While the first two quarters of 2009 won’t be remembered as the “brightest times” in the solar space there are some positive shifts occurring on the solar finance front that will help the long-term viability and short-term health of the industry. On one hand there are fewer tax equity investors with solar experience than just 12 months ago, but there are also new entrants, including corporate, international and private equity investors that are positioned to become active players. These new types of investors have different investment profiles and requirements, opening up new avenues for project financing. This, combined with regulatory changes on the horizon is triggering new developments throughout the solar supply chain, particularly on the financial side.

Innovative financial tools, such as the Power Purchase Agreement (PPA), have become key drivers of the U.S. solar market. Developed as a way to finance the large upfront capital cost of solar energy systems, PPAs have enabled a whole new class of solar customers and become a staple of the industry. With the PPA, solar financiers have shown the wherewithal to successfully match financial innovation with solar technology progress to propel the sector’s growth. Now, with a new set of variables in the market, they are developing new financial innovations to keep moving the industry forward. While those innovations take time and great effort by many parties to come to fruition, they are underway.

These new mechanisms will take advantage of newly-minted policies from the Obama administration, in particular the Cash Grants for solar that are a part of the stimulus package. The grants provide a significant reprieve for the industry on a number of fronts: banks will use the cash grant instead of the investment tax credit (ITC), allowing them to invest in more projects with less tax appetite. On the developer side, the payment of the cash grant upon project completion will enable immediate project ownership, instead of requiring a tax investor to be part of the financing. Historically, developers have had to wait five years or more before assuming ownership from the tax investor. Additionally, cash grants are appealing for construction financing, as they will reduce the perceived “take out” risk of the project. Initial guidance and the program application have just been released, and it appears that the DOE and Treasury have created an efficient program for stimulating green jobs.

Besides new entrants on the financing front, with many banks stabilizing and a positive policy outlook, some of the legacy players are also re-entering solar investing and we are also seeing some activity from non-traditional sources of permanent financing. For instance, regional financial institutions, utilities, and FORTUNE 500 corporations see distributed generation solar as a solid investment, particularly because of the recent 8 year ITC extension, the potential for cash grants to ease the upfront cash required and the basic principle that solar is a stable resource with low technology risk.

As to be expected when there is turbulence in the market, solar has witnessed a flight to quality. This applies to projects, in terms of credit and size, as well as developer partners with proven track records. While market conditions have created some additional hurdles for solar financing, they have also been a catalyst for change and innovation on how projects are financed, helping keep the long-term prospects sunny.

Technology development in the solar industry continues to accelerate at an unprecedented rate. Over $3 billion was invested in new companies and technologies in 2008 alone, and investments in solar have doubled every year for the last five years. Manufacturers of traditional photovoltaic (PV) panels continue to drive improved efficiencies, inverter manufacturers boast higher reliability, and as in the case of micro-inverters even offer a different take on older technology-–producing AC current at the panel or string level. A variety of innovative new thin film technologies and material systems are also emerging with the potential to offer unprecedented new and lower cost structures. Entrepreneurs are addressing the balance of system as well–looking for ways to reduce costs and accelerate the deployment of PV systems while also increasing quality and reliability.

All of this investment is aimed at reaching renewable energy’s holy grail-–grid party, the point at which solar power becomes less expensive than traditional polluting sources of energy. The Levelized Cost of Electricity (LCOE) for solar is rapidly closing in on traditional power due to increasing fuel costs for carbon-based energy sources joined with the introduction of new technologies reducing total solar system costs.

However, no matter how compelling these technology solutions may appear on paper, without mitigation of certain finance and performance-related risks, they may struggle to penetrate a solar market. With Power Purchase Agreements (PPAs) driving the majority of commercial projects, new technologies must meet “investment grade” standards and deliver reliable products to last and perform at predictable levels for the duration of long-term PPA contracts.

PPAs allow customers to shift the burden of paying for and maintaining solar systems to third party renewable energy providers, such as Tioga Energy. This model is so attractive to the market that PPAs funded 72% of the new solar systems during 2008. In the first quarter of 2009, the PPA market continues to show strong growth, even under the current negative economic pressures. This is because PPAs allow customers to forgo the large upfront costs of solar installations and simply pay for the power–not the solar equipment.

Since PPA providers typically contract with customers for 15-20 years, they must choose reliable technology that will last. This demand for healthy, long-term economic outlooks directly impacts the success of emerging solar technologies, because both the PPA provider and the financial backers of these multi-million dollar solar systems need reasonable assurances that the systems will perform as expected for at least 15 years.

Show Me the Data
For providers of traditional solar technology, there is a wealth of performance data available–thousands of projects spanning three decades. Still, these manufacturers must provide 3rd-party test results, long-term warranties, and 3rd-party studies that validate their products’ longevity. For manufacturers of emerging technologies (without such performance data and warranty backstop), this becomes a serious challenge to quick market penetration.

