Solar market scouts for cash as subsidies fade

By Matt Daily

DALLAS | Tue Oct 18, 2011 3:09pm EDT

(Reuters) – The sunset of two key U.S. subsidies has set the solar industry scrambling to keep the cash flowing to fund new renewable energy projects, and the outlook looks cloudy, according to industry experts.

The U.S. solar industry is on pace to install a record 2 gigawatts of new installations this year, according to China’s Suntech Power, more than double the 880 megawatts put on line in 2011 and well above earlier forecast of 1.5 to 1.6 GW.

But a Department of Energy loan guarantee program that helped fund billions of dollars in solar installations expired at the end of the September, and another program that pays solar developers a cash grant of 30 percent of the cost of new projects will expire at the end of the year.

“What we hear from our members is finance, finance, finance,” said Thomas Kimbus, general counsel and vice president for strategy at the lobby group Solar Energy Industries Association.

The cost of solar power has dropped dramatically in recent years, but even a decline of nearly 40 percent in the price of solar panels this year has not yet eliminated the need for government incentives to make the energy source competitive with fossil fuels.

Kimbus and other company executives say they are hopeful the U.S. government will extend the cash grant program, but even the most optimistic observers admit that the collapse of Solyndra, which sank after taking $535 million in government-backed funding, has hurt solar’s profile in Washington.

The cash grant program will turn into a tax benefit program that allows solar power plant developers to deduct 30 percent of their projects’ costs over several years.

Project developers typically sell those tax benefits into the ‘tax equity’ market, which allows the buyers to use the proceeds to cut their own tax burden and brings cash to developers to pay for their construction costs.

“The two key drivers are the cost of the module and the cost of capital,” said Robert Krugel, managing partner of Smart Energy Capital, which has helped develop more than 300 megawatts of solar projects.

Industry experts differ on their view of that tax equity market and whether the major banks – usually the biggest buyers of the tax credits — still have an appetite to help fund the clean energy industry.

“I don’t think anyone knows how it’s going to work out,” said Bill Bush, chief financial officer of Borrego Solar Systems Inc, which has helped fund more than 1,000 solar projects.

“(But) banks are still making money and still want tax credits,” he said.

BIG VERSUS SMALL

Solar panel makers such as First Solar, SunPower and Suntech Power Holdings have benefited from the advent of “utility scale” solar power plants that can rival in size natural gas and coal-fired power plants.

Those plants cost billions of dollars to build, require long-term power purchase agreements from utilities to guarantee future revenue flow, and have depended on the now-expired government guarantees to bring their loan costs down.

Major power companies such as Exelon Corp, Sempra Energy and NRG Energy have taken stakes in those plants, but the expiry of the loan guarantees has put future development in jeopardy.

Those large plants may be able to tap into the debt markets that are typically reserved for fossil fuel power plants and other big projects.

“I’m quite sure we’ll see 300-, 400-, 500-million-dollar projects financed in the (solar) debt market,” said Marty Klepper, co-head of the energy and infrastructure projects group at law firm Skadden, Arps.

Still, it is the small projects that have surprised many in the industry this year, driven by the success of solar leases. Under those programs, an investor builds and owns a homeowner’s or business’s installation and receives a monthly payment from the property owner.

Those leases have made it cheap for property owners to cut their monthly power costs and install solar power without spending tens of thousands of dollars up front.

Clean Power Finance CEO Nat Kreamer raised $75 million from Google to fund solar leases under an investment fund and is deploying millions of dollars from another unnamed software company to installers of residential solar systems who use its software.

The young company, whose number of financed projects has grown by 5 percent per day since April, is looking to banks, infrastructure funds and other corporations to raise money and roll out more rooftop systems.

“We’ve had volume over $1 million daily in the summer months,” he said.

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