo.

“We have some of the best and brightest people in the industry working for us,” he said. “But we’re asking them to spend a substantial amount of time cutting and pasting data from monthly operating reports into our system. We should change that. That is one of the reasons why I am a huge fan of using Orange Button.”

As with Orange Button, the development of increasingly sophisticated risk management tools and best practices is a sign of the solar industry’s maturation. As solar investments grow, so will compliance requirements and risk management needs. It is a matter of scale and size. As an investment grows, so does the magnitude of its potential downside.

Every asset class goes through this process. Bolstered by consistent data standards, solar risk management will be critical to helping our industry scale.

#Solar100’s Katherine Hamilton: The Steve Kerr of Renewable Energy

Originally posted on pv magazine USA.

Richard Matsui, founder of kWh Analytics, speaks with Katherine Hamilton, Co-founder and Chair of 38 North Solutions.

Energy veteran Katherine Hamilton reminds us of basketball veteran Steve Kerr (and vice versa). Here’s why:

  • Both are grounded in years of technical expertise: In the ’90s, Kerr was as a basketball player before becoming a coach, and Hamilton worked as an energy engineer before becoming an energy policy expert.
  • Both are respected as industry experts: As the head coach of the winning team of the 2015 and 2017 NBA finals, Kerr is sought out for his insights on his team as well as the broader sport. Known for her energy expertise, Hamilton has testified before the House Science Committee on renewables, advises world leaders on how to accelerate the global transition to clean energy, and serves as Ambassador to the Secretary of Energy’s Clean Energy Education Empowerment (C3E), President of GRID Alternatives Mid-Atlantic, and Co-Chair of the World Economic Forum’s Global Future Council on Energy.
  • Both are quick to recognize their colleagues (and have a sense of humor): When Kerr was asked to compare himself to Gregg Popovich, he reportedly responded, “Pop’s one of the greatest coaches of all time, certainly top three. I’m not… I think I’m fourth.” Similarly, Hamilton introduced her industry colleague Amy Harder as an, “Awesome new entrant to #Solar100. I dropped down one; like to think was making room…”
  • Both are thoughtful advocates: Whether it’s speaking about gun violence and the need to keep citizens safe or commending player Kevin Love for speaking about mental health, Kerr is known for his ability to speak to the core issue in a way that can reach across partisan lines. Similarly, whether it’s casually describing her experiences as an expectant mother testifying before a male-dominated House Science Committee in the ’90s or speaking about the importance of renewables in local job development, economic growth, and community redevelopment, Hamilton has dedicated her career to finding innovative energy solutions across partisan lines.

Katherine Hamilton’s at the top of her game and is this month’s #Solar100 thought leader.

Starting in Renewable Energy

Richard Matsui:  I read that before 38 North Solutions and your current work in energy policy, you were an English major and then an engineer. What first drew you to working in energy?

Katherine Hamilton:  My grandfather started as a surveyor for Virginia Electric and Power Company, and worked his whole career at what he called “The Company.” He was the family engineer and always wanted another engineer in the family. Given my interest in energy, I was the closest thing, even though I have degrees in English and French.

I ended up taking a summer internship with Virginia Power. Practically speaking, my grandfather also saw that utilities were great companies to work for, providing long-term stability, good retirement benefits, and a career trajectory. After I graduated from Cornell and the Sorbonne, I decided to apply for a full time job at Virginia Power.

The utility was looking for distribution design engineers (and I was obviously not one), so I took night classes in engineering. I had to take a test every six months for three years to ensure that I was doing my design calculations right, that I knew the difference between a wye and delta-connected transformer, etc. It was the best possible training on how electricity works and how systems work. I had to really learn the business, and I enjoyed it.

We were very innovative for our time—this was in the late ‘80s and we were implementing energy storage—ice storage systems—with thermal energy storage rates to deal with growing demand.

Following my desire to work with clean technologies, after a decade at the utility I moved to the National Renewable Energy Laboratory (NREL). There I started new programs for the Department of Energy’s Federal Energy Management Program, including energy audits for federal buildings, water efficiency programs, and increased renewables for federal sites.

Richard Matsui:  Wow, that’s an interesting backstory. How did those experiences with energy engineering then lead to your later work in solar?

Katherine Hamilton:  When I was at NREL, because of my background in creative writing, I was adept at translating what NREL’s scientists were doing into language that policymakers could understand. As a result, I was called upon as an expert on renewable energy, testifying as a witness for the Republicans on the House Science Committee in the ‘90s. That is now sadly the committee that does not seem to believe in science. Back then, Newt Gingrich was Speaker of the House, and Republicans and Democrats were still certainly much closer to the middle then than they are now. The Science Committee had a Ph.D. physicist on it who was a Republican.