Since PPAs dominate commercial new solar installations, new technology companies should evaluate several risk guarantee strategies in order to accelerate mass adoption.

Three ways to mitigate technology risks for PPA providers include:

1. Proven reliability through accelerated lifetime stress testing by trusted 3rd parties.

2. Technology warranties or performance bonds for at least 10 years and ideally through the duration of the PPA contract, typically 20 years.

3. Component migration strategies that enable system operators to replace failed components, should they occur, with other components (reducing overall risk of the projects’ financial failure).

Unfortunately world class testing is not sufficient on its own to prove reliability–making warranties, guarantees, and risk sharing a necessity. The challenge for startups or undercapitalized technology vendors is that it may be difficult or impossible to fully back long-term warranties with sufficient balance sheet reserves to guarantee a full recall should a major product issue occur.

It’s here, once again, that the PPA can account for discrepancies in product and performance guarantees, balancing a project’s risk and reward profile and offering a path to market for novel new technologies. For example, through innovative deal structures, PPAs allow manufacturers to balance excess risk by discounting front-end pricing or incorporating third party assurance programs,

Today, it can be expected that the most successful new emerging technologies will not only win their share of the market on technological merits, but also on verified testing, risk mitigation, and creative deal structures around PPA relationships. With 72% of the commercial market funded by PPAs, the technologies used in those projects are best positioned to thrive and succeed.

Paul Detering

Since my last post around the solar conference in San Diego, large amounts from the bailout bill have been distributed, Obama has taken office, and the automakers have their bailout as well. “Change” is coming in many forms. At the conference, we experienced a surge of exuberance around the passing of the solar investment tax credit (ITC) as the logjam of pent-up deals began to move forward. But now, having a couple months for the market to digest what has happened and for people to realize what all these changes mean, a very different renewable energy world is emerging.

I’ve had a lot of queries since October about how significantly the financial crisis has crippled alternative energy – specifically, tax equity-based solar projects. Certainly, albeit temporary, declining costs for petroleum-based energy further raises questions about the timing to move to renewable energy.  The industry momentum that was building has undoubtedly faltered.

That said, the financial crisis hasn’t been all bad. It has, in some ways, supported the business model for companies like Tioga. For some time, people were predicting Power Purchase Agreements (PPAs), a third-party project finance mechanism, to represent 50% to 80% of the commercial solar market and a recent Alta Terra survey shows this number now over 70% for 2008.  The financial crisis has helped this along because more than ever, companies want to hold onto their capital to help ride out this financial storm and save money where they can. One way to do that and go green is through a solar PPA that allows them to trade a portion of their current utility bill for a potentially lower one via solar, without the burden of additional debt or capital outlay. And, despite the plummeting costs of oil and natural gas (which never seems to translate into lower utility prices nearly as quickly as they went up), it only serves to demonstrate the hedge value a PPA offers against volatility in energy prices.

Another positive factor in the solar segment is that solar panel prices are starting to come back into balance after being driven to temporary highs due to the high demand in Europe and the weakened US dollar. Lower panel prices and a recovering credit market will allow more businesses to go solar and save money. This has the potential to  help save not only the environment, but maybe the economy too.

The incoming Obama administration says they want green jobs and energy independence as cornerstones for turning the economy around. As a result, we’ve received numerous contacts from advocacy groups over the last couple of weeks soliciting ideas for the Obama transition team on how the new administration might promote solar energy. Now, I’ll leave it up to CNN, NPR and others to explain the details around what types of proposals are more or less likely to be accepted, but clearly the ones that can be quickly implemented for immediate job growth will float to the top of the pile.

We’re looking for legislation that helps finance solar projects to be a part of that mix. Because PPAs reduce risk and large capital outlays, they can help the new administration, the economy, and businesses recover from this current financial crisis. That doesn’t mean that there won’t still be challenges in 2009, but I’m confident we’ll rise to the occasion.

Paul Detering

General Comments:

• Huge attendance growth, doubling to 20,000 visitors from 2007, coupled with extreme segment optimism
• High optimism is not yet tempered to the financial/credit crisis and looming, global economic distress
• Great parties, with more free food and drink than one could wish for in the fabulous waterfront San Diego setting, which is about as good as one can imagine for a trade show (comfortable hall, great hotel and food access, perfect weather…)

