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Simplifying Solar Diligence: A TurboTax®-like Solution

May 7, 2015 no comments in Solar by beEdison

This article originally appeared on the official blog for the American Council On Renewable Energy.

This is part 2 of a 3 part series

It’s time to relax. The day has passed and we can all finally let out a collective sigh of relief now that we’ve successfully navigated the obstacle course that is filing our annual income tax return. Luckily, almost no one needed to read the 3,863 page long Internal Revenue Code to figure out how to complete their taxes. Most of us were probably smart enough to use TurboTax®, or another tax return preparation tool like it. If you would have filed your yearly income taxes by following the guidelines presented in the Internal Revenue Code, it would have taken time—lots of it—and you’d likely miss key information. Like taxes have taught us, it’s much easier to use a technology platform to simplify complex processes. As it turns out, solar diligence isn’t much different.

In last week’s blog, the truSolar risk screen standard for commercial and industrial solar projects was highlighted. truSolar is much like the Internal Revenue Code, in that it sets comprehensive guidelines and rules that should be followed. You could review the truSolar standard in its entirety in order to score your solar project’s risk profile, but that would consume valuable time. So here’s the good news: there’s a software platform like TurboTax® to help streamline a project’s truSolar assessment.

beEdison is a cloud-based technology platform that operationalizes and professionalizes the truSolar standard into a quick and efficient survey. Much like how TurboTax® asks the right questions to complete filing scenarios, beEdison asks questions unique to a project. For example, a project developing a ground mount array, won’t be asked questions about the structural integrity of a roof.

While TurboTax® electronically prepares tax filing documents, beEdison produces a comprehensive diligence report to share with project partners. Additionally, beEdison’s platform provides recommendations to mitigate project risk and improve a project’s quality, while an online deal room securely stores project documents. It’s like Dropbox, only specifically tailored for solar project documentation. A user can upload multiple files with the click of a button and easily share documents with project partners. NY Solar Demo - Dashboard_Score

The most anticipated TurboTax® display is the one that reveals your annual tax refund or payment. Similarly, beEdison’s Dashboard reveals a project’s truSolar score which effectively summarizes a solar project’s risk profile, and instantly allows investors to assess whether the investment opportunity in front of them aligns with their risk appetite.

Similar to the renewable energy sector at large, as the commercial and industrial solar sector realizes its full potential; it’s still constrained by the complexities of project development. There is no standardized way to assess the risks of C&I solar assets. Innovative tech developments like beEdison will alleviate headaches associated with project development and diligence, and help solar asset buyers and sellers complete more projects with more efficiency.

In next week’s final blog post we’ll look at the future of truSolar and beEdison and the impacts each can have on a rapidly evolving solar industry. Stay tuned, especially if you are interested in asset securitization and secondary markets.

Increasing Returns for Solar Tax Equity

May 5, 2015 no comments in Solar by beEdison

Oversupply of Deals to Drive-up Yields through 2016YE

This is part 1 of a 2 part series

In the US today, solar photovoltaic projects receive an Investment Tax Credit (ITC) of 30% of eligible costs. Project equity sponsors often look for an investor (called the Tax Equity Investor) to co-invest in their projects and monetize the ITC. Capital from Tax Equity Investors (called Tax Equity Investment) constitutes approximately 35% of the total capital required for each project. The remainder is provided by the project sponsor and term debt, if applicable. For smaller projects, Tax Equity Investments can earn a 30% IRR or more over 6 years. All of the invested funds are returned via tax savings within 24 months. Cash dividends through annual coupons yield a further 15+ percent. Typically, the manager of a Tax Equity Fund (several Tax Equity Investments made simultaneously) will screen investment opportunities, conduct diligence, manage the investment, oversee project operations and distribute returns to Tax Equity Investors.

Tax equity continues to be king of the US solar project capital stack. With few institutional, fewer corporate, and even rarer, individuals with both a tax obligation to off-set and the passive gains that qualify – finding and closing on tax equity is usually more difficult than securing sponsor equity and long-term debt.