[Laughs] At the time, I was also pregnant with the third of my four kids, and I thought those House Members were going to have a heart attack when I walked into the hearing room. But they were still interested in science, and, as a result, I was able to tell the story of renewables on behalf of NREL. Those were the days when renewable energy was not politicized to the point that it is now. It was considered innovative to talk about renewables in the context of science.

Policy Landscape After 201

Richard Matsui:  Section 201 dominated headlines and lobbying resources for months, and now our industry needs to quickly pivot to the next policy struggles. What are the biggest policy issues that a solar developer should be concerned about today?

Katherine Hamilton:  The best thing about having this 201 case done and having the tax bill done is that we have more certainty on pricing of modules and projects as well as duration of the tax credits. Now we need to watch out for statutes like PURPA.

Richard Matsui:  What level are you most concerned about PURPA, the state or federal level?

Katherine Hamilton:  While PURPA could probably use some updating, I view PURPA as a tool that has been used to allow competition in states where there is a utility monopoly. PURPA allows other resources to come in and compete, and both solar and wind have benefitted from PURPA. If you could tweak that statute to allow more distributed energy resources, including storage, you could use PURPA to create even more competition.

The problem with touching PURPA is that—just like the Clean Air Act—in opening the statute, it could be tweaked for the better, but it could also be tweaked for the worse. Because Congress is so polarized, it may be that FERC is a safer place to revisit PURPA.

Richard Matsui:  If you take the three-year view on this, in what ways do you see PURPA changing?

Katherine Hamilton:  Some of the calculations on cost benefits are up for discussion based on new applications and services, as is the one-mile rule. But in both cases, opening up the legislation brings us to a slippery slope. At this point, it is better to not revisit PURPA until we have more support in Congress, to ensure that it is managed very carefully and to the benefit of innovative resources and consumers.

Opportunities and Challenges for States

Richard Matsui:  What are some of the opportunities in solar from a state perspective?

Katherine Hamilton:  We can start with the states that already have high renewable portfolio standards—Hawaii, California, and New York.

Then, we can look at states that are considering raising their RPS, like Arizona, which may be creating interesting opportunities for energy storage as well.

And then there are states that might seem like unlikely candidates but that are opening up dockets on distributed energy resources. I think that is the path by which solar is going to grow more—as part of a distributed energy resource. Those proceedings are happening in Missouri, Arkansas, Louisiana, and other states in the Midwest. Even Florida is opening up a bit. We’re going to start seeing solar in states that are looking at the resource in a context that’s broader than just net metering or RPS, but as a key part of a more distributed, flexible, demand-side resource.

Richard Matsui:  I had not heard of this trend. What’s driving these states to see solar from the lens of distributed energy resources, as opposed to an RPS or other “tried-and-true” approaches?

Katherine Hamilton:  These states see that demand response is having an impact. Demand response used to be just load shedding—you would call customers, they would drop their load, and you would the lower the peak, saving consumers money and benefitting the grid. Demand response has become a lot more sophisticated and now enables resources of all types, including  storage and solar + storage, to be more dispatchable and flexible. Solar and other demand-side resources—whether CHP or fuel cells or small wind—create more dispatchable services at the edge of a grid. And those customer-sited resources are only growing.

Regulators know that they want to get ahead of the curve, so they’re responding: “What does this mean? How do we value it?”

A lot of states are currently going through their integrated resource planning. Utilities have to think several years in advance, so when they look down the road, that’s what they’re seeing for the grid: consumer engagement, solar usage, and technologies in combination with solar that change the way residential, industrial and commercial consumers are interacting with the grid.

Richard Matsui: How is the advent of energy storage shaping solar policy?

Katherine Hamilton:  Storage is like bacon; it makes everything better. You can’t limit storage to just being for solar, although solar certainly has a lot to gain from the use of storage. We can get away from relying on NEM all the time, and instead look at the full value stack of what behind-the-meter solar + storage can bring. It starts to look more like straight-up generation, just from the “load” side.

Richard Matsui:  I tend to be quite cautious when thinking about the future of solar. Yes, we have tremendous tailwinds in favor of our industry, but I’m also always waiting for the other shoe to drop. You mentioned that you are an optimist, and I’m wondering—what makes you an optimist?

Katherine Hamilton:  Innovation is moving so fast, costs are coming down, we’re starting to see solar become much more dispatchable with smart inverters, energy-storage technologies, and with tools like demand response. I also do a lot of international work, and globally, the trends are all toward a huge increase in solar energy. The scale of this change and the trends of costs coming down paired with integrating technology costs dropping makes me incredibly optimistic.

Richard Matsui:  What are the top three states that the industry ought to be most worried about from a state policy standpoint?

Katherine Hamilton:  I think we need to worry about Virginia, North Carolina, and states that are talking about rate-basing grid modernization.