2008 Takeaways:

• Average commercial PV project sizes continue upward – many, many 1-3MW projects in addition to the sub-megawatts (not to mention small utility and utility scale PV growth)
• New products announced last year to great fanfare are close to delivery and/or in low-volume production stages now – think micro-inverters, new CSP, thin film (e.g. CIGS) beyond the existing big names
• Big upstream players (cells/modules) are reaching further downstream, some testing the waters (sorry, it’s all NDA), some diving in head first (e.g. Suntech)
• Module supply is loosening, but still questionable versus growing demand.  Spot pricing may show much higher volatility than past
• This year, not a single person visiting our both – and we had a lot of visitors — asked “what’s a PPA?” High market acceptance
• The Germans are coming!!
• The suits are here
• Double Decker booths are in! (…to have Sharp’s marketing budget….that’s the life)

Looking Forward

• In many Europeans’ eyes, we are a fledgling industry, ripe for cost reduction, standardization (product, incentives, process, etc.) and large-scale deployment rolled out six-sigma style.  It’s going to be interesting.
• The big supply constraint for 2009 C&I PV may be financing.  Caveat Emptor.
• The utilities are on the way…think of the deafening, equipment sucking sound otherwise known as Spain…are the utilities, utilizing the ITC, to become the “Spain” of North America?
• Fancy trackers, intricate CSP devices…do we really need all that complicated stuff to make cheap electrons?
• The Germans are coming (did I already say that?).  The Spaniards are sitting across the aisle in first class, enjoying the exchange rate.

Great show, great week, huge opportunities.

Preston

The Solar Power International 2008 exhibit hall has a tradition of showcasing new product launches and the latest in solar technology, and this year was no exception. The hardware represented this year, as well as conversations in the halls and conference sessions, highlighted one notable theme absent from past solar industry conference tradeshows I’ve attended in the US: the PV industry is facing a shortage of qualified installers.

With increasing focus on clean, domestic energy generation and federal ITC support now in place, a lack of qualified technicians and installers presents a potentially serious bottleneck to industry growth. In California alone, if the state is to reach its 1 million solar roofs initiative in 10 years, it will require more than 10,000 additional certified installers. This year’s innovative products on the floor attempted to address the problem by reducing the time and complexity of the installation process.

Product Innovation Focuses on Installation

The expo floor showcased a new breed of simplified panel technologies, including wiring, grounding, and mounting elements incorporated into the module framing systems themselves, and simplified wiring harnesses. Developers of microinverters module-integrated inverter systems also demonstrated powerline communications that promise to virtually eliminate all DC and communications wiring, reducing system design and installation requirements to an absolute minimum.

As competion in solar technology intensifies and matures, margins will be tested throughout the entire value chain. These products represent a focus on reducing the labor cost component of installed solar systems, as well as recognition that for the industry to expand, the base of installers has to grow beyond those with years of PV design and DC wiring experience.

This same focus was reflected in several conference workshops and panel discussions bringing to light the importance of workforce development activities. As the U.S. economy and workforce facing challenging and changing times, the growth of the solar industry and development of integration technologies offers an economic opportunity to a new generation of skilled solar technicians.

The question begs asking: with all the hype around green collar jobs, where are all the green collar workers?

Which do you want first? The good news or the bad news?

The good news is Congress extended the Investment Tax Credit for 8 years. This is both unprecedented and long overdue, and it’s got the body of the 2008 Solar Conference upbeat and jovial. People are a buzz about the support the industry has finally received from Congress – after 12 highly contested voting attempts to finally pass legislation this year and avoid a crippling lapse. Layer that on top of industry already high on rampant growth, and one might argue you run the risk of blindly marching a healthy solar market into distress over the greater financial elements at play.

So here is where the bad news comes in…the house of cards that is our financial and banking system is quivering and people in the exhibit hall or at events at Solar Power 2008 don’t seem to be fully aware of the extent of the damage currently happening in the credit markets.

Granted, clean energy investment seems to have found shelter during the initial stages of a credit fallout. But, there are some serious challenges for solar in 2009, depending just how extensive the current financial crisis shapes up to be.

Banks that have been traditional early adopters in financing renewable energy have either forced themselves to become regulated, or will not be paying taxes next year thanks to losses acquired in acquisitions or large write downs. The amount of taxable income in corporate America has shrunk. So investors sophisticated enough to work with solar providers could demand a premium for their investment.

That being said established companies with track records can and will weather the storm.  Tioga Energy is fortunate enough to have carefully chosen partners that have maintained their tax equity support of our projects, as they have largely shielded themselves from write-downs.  All of Tioga Energy’s 2008 projects are secure.

The financial crisis and its fallout will not only reshape the game of solar, it could also freeze out new US companies looking to get in and play.  Hopefully the provisions of the $700 Billion bail-out will have the desired effects and quickly enough that naïveté and exuberance floating around the industry won’t run flat into the stark reality of the crisis as it is today. From what I’ve read recently, the bailout is having a mild effect to where bankers are seeing credit loosen a little and their consensus is it’s not a matter of if anymore, but when.