Demand for tax equity is increasing in a growing marketplace dependent upon it. Also, the reversion of the Investment Tax Credit, expected after December 31, 2016, will only increase deal supply, as 2017 projects are rushed into completion during 2016. New entrants into the commercial solar segment are further increasing demand for smaller ‘bite-sized’ investments – at sizes below traditional institutional minimums and corporate preferences of typically $10 million per investment. Demand for Tax Equity Investments will outstrip the supply of capital from existing investors between now and the end of 2016. Even when project developers and sponsors overcome these supply-demand obstacles, a final barrier can make closing tax equity difficult – middle market entities with unrated credit backstopping the long-term cash flow of the solar project. Institutional Tax Equity Investors have traditionally invested in projects involving rated credits only, shying away from lucrative, unrated middle market opportunities. Middle market and smaller balance-sheet power purchasers create a big challenge for sellers and a big opportunity for Tax Equity Investors – at least for those with access to deal flow and a ready plan to invest reliably. The market is beginning to see new Tax Equity Funds established to support an underserved markets segment – investments of $1–2.5MM per project. Provisional returns on investments of $1MM are shown below.

As this market imbalance grows over the next 18 months, overall yields on Tax Equity Investments will likely increase along with returns on cash and tax-cash multiples. This imbalance will further a Tax Equity Investor’s-market and a boom for such investments before December 2016.

PARTNERSHIP FLIP INVESTMENT STRUCTURE OVERVIEW

Tax Equity Investments are made through a special purpose LLC (an “SPE”) using a Partnership Flip Structure. Project sponsors are responsible for development, construction and commissioning of a project. After the investment manager’s diligence, the tax equity investment is made just before the project is commissioned. The Tax Equity Investor co-invests alongside the project sponsor and enjoys a priority equity position. The Tax Equity Investor and project sponsor own 99% and 1% of the SPE, respectively, until the investment hurdles are met. Once a predetermined hurdle is met, the ownership interests in the SPE flips – the project sponsor then owns 95% of the SPE and the Tax Equity Investor owns the remaining 5% interest. At this point, the Tax Equity Investor typically elects for their residual interests to be bought out by the project sponsor. 100% of Tax Equity Investment is returned through the ITC and accelerated depreciation. In addition, preferred cash distributions equaling 10-15% of the Tax Equity Investment are made via annual coupons and, if a buyout is elected, an additional payment in exchange for the residual 5% interest. NOTE: The IRS treats the ITC and depreciation benefits as passive losses, which for individuals generally needs to be matched against passive income. Corporations do not have this requirement. Please consult a tax advisor for guidance.

ABOUT DISTRIBUTED SUN

Distributed Sun LLC (“DSUN”) is a renewable power developer and Tax Equity Investment manager. DSUN has operating assets in 7 US states and a development pipeline in 12 US states. DSUN has screened nearly $12B of investment opportunities in renewable energy – from 226 unique network partners. DSUN’s proprietary investment methodologies, screening and underwriting practices are used by hedge funds, institutional and individual investors. DSUN has made Tax Equity Investments in several projects and will continue to service the growing demand for such investments. Send an email to Jeff Weiss at jeff@distributedsun.com to learn more about the Tax Equity Investments and the Investment Tax Credit.

DISCLAIMER – This article should not be relied upon and is not a substitute for the skill, judgment and experience of an investor, its management, employees, advisors and/or clients when making investment and other business decisions. This blog article is not a solicitation to invest, investment advice or a tax opinion – please contact your counsel for advice.

A Rosetta Stone for Commercial & Industrial Solar

May 1, 2015 no comments in Solar by beEdison

This article originally appeared on the official blog for the American Council On Renewable Energy.

This is part 1 of a 3 part series.

The U.S. solar industry continues to face real obstacles to scale despite all the positive news about growth in jobs and installations this past year. There are widening imbalances, and looming disruptions, among the residential, commercial and utility solar segments that reveal some of the challenges and opportunities that lie ahead. Industry leaders are working together, however, to crack the code on solar diligence and streamline the process for financing commercial and industrial solar projects.

According to the U.S. Energy Information Administration, commercial and industrial electricity consumers use 51% of the nation’s power generation—more than twice as much as homeowners and renters at 22%. Despite this, the residential solar segment overtook commercial and industrial (C&I) total capacity installed in 2014 (see graph right). And according to the Solar Energy Industries Association, this gap is only forecast to grow by another 500 MW by 2017. Resolving this imbalance is central to the industry’s future growth prospects.

In an industry where the utility solar segment is estimated to decline by more than 5 Gigawatts from 2016 to 2017 according to Bloomberg New Energy Finance, billions in investment and potentially tens of thousands of jobs may be lost if market leaders don’t work together to unlock commercial growth at scale.

While game-changers like battery storage and community solar are on the horizon, there are market-driven solutions that are available. If these solutions are adopted, they can have a big impact today. These solutions do not rely upon forward declining cost curves, technology breakthroughs, or policy interventions. Ready solutions that crack the code of commercial growth rely mostly on adoption. As the industry begins to accept standards to uniformly screen the risks of the underlying commercial solar asset, and score the underlying, unrated credit of the off-taker, the positive impacts are significant.

