Most solar entrepreneurs look at an installation and see green.
Experts say that should be even more true in the current financial climate. Because of favorable interest rates, sinking solar system prices and the sector’s increasingly de-risked reputation among investors, many developers are noticing they can squeeze even more money from already-operating projects.
Refinancing, a humble financial transaction that’s caught the eye of many solar developers, could allow companies to pull more money from a project and shuttle it elsewhere.
Renegotiating a loan or credit agreement now can mean a better interest rate while increasing the amount of debt funding on a project, freeing up a developer’s own cash.
“There’s this $2 billion opportunity sitting right under the industry’s nose,” said Richard Matsui, founder and CEO at kWh Analytics, a solar data and finance company that’s helped several clients refinance.
“That’s the challenge and the opportunity for the industry. You’ve got all this trapped cash in these solar farms, and refinancing is a way to take advantage.”
Using the "shakeup"
U.S. utility-scale system prices sunk to $1.07 per watt in 2018 from $1.56 in 2015, according to data from Wood Mackenzie Power & Renewables, meaning newer-build projects are significantly cheaper than existing installations.
The solar industry is still surfing a wave of cash, with new investors crowding the space and dropping money into utility-scale and commercial projects. That’s in part because financiers no longer see solar as an unproven sector, instead viewing it as a de-risked cash cow (whether or not that’s accurate remains an open question).
According to Michelle Davis, a senior solar analyst at WoodMac, the investment competition has prompted a precipitous drop in the price of debt capital over the past couple of years.
The Federal Reserve also lowered interest rates marginally at the end of July, offering an opportunity, Matsui said, to “lock in that new, cheaper cost of capital” if a company refinances.
Taken together, those variables have created an environment especially ripe for refinancing to upsize debt.
“The shakeup across the board over the last 18 months has really led people to look at the best ways to deal with their business,” said Michael Blomquist, COO and co-founder of Open Energy Group, a marketplace that matches renewables projects with financiers. “We think [refinancing is] quite interesting, because it helps our clients effectively get better investment returns out of their existing projects.”
“A fine balance” on refinancing
Matsui has good reason to boost refinancing’s profile: His business stands to benefit. The company kWh Analytics contends that its “solar revenue put,” a solar output insurance product the company released last year, can increase debt sizing by about 10 percent when combined with refinancing.
This year kWh has completed two high-profile refinancing deals using that tool: one with AES Distributed Energy on a portfolio of 41 projects and another on a 23-megawatt project with Invenergy.
“We are always looking for the opportunity to consolidate and simplify our financial structures,” Brian Cassutt, AES Distributed Energy’s CFO, told Greentech Media. “Change in interest rates aside, what we’ve seen is a tightening of margins, which has opened opportunities to refinance.”
Just because the opportunity is there, though, doesn’t mean all developers are flocking to it, according to WoodMac’s Davis.
“I’m sure there are a lot of projects out there that have more expensive debt capital than rates you could get today,” said Davis. “Whether or not that means every developer is going to refinance is another question.”
“It depends on what kind of numbers we’re talking about and what kind of developer we’re talking about," she added.
Blomquist agrees that there are many factors to consider, such as whether refinancing will yield a more favorable return or if the company can better deploy the extra cash it generates in the process.
Developers also have to decide whether the associated savings will be worth the price.
“It’s a fine balance between understanding the friction costs of going through a refinancing process and the benefits that reduced margins could bring to portfolios,” said Cassutt.
That cost has in many cases made sense for AES. Cassutt said over the past couple years the distributed energy business has refinanced more than 100 different projects sized under 1 megawatt.
Last year, sPower, an owner of solar assets that is partly owned by AES, also refinanced about half of its 1.3-gigawatt operating portfolio.
“We feel great about taking this much interest rate risk off the table in today’s environment. As the space continues to get more competitive, the importance of de-risking cash flows to preserve our margins has never been more important,” said CFO David Shipley at the time.
Refinancing is on the radar for other big players, too. NextEra Energy fielded a question about refinancing efforts on its recent second-quarter earnings call and said it is working to take advantage of “really low interest rate environments.”
“NextEra is very savvy,” said Davis, pointing to the company’s “clear financial focus and good financial performance.”
The attention from companies such as AES and NextEra indicates others may soon follow suit. In an August industry note, Bank of America-Merrill Lynch analyst Julien Dumoulin-Smith said possibilities to refinance are “among the most important dynamics” coming out of the first half of 2019. But, Dumoulin-Smith noted, “many companies are only beginning this planning now.”
Follow the money
Matsui said the money developers can wring out of a refinancing is “cash in your pocket” that could be instrumental to the industry’s continued growth.
Companies can use the money to invest in developing new projects, and asset owners can use it to buy more projects or portfolios.
“We’re always looking to recycle capital,” said Cassutt, who added that AES may use the money it gets from refinancing for development or to “optimize the capital structure” on its existing portfolios.
Refinancing, Blomquist said, may also allow companies to take a hard look at their financials and decide where their strengths lie and where their money should go. He pointed to a related trend of companies moving away from owning projects and selling portfolios — like Cypress Creek Renewables’ project offload and slight pivot to focus on development — as equity investors flood the solar space.
“You see a lot of opportunities and a lot of news about people buying operating projects, and that is a corollary to refinancing,” said Blomquist. “If they’re reevaluating whether they want to be long-term owners, that may be because even with a refinancing, they'd rather get all of the money out to redeploy elsewhere.”
Wherever the money goes, for Matsui, the value proposition is simple.
The “bottom line is that there’s more money for the solar industry,” he said, “which means that we’re going to get to build more solar farms.”
