Tax equity has been the primary way to finance solar projects in America. But it has sometimes proven difficult. There are a limited number of entities with enough tax liability to invest large pools of money.
Concerns over a tax equity bottleneck helped spur the creation of new financial tools, such as securitization and YieldCos. But it’s not as though tax equity is in such short supply that companies are struggling to raise money.
“Tax equity remains the most expensive capital in most solar projects today,” said Shayle Kann, senior VP of GTM Research. “But leading developers have consistently proven their ability to raise enough tax equity to sustain their rapid growth and build out their pipelines.”
“Given its inherent supply constraint (that is, it is limited to particular companies with large tax appetites), tax equity will likely be a challenge for every developer as long as it remains part of the capital stack,” he added. “But we see no signs that it will hinder growth in the U.S. solar market.”
In 2014, the U.S. solar industry completed a project every two and a half minutes. Those installations were a result of $15 billion in investment of all types.
Residential solar has been the fastest-growing sector, with four-fold growth over three years, rising from 200,000 systems installed in 2014 up from 50,000 systems in 2011.
The following charts show the residential solar companies that have raised the most tax equity since 2008.
Source: GTM Research
There’s little surprise that SolarCity, the biggest residential solar installer in the nation, raised the most money. The company announced more than $750 million in tax equity last year. At the same time, SolarCity appears to be well positioned to rely on other financing tools to meet its cash flow needs when the federal Investment Tax Credit declines to 10 percent in 2017.
SunPower and Clean Power Finance also raised significant amounts of tax equity last year. NRG Home Solar also entered the scene in 2014 by raising more than $100 million in tax equity -- reflecting the company’s decision to get into solar in a big way.
Overall, publicly announced tax equity funds totaled just over $2.2 billion in 2014, roughly equivalent to 2013 levels.
There are a few possible explanations as to why tax equity funding has been flat despite growth in the residential solar market. None of them are tied to a tax equity bottleneck.
The primary reason is that these are only announced funds. There are many more, especially among the leading financiers (SolarCity, Sunrun, and Vivint Solar), that were never announced.
But that’s not the whole story. Solar system costs have also come down significantly, so less funding is needed to build the same number of systems -- about half as much now compared to 2008.
The final factor is the rise of residential solar loans relative to leases and PPAs. Hundreds of millions of dollars of loan funds have been announced in just the past year (along with those unannounced, just as with tax equity funds). GTM Research expects market share for residential solar leasing to have peaked in 2014.