When buyers and sellers of commercial solar assets share a common language, the time to screen and qualify deals is reduced from days to minutes. Conversion ratios – development assets becoming operating assets – increases from less than 5% to over 15%. And annual industry transaction expenses are reduced by hundreds of millions of dollars. These industry-driven solutions represent a positive, billion-dollar-plus annual impact in the U.S. by 2018, and help to restore the commercial solar segment to its share of U.S. electricity consumption.

Co-founded in 2012 by Distributed Sun, DuPont Photovoltaic Solutions, Rocky Mountain Institute and Underwriters Laboratories, the truSolar® Working Group has developed a uniform risk screen standard for commercial and industrial PV projects.

truSolar is like the Rosetta Stone of clean energy asset finance as it bridges the communications gap between developers and investors by assigning easily understood scores to project risk elements. truSolar creates a common language for talking about risk, as well as a common understanding of what “good solar projects” look like. This is appealing to pension funds, tax investors, and especially the small regional and community banks that are the traditional financiers of small business.

The image below provides a high level overview of the truSolar risk screen’s structure. This hierarchy is used to unbundle and scrutinize project risk elements before scores and their associated weightings are applied. At the end of the assessment process, an overall project score is calculated that summarizes the investment opportunity’s risk profile.Having a common truSolar language for project diligence produces three major benefits for America’s renewable energy industry.

First, financing C&I solar projects with transparent, uniform risk attributes increases deal velocity and conversion ratios. Second, standardized project scoring, coupled with standardized reporting formats, significantly reduces the time and effort spent on due diligence, thereby reducing project soft costs. Third and finally, the use of a consistent scoring methodology across solar project portfolios helps the primary market better serve securitization in the secondary markets. Ratings agencies, underwriters and investors have a quicker path to a clearer view of how each asset bundle aligns with their risk appetite and investment return requirements.

In next week’s blog post, we’ll pull back the covers on a new cloud-based software platform that makes the truSolar risk standard incredibly easy to use. It’s the solar industry equivalent of TurboTax®, and similar software innovation is changing the way renewable energy players go about their business.

beEdison is a Finalist in the 2015 “Finance for Resilience” competition!

March 19, 2015 no comments in Solar by beEdison

Finance for Resilience (FiRe) is an open and action-oriented competition platform that collects, develops and helps implement powerful ideas to accelerate finance for clean energy, climate, sustainability and green growth. FiRe, which is run by Bloomberg New Energy Finance, focuses on interventions that are led primarily by the private sector, bear the potential of significant incremental finance and can be implemented independently from the international policy process of climate change.

This year beEdison, with the support of truSolar’s working group members, submitted an intervention titled: “Automating a Fico-like risk score for clean energy.” The submission was judged by a panel of renewable energy experts along with 51 other entries, and was selected as one of eight finalists to present at this year’s “Bloomberg Future of Energy Summit.” beEdison’s intervention is grounded in big-picture thinking, and has at its core a sharply delineated focus: we must lower transactional soft costs for commercial clean energy projects and promote clean energy asset securitization by scoring risks in a standardized way.

The Challenge: The starting point for beEdison’s invention lies in the recognition of a key challenge facing market participants who want to expand clean energy deployment. Currently, the commercial & industrial sectors consume 51% of America’s energy, twice as much as residential and more than residential and transportation combined. Yet, in 2014, after several years of shared leadership, C&I was overtaken by residential in total solar capacity installations. Why this happened reveals how the C&I segment can and should adopt ready solutions to unleash growth, such as: 1) a reliable framework for credit assessment like FICO, and 2) standardized contracts, transaction practices, and cloud technology for solar asset buyers and sellers that enable growth to match and exceed residential proportionate to its actual share of electricity consumption.

The Solution: A widely-adopted, cloud-based software platform (beEdison) is needed to streamline/standardize commercial diligence, while providing reliable and uniform scoring metrics for financiers to use. Such a platform using industry accepted diligence and rating standards (truSolar®) will lower project costs, improve deal conversion ratios and accelerate solar asset securitization.

Scope: beEdison and truSolar will initially promote greater funding inflows into the USA’s non-residential solar market, before platform expansion occurs in markets such as Europe, Australia/NZ, Latin America and Africa. The beEdison executive team will also collaborate with industry leaders in other renewable energy sectors to devise project due diligence standards that are suitable for adjacent markets such as energy storage, energy efficiency, biomass, and other complex asset classes such like infrastructure-as-a-service.

