United States: Solar Industry Magazine Publishes – A Decade Of Evolution In U.S. Project Financing

The full text of the article is below or it is available at Solar Industry Magazine:

The solar industry has undergone a tremendous evolution in the course of the last decade. Below we outline some of the more notable developments, with a focus on project financing in the U.S.

In 2007, the largest solar photovoltaic project in the world was an 11 MW project in Portugal, called Serpa, that cost EUR 58 million to build. Today, the largest solar PV project in the world is Tengger Desert Solar Park in China and is 1,500 MW, or more than 100 times the capacity of Serpa, and the cost of building a solar project is a fraction of what it was a decade ago.

In 2007, manufacturers of thin-film solar and manufacturers of crystalline silicon solar were battling to see which would be the predominant technology. Today, there are more manufacturers of crystalline modules than thin film and more projects using crystalline modules than thin film; however, First Solar appears to have found success with rigid thin-film modules.

In 2007, terms like "resi," "C&I," "DG" and "community solar," which are now ubiquitous in our industry, were unknown to most energy financiers.

Furthermore, the U.S. tax equity market for solar in 2007 was nascent at best. The leading structure was the sale-leaseback. Investors were starting to experiment with early forms of a flip partnership that lagged in sophistication behind the structuring being used for wind project tax equity. If a solar company called an investment bank looking for financing, the call was directed to the venture capital desk.

Today, the partnership flip has far surpassed the sale-leaseback in use in the U.S. solar industry. In addition, there are now two distinct partnership flip structures for solar: internal rate of return-based flips that resemble those used by the wind industry and time-based flips. In addition, there are niche structures like pass-through leases and inverted leases, and in 2007, those had not yet migrated on a meaningful level to solar from the historic tax credit industry.

The investment tax credit (ITC) for which solar projects qualify has also changed in the last decade. In 2007, the ITC was still an alternative minimum tax "preference." That meant companies subject to the "AMT" had to carry the credit forward until the company generated enough taxable income relative to its tax attributes to exit AMT. The AMT problem was fixed by the Emergency Economic Stabilization Act of 2008. This legislation made solar more attractive to tax equity investors with other significant tax attributes on their tax returns.

Further, in 2007, if you proposed that Congress should allow solar project owners to trade a project's ITC for an equal cash payment from the U.S. Department of the Treasury, your knowledge of the political landscape of Washington would have been seriously questioned. In response to the financial crisis, that is what Congress did with the Section 1603 cash grant program enacted in the American Recovery & Reinvestment Tax Act of 2009.

As the solar industry evolved, residential solar exploded. Residential solar started with companies offering homeowners leases of rooftop solar. Power purchase agreements (PPAs) were added to the mix to provide homeowners with a more flexible financing option. The basic PPA structure was then supplemented with a prepaid PPA structure for homeowners flush with cash.

In 2017, loans and cash sales are becoming more popular in the residential market segment, and state programs like the Green Bank in Connecticut or Property Assessed Clean Energy (PACE) programs in states like California and Florida offer homeowners financing at low rates. Debt to finance pools of residential loans, PPAs and leases has been provided in many forms.

Furthermore, in some jurisdictions, due to the advent of community solar, consumers do not even need to own a home or business location to adopt solar. The leading states for community solar are Massachusetts, Minnesota, New York and Vermont, with South Carolina trying to lead the South. Community solar arrangements vary significantly based on the local regulatory regime.

Community solar requires remote net metering rules to be in place. That is, a consumer must be able to earn a credit toward her electric bill for her residence or business, whether such residence or business location is rented or owned, based on electric generation at a utility-scale solar project that may be miles away. For the billing arrangements to work, the utility-scale project must be in the same utility district as the consumer's residence or business location.

Community solar, depending on the regulatory regime, offers consumers similar financing options as traditional residential rooftop solar: (i) purchase of an undivided interest in the project, with the homeowner claiming a 30% tax credit under Section 25D of the Internal Revenue Code as described in Internal Revenue Service (IRS) Private Letter Ruling 201536017; (ii) a fixed-price lease of an undivided interest, in which the consumer makes a fixed monthly payment in exchange for all of the production from her portion of the project; and (iii) a net metering credit purchase agreement under which the consumer pays for each kilowatt-hour produced by her portion of the project in a particular month. Despite the variation and complexity, developers of community have obtained both tax equity and term debt financing from a variety of sources.

As community solar projects further the goal of democratization of solar, our industry is still left with the criticism that solar is an intermittent resource that is unavailable at night or during periods of cloud cover. To address this challenge, our industry is pursuing energy storage solutions.

Storage is a market segment with tremendous potential for at least three reasons. First, as we saw with respect to solar modules this past decade, efficiency of storage appears to be improving, while costs are declining.

Second, many utilities are recognizing the reliability benefits provided by storage. For instance, Southern California Edison has entered into resource adequacy purchase agreements with 15-year terms for storage under which it pays independent power providers for "capacity attributes," which are resource adequacy attributes (e.g., the ability to provide power to the grid at key times) identified by the California Public Utilities Commission or California Independent System Operator. Large consumers of energy are incorporating storage to reduce their peak demand charges, sharing the cost savings with storage developers. Still, others are using storage to provide frequency response services.

Third, the IRS ruled, most recently in Private Letter Ruling 201444025, that storage owned by the same taxpayer as a solar project qualifies for the ITC to the extent the storage is at least 75% charged by the solar project – although less than 100% solar charging does result in a proportionate reduction for the ITC for the solar equipment. For instance, 80% solar charging would mean 24% (i.e., 80% multiplied by 30%) of the eligible basis of the storage project would qualify for the ITC.

The IRS announced in Notice 2015-70 that it is going to overhaul the regulations that define ITC eligibility, which were last updated in the 1980s. That overhaul could affect the rules for storage, but we hope any departures in the new regulations from the storage private letter rulings are to remove administratively burdensome requirements, such as the solar charging percentage having to be tested each year during the five-year recapture period, without altering the principle that storage charged with solar qualifies for the ITC.

Some of the fate of the U.S. solar industry over the next six years is dependent on pending IRS guidance as to what it means to "begin construction" of a solar project. This guidance will be important, as it determines what level of the ITC a solar project will qualify for after 2019 as a result of the ratcheting down of the ITC enacted in the Consolidated Appropriations Act of 2016. The IRS is working on that guidance but is taking its time, as it is only relevant starting in 2019 because projects must begin construction by the end of 2019 to qualify for a full 30% ITC. Then, projects that begin construction in 2020 are eligible for a 24% ITC; projects that begin construction in 2021 are eligible for a 22% ITC; and after 2021, current law provides for a permanent 10% ITC. However, regardless of when a project began construction, it must be placed in service (i.e., be operational) by the end of 2023 to qualify for more than a 10% ITC. The IRS issued relatively generous guidance to define beginning construction for wind projects. Our industry is optimistic that the guidance for solar will be no less generous.

The solar industry evolved to overcome the obstacles it faced a decade ago. Given our industry's ingenuity and drive, it appears likely that it will continue to evolve to successfully address the challenges of today and the coming years.

Originally published November 1, 2017

Visit us at mayerbrown.com

Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.

© Copyright 2018. The Mayer Brown Practices. All rights reserved.

This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Troutman Sanders LLP
Troutman Sanders LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Troutman Sanders LLP
Troutman Sanders LLP
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions