By Greg Burkart

If you have been sitting on the sidelines waiting to launch a solar project, 2010 is your year. Efficiency ratios are increasing, module prices are falling and financial incentives are rising. The key to pulling off a project is the ability to obtain financing quickly. 

Developers should take advantage of California’s Solar Initiative or Colorado’s Property Assessed Clean Energy (”PACE”) Financing and the US Treasury’s 1603 payments in lieu of tax credits to help finance individual projects. By collateralizing the financing with property tax assessments, borrowers should obtain longer tenors while lenders gain confidence from stabilizing property values, especially in communities such as Boulder and Berkeley. With PV module prices at their lowest level in decades and the Treasury payments expiring this year, you do not want to miss out on this opportunity.

The prices of PV modules are falling. 

According to a recent article in The Wall Street Journal, the lifetime cost of producing some types of solar power have fallen roughly 50% during 2009 while other renewable technologies have seen only a 10% drop.¹ Interestingly, the free fall has not reached maximum velocity just yet.Because of overcapacity in the industry and falling poly-silicon prices, analysts are predicting that adjusted sales prices of PV modules could fall another 15-20% through the fourth quarter of 2010.²

Currently, some developers of rooftop systems are seeing module prices in the range of $2.25 - $2.40 per watt with installed prices, depending on the type of roof, in the range of $4.25 - $6.25 per watt.

At the same time, financial incentives are rising. In response to the financial crisis, Congress created several programs to stimulate the alternative energy sector.³ One particularly beneficial
program is Treasury’s payments in lieu of investment and / or production tax credits.⁴

The payments are 30% of the qualified basis of the specified energy property and Treasury has been processing payments, on average, in less than sixty days of receiving an application. Taxpayers are eligible to file their applications upon placing the specified energy property in service.

The funding, however, is available only for projects in one of two categories: a) projects that are placed in service last year or 2010, or b) projects for which construction commenced in 2009 or 2010 and the asset is placed in service by the credit termination date for production or investment tax credits. Through the first ten weeks of the program, Treasury has awarded approximately $23,650,000 to 90 solar projects.

This is a run rate of approximately $2,300,000 per week. States have also been supporting the industry with incentives. In May 2008, the Colorado Legislature enacted a financing mechanism for renewable energy projects.⁵

Under the program, local communities may create clean energy finance districts where the county provides financing for installations of renewable energy and/or energy efficiency improvements. In Boulder - the community authorizing the first clean energy district in Colorado - the county floats long-term bonds, which are repaid through special assessments on the property tax bills for the property receiving the improvement. The interest on the bond, for certain household income levels, is subsidized.

The maximum amount of the loan is $50,000 or 20% of the statutory actual value of the property on which the property is installed.⁶

Starting this month, Boulder will expand the program to cover commercial properties. With that expansion comes an opportunity to make a bigger impact on the environment by addressing the larger footprints normally associated with commercial projects.⁷ Applications for commercial projects are due March 15, 2010. For a government-conceived program, its steps are relatively simple and straightforward:

♦ View the eligible measures list and determine which energy efficiency and renewable energy measures to undertake using this program.
♦ Have a contractor (certified or licensed in their respective trade) give estimates for the projects. The contractor(s) must give an official estimate as well as fill out Boulder County’s “Contractor Cover Sheet,” which will be available with the application in mid-January.
♦ Apply for the loan using the paper application available on the County’s website in mid-January. Attach the official estimates and the contractor cover sheet to the application.
♦ Wait to hear from the County to see if the project qualifies for the loan.
♦ If the project qualifies, the applicant will undertake the energy efficiency and renewable energy project(s).
♦ Once the projects are complete, the applicant will send Boulder County the official invoices and the County will pay the contractor(s).⁸

The finance markets should respond well to the Boulder model.

Regulatory initiatives have emerged as a key theme associated with the success of the alternative energy industry generally. According to Jefferies International, “the most frequently cited risk factors can all be settled by the right incentive program”.⁹ Treasury’s 1603 grant program and Colorado’s PACE legislation creates an opportunity for developers to access secured, long-term debt. Since Treasury’s 1603 program provides a cash grant of 30% of the eligible project costs, the state programs effectively need to finance the remaining 70% of the remaining project costs. 

As Boulder shifts its focus to commercial projects this month, they will need to address the gap in financing. Because many commercial installations involve costs that exceed $50,000, even at today’s prices, developers will be forced to contribute more equity or raise conventional debt.In analyzing California’s Solar Initiative, a program comparable to PACE, financial analysts have noted that through a combination of federal subsidies, state incentives and accelerated depreciation, “project and equity returns as well payback periods are compelling”.¹⁰

To cover the gap, Colorado may want to explore raising its borrowing caps, authorizing California-styled performance-based incentives in addition to the financing, or expanding the availability of the Public Service Company of Colorado’s pricing pilot program to cover commercial projects. As the prices of PV modules continue to fall throughout 2010, the returns and paybacks on projects should continue to rise and accelerate the recovery in the solar sector.

[1] Source:  The Wall Street Journal, “Clean Energy Sources:  Sun, Wind and Subsidies”, p. A13, Jeffrey Ball, January 8, 2010 citing Bloomberg New Energy Finance.

2 Source:  Clean Energy Primer, “Solar Primer”, p. 9, Jefferies International Ltd., September 9, 2009.

3  For more information on this topic, please see, http://www.renewableenergyworld.com/rea/news/article/2009/11/an-incentive-in-every-pot-the-race-for-new-energy-related-federal-cash-grants “An Incentive in Every Pot: The Race for New Energy-Related Federal Cash Grants”, Gregory C. Burkart & Jerome M. Schwartzman, November 9, 2009.
4. Jefferies International views the 1603 grant program as “arguably the most coveted provision throughout the clean tech industry.  Grants could serve as a backdrop for the disappearance of the tax equity partnerships.”  Clean Energy Primer, p.33.

5 For similar “property tax financing” programs in California see CA Streets and Highways Code Section 5898.10 et seq.  In Texas please see HB 1937 enacted on May 26, 2009.

6 Source:  Database of State Incentives for Renewables & Efficiency (“DSIRE”) at http://www.dsireusa.org/incentives/incentive.cfm?Incentive_Code=CO154F&re=1&ee=1.html

7 Source:  “Climate Smart Loan Program”, www.bouldercounty.org/bocc/cslp/CSLP_Commercial.html

8 Source:  Id.

9 Source:  Clean Technology Primer, “Key Themes in Clean Technology”, p.4, September 9, 2009.

[10] Source:  Clean Technology Primer, “Solar Primer”, p