Scale: By 2018, wide adoption of beEdison software solutions can unlock hundreds of millions of dollars in additional annual investment in US non-residential solar. Higher conversion ratios and soft cost reductions contribute to this additional capital deployment. There will also be secondary benefits that impact our environment and the capital markets. An additional 1.6GW of solar installed by 2018 would reduce carbon emissions by approximately 1.6 million metric tons: the equivalent of removing 351,000 cars from our roads. In addition, the widespread adoption and acceptance of beEdison project scores will facilitate securitization of solar project assets in the financial markets: this development will provide investment managers with additional capital deployment options.

The beEdison team knows there is a lot of work ahead. As a company we are committed to breaking down the market’s resistance to change by building trust between partners; securing acceptance of the truSolar Risk Screen Methodology by industry participants, notably financiers, rating agencies and solar project developers; and investing in efforts to convene industry players who can formulate and publish complementary risk screen methodologies for wind, biomass, biofuels and geothermal investment opportunities.

Join us on this mission! Contact join@beEdison.com for more information about beEdison’s software and project rating solutions.

Will standardized credit assessments for unrated off-takers unleash the potential of solar in the non-residential space?

February 13, 2015 no comments in Credit Analysis, Solar by beEdison

Graph Image

According to Bloomberg New Energy Finance, the United States deployed 1.2GW of commercial solar in 2014. (1) This may sound like good news, but the graph to the right clearly shows that in 2014, America’s residential sector overtook the commercial sector for the first time in terms of annual PV capacity deployments. This development begs the question: what is preventing America’s non-residential solar sector from scaling at a faster rate, noting the country consumes more than twice as much electricity in the commercial and industrial segments today as it does in residential?

In many respects, it is easier to deploy solar on the rooftops of homes than on commercial buildings. Residential off-takers have credit scores (FICO) that can be used by investors to determine payment risk. The segment has been largely “productized” and lends itself to standardized contracts and workflow processes. Residential solar companies close sales “on the spot” and without negotiating. Installation crews can drive to one home, install a system, then drive a few doors down and essentially install the same system, with practically zero impact to grid stability, the environment and other regulatory matters. Non-residential solar companies face nearly the opposite on each of these issues. Their installers are rarely building the same type of system or in the same zip code or city. Larger systems face interconnection and permitting challenges that are highly bespoke. Every deal is a negotiation. Understandably so, the commercial segment is highly fragmented. Standardized contracts and uniform methods for evaluating and rating development assets are only just now taking root. And most importantly, there is no reliable, accepted, third-party method for scoring unrated commercial credit risk. Until now.

Over 90% of commercial real-estate in the US is owned by unrated credit entities. Cracking the code of scaling C&I solar, therefore, revolves largely around the establishment of a reliable commercial credit scoring methodology.

In some ways, it strains the imagination to understand why this has not already been achieved for commercial solar. In addition to S&P, Fitch and Moody’s, there are another 7 NRSROs (nationally recognized statistical ratings organizations). There are 42 credit rating agencies globally and 34 credit reporting agencies.

The vast majority of non-residential solar power purchasers are small and medium sized enterprises. The options available to reliably assess their credit worthiness are limited:

• Dun & Bradstreet provides credit profiles for thousands of businesses, but D&B’s underlying data streams are mostly self-reported by businesses, which means the resulting scores have limited reliability.
• CRAs like Experian utilize third party data to generate credit profiles for businesses. These reports may be more reliable than D&B’s offerings, but they focus largely on payment histories, providing limited insight into current financials or how businesses and their respective industries may perform over the mid-to-long term.
• NRSROs like S&P focus mostly on entities with publicly traded debt instruments, thus ignoring the universe of unrated credits that comprise the vast majority of potential non-residential off-takers.

Building upon the foundation of credit risks identified by truSolar®, the beEdison team has created a standard approach to reliably assessing off-taker credit risk. In doing so, beEdison is helping to unleash the full potential of nonresidential solar. Credit assessment is offered to partners as a service, and is being automated as a separate credit module within the beEdison platform. These credit diagnostics leverage third-party data, standard ratio and comparables analysis with proprietary scoring to rate prospective counterparties along seven key dimensions:

1. Payment history;
2. Financial health;
3. Performance relative to industry peers;
4. Counterparty industry outlook;
5. Implied credit rating;
6. Liens, judgments and bankruptcy profile;
7. Capacity to meet PPA commitments during financial downturns.

Contact credit@beEdison.com for more information about the company’s counterparty assessment services.

(1)BNEF. (Feb 4, 2015). Sustainable Energy in America Factbook – 2015. Page 77.

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