The fact that I am writing this post at almost 2am speaks directly to the enthusiasm and excitment around the celebrations happening all over downtown San Diego this week.  There have now been three nights straight of various parties and gatherings that have been hosted by companies and organizations who want to show their appreciation for their customers, partners, each other, and well… just about anyone who wants to celebrate the continued growth and strength of our industry.  It is not lost on all of us who have wandered the streets of San Diego’s Gaslamp District and waterfront that we seem to be an industry almost alone in the world in our joy and excitement while global financial markets shake.

Could it even be appropriate and logical that our trajectory as an industry will help the rebuilding of the economy?   Ok, that’s a little heavy, but there is no doubt that the leaders of the solar industry say they believe this to be true… and some even more so as the nights wore on and glasses were emptied.  It has been great seeing old friends, colleagues and business partners again, and meeting all the newbies who have finally seen the light that solar is great place to be.  Here’s to being part of the solution!  Now let’s all get back to work and sell some megawatts…

Right now I’m in San Diego, which has become the Mecca of Solar, literally overnight. Solar Power International 2008 has drawn thousands of people from around the world to talk shop and deals. And where I feel like I am living The Strange Case of Dr. Jekyll and Mr. Hyde.

There is tremendous excitement and enthusiasm here in San Diego’s convention center and Gaslamp district.  My breakfast meetings start early (7AM) and the days are filled with meetings about very real opportunities and projects.   Finding a quiet corner to meet is impossible.  Occasionally, I meet in one of the private meeting rooms hosted by some of the big players attending the conference. But usually it is in one of the many large “meeting rooms” on the upper level.

These rooms are great.  They typically have 5 to 10 tables and are well stocked with water, sodas and ice where 3 or 4 meetings are underway simultaneously in multiple languages – German, Spanish, Japanese, English – the Solar World right before my eyes. Very exciting.

At the conference day’s end, its thousands of solar enthusiasts spill out of the convention center and cross the street. Some people are so eager to get to the Gaslamp District and continue making their solar connections, that they attempt jaywalking. A crossing guard, looking out for our safety, has been kindly, but firmly, threatening people with tickets to keep us in line.

The Gaslamp District is San Diego’s historical heart along the water, bustling with shops and restaurants. Here the solar industry discussions carry late into the night over fine food and drinks at the many parties lining the streets. The excitement in the air is electric (renewable of course) from the estimated 20,000 people in attendance. That is up from 6,000 in 2006 and 9,000 in 2007. Clearly, solar is on a roll in America.

So these are my Dr. Jekyll days. As you well know, it’s in the dark where Mr. Hyde emerges. About half way through the day yesterday, I was riding the escalator up to the meeting rooms and the banker I was meeting with told me the Dow was down 730 points! Wow! I had not checked the WSJ service on my blackberry all day.

What a roller coaster. Flying down to San Diego on Monday, the Dow was up 940, Tuesday was relatively normal and now another 730 point drop. I think everyone at the conference is optimistic, as I certainly am, about solar energy’s long-term future. But Wall Street is not helping us right now. We are fundamentally changing the power industry in this country and building a better, more sustainable, and decentralized energy future. However, in the short term we must navigate some difficult and choppy waters.

At the end of the day, we depend on our customers, be they residential homeowners installing solar panels on their roofs and large commercial entities looking for less expensive green electrons, to utilities looking to fulfill state renewable portfolio standards and diversify away from fossil fuels. In these uncertain times every customer, understandably, is proceeding more cautiously. To top it off, this fundamental, low carbon economy switch needs a lot of money and that means the banking industry’s participation is important. Unfortunately, they are rather preoccupied at the moment.

Everyone I talk to in the banking industry agrees that their highest priority, once the global banking industry returns to some level of normalcy, is the clean tech industry and specifically new renewable energy. They know it’s the one sector of the global economy with the strongest potential for growth. So while I feel like I’m living the Jekyll and Hyde story, here in San Diego, the condition of Mr. Hyde will not prevail.

Coming this week:

• Business ramp up from ITC Extension
• Crisis on Wall Street impacts to Solar Main Street.
• The Best of the Tech
• C-Sweet: Solar Power’s social scene
• The ongoing quest for grid parity
• SP08 in review

Paul Detering

CEO, Tioga Energy

Link to SP08 Press Release

http://www.solarpowerconference.com/news/news.php?id=96

More on ITC Extension: Tax credit extension gives huge boost to solar industry

http://www.mercurynews.com/vc/ci_10692136

Credit Crunch and Renewables: Green Meltdown: Credit Crunch Whacks Renewable Energy, Too

http://blogs.wsj.com/environmentalcapital/2008/10/09/green-meltdown-credit-crunch-whacks-renewable-energy-too/