Instead of rate-basing nuclear plants that may never run (like in South Carolina), utilities are trying to find other assets to rate-base—for example, unnecessarily undergrounding high-voltage transmission lines. These investments can suck the air out of the ability for a consumer to benefit from investment in more distributed technologies like solar and other non-utility offerings. Utilities are rightly nervous about their revenue model changing, so they are going to protect what they have and attempt to control their own future. This can certainly have an impact on consumer choice and distributed solar.

Finding Allies and Advocates

Richard Matsui:  Vote Solar recently came out with this campaign against the Duke Energy Power/Forward plan for grid modernization, though at the time I didn’t appreciate why this was an issue for our industry. Now I see it. Is this the right strategy for our industry, to advocate on issues like net metering or RPS that extend beyond traditional solar issues?

Katherine Hamilton:  Absolutely. You have to be able to look at the whole system because it’s all interconnected. I think the industry needs to find allies on the ground and those allies can be unconventional. Allies can include the Chambers of Commerce, groups who believe in competition and the free market. Certainly environmental groups have been traditional allies, but an ally can include those who want to protect consumers and allow for increased local innovation. So yes, look to your state Solar Energy Industry Association (SEIA) chapter, but also other allied organizations to make sure that you craft the messages that work in that state. Particularly in red states, those arguments can be about economic growth, local jobs, and keeping costs lower for consumers.

Richard Matsui:  Which organizations are our most effective advocates?

Katherine Hamilton:  I think Vote Solar has done a lot of really good work with quality analysis to back it up. Different regions have a variety of grassroots non-profit and business organizations that help take the lead, so there are a lot of groups combining forces on the ground.

Certainly, on the federal level, SEIA advocates for the solar industry. SEIA did a great job on 201, organizing diverse groups, leveraging the industry collectively, and creating the right messaging. For small companies with limited reach, it is difficult to be engaged with federal policy on a one-on-one level. You’re managing your own business, so you rely on your trade group for advocacy.

Showing Up, A Free Rider Problem, and the Roles of Companies in Shaping Policy

Richard Matsui:  A couple months ago, an energy policy expert came in and spoke at one of our company’s weekly Lunch and Learns. He told us that when it comes to policy, “Companies are either at the table, or they’re on the menu.” Would you agree? If so, what are the for-profit companies that are taking a leadership role?

Katherine Hamilton:  I don’t think that if your company can’t engage directly in policy work, you’re necessarily on the menu.

I think a better way to put it is: Regardless of your size, you need to show up. Showing up could mean going to your local SEIA meeting and ensuring that the issues you care about are included on their list of priorities, or it could mean attending a town hall meeting, or writing your member of Congress a letter on what you care about. It is important to show up and participate.

You may not have to be in every single proceeding in every single state and in Congress. You just need to ask: “Look, if I don’t have the time and resources to do this, who does? I better figure out who does, and work to ally myself with them.”

Richard Matsui:  So, there are different ways of being at the table, without hiring a policy team.

Katherine Hamilton:  There are companies that have big policy teams. It’s great that they have those resources, but not everybody does. So the reality is, you need to be able to work with what you’ve got.

Richard Matsui:  But I wonder about the free rider problem that our industry has always had. Policy teams are a business function that only large companies can afford, and historically, we’ve had publicly-traded giants like SolarCity and SunEdison that would invest in policy on behalf of the whole industry. With the collapse of some of those leaders and, therefore, their policy teams, have we seen a reduction in our industry’s ability to advocate successfully?

Katherine Hamilton:  We are seeing that impact on the state level, because some companies used to be in every state but no longer have the bandwidth. We had more companies on the ground in every state, and then they could work together and leverage resources.

The reduction in the number of companies in each state policy battle increases the importance of finding allies. When we’re the last solar policy group left in a state, we better find allies. We need to ask: “Who else is out here that maybe is not doing solar specifically, but with whom we have shared goals?”

Solar in the Trump Years

Richard Matsui:  How can our industry effectively advocate for itself in the Trump years?

Katherine Hamilton:  Good question. SEIA and other coalitions worked hard to reach the administration in the tariff case and explain that Republicans should care about solar.

What has been most upsetting to me over the last fifteen years is that renewables have become partisan. Part of that has nothing to do with renewables, but it has to do with interest groups influencing Congress and previous Administrations to create a zero sum game between renewables and traditional energy resources. This has polarized the industries—fossil to Republicans and clean energy to Democrats.

I think part of our job is making sure that we change that narrative. For example, 85% of wind projects are in red states. Let’s make sure that we talk about solar in a way that’s very much about jobs, economic growth, and community redevelopment, rather than only about cleaning the planet or having a green resource. We need to be strategic, using words with different policymakers that speak to their concerns.

With the current administration, we need to lead with our business-first points and speak in that language. We have cost-competitive technologies that are challenging and beating the incumbents.

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://chadbournecurrents.com/2018/02/26/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

kWh Analytics, Coronal Close the First Solar Revenue Put

Originally posted on pv magazine USA. Additional information available on Business Insider.

The company says that the new product has the ability to reduce up to 5 cents per watt in financing costs.

With so many in the solar industry and outside it fixated on the potential impact of tariffs on solar deployment, it is important to note that a big part of system cost reduction has been and will continue to be driving down “soft”, non-hardware costs. Some of the most important soft cost reductions have involved driving down the cost of solar finance, such as the securitization of solar assets pioneered by SolarCity.

Yesterday kWh Analytics and Coronal Energy announced a new development in reinsurance that kWh Analytics says can significantly reduce the cost of solar finance, closing on the industry’s first solar revenue put for three solar projects totaling 30 MW-AC in Virginia.

kWh Analytics’ Solar Revenue Put is backed by an un-named “global” insurer and provides a guarantee that investors will get paid for up to 95% of a solar project’s expected output, even if the plant itself falls below this. The product provides insurance not only against cloudier-than-expected weather, but also panel failure, inverter failure, snow and system design flaws.

“If you are an investor or a bank looking at a project, your number one concern is cash flows,” kWh Analytics Founder and CEO Richard Matsui told pv magazine.

“The idea itself is not new,” he observes. In fact, Matsui notes that all of the combined cycle gas plants in the United States built in the last decade have carried some sort of hedge to cancel out uncertainty of the project, which usually involves the risk of lower-than-expected power prices. Similarly, the wind industry depends heavily on fixed-shape hedges, which put a floor on prices.

And while Matsui says that a number of insurers had expressed interest in a similar product for the solar industry, they lacked the necessary actuarial data on PV plant performance. This is where kWh Analytics came in, and Matsui says that his company is able to draw upon the data that they have gathered from monitoring an estimated 20% of the large-scale PV plants in operation in the United States.

“By and large the (solar) asset class performs very well,” declares Matsui. “Everyone who is in solar knows that, but we just happen to have the best data to prove that.”

Matsui notes that in the past three months, his company has already seen seven lenders issue term sheets at 1.10x or 1.15x DSCR against P50 revenue when the Solar Revenue Put is in place. He notes that this compares to a standard “haircut” of 30%, meaning that project developers were typically able to only borrow 70% of a project’s estimated income.

If banks are willing to lend more towards the value of projects, that means a potential lowering of financing costs. And while differences in the available rates and types of finance between different projects makes it inherently hard to determine what the overall impact on cost will be, kWh Analysts estimates that developers and project owners could see a 5 cent per watt reduction in certain projects.

“In the solar business, risk is cost. In fact the cost of capital is the single largest cost in a solar power plant,” states Matsui. “Using data, we at kWh Analytics reduce risk. Lower risk means lower costs means more solar.”

“In 2018, 1.10x DSCR will become the new normal.”

Developer Inks Financing with First Solar Revenue Put

Originally posted on SparkSpread.

A U.S. developer recently closed financing for a 30 MW (ac) portfolio of solar projects in Virginia with what is thought to be the industry’s first solar revenue put.

The deal, which was executed by developer Coronal Energy and a AA- rated insurance company, was structured by kWh Analytics, a solar risk management outfit.

The multi-year revenue put guarantees up to 95% of forecasted P50 energy production at the Coronal Energy portfolio, which is also financed with tax equity provided by an unnamed bank.

By providing an “all risk” insurance policy, which covers losses due to factors including adverse weather and panel failure, the kWh Analytics revenue put has the potential to reduce the debt service coverage ratio (DSCR) required by project finance lenders to 1.10x or 1.15x from a more typical 1.30x.

The lower DSCR could cut the overall cost of solar projects by as much as $0.05/per watt, equivalent to half the $.10/per watt increase expected as a result of the imposition of tariffs on solar panels imported in the U.S.

“In the solar business, risk is cost. In fact, the cost of capital is the single largest cost to a solar power plant. Using data, we at kWh Analytics reduce risk. Lower risk means lower cost means more solar,” Richard Matsui, founder and ceo of kWh Analytics, said in a statement.

Indeed, in the fourth quarter, seven lenders issued term sheets at 1.10x or 1.15x DSCR on the P50 revenue of projects, assuming that kWh Analytics revenue put is in the structure, he notes.

San Francisco-based kWh Analytics is able to asses and price solar project risk via a proprietary database of historical performance data, accounting for some 20% of the U.S. market.

The transaction with Coronal Energy, which closed on Dec. 22, covers the Essex project (20 MW), which is contracted to Dominion Energy; and the Martin and Palmer projects (10 MW, total), which sell power to Central Virginia Electric Cooperative.

“Our work with the kWh Analytics team enabled the portfolio to move smoothly across the finance finish line and on to producing clean, low-cost energy for our utility customers,” Ed Feo, Coronal Energy’s president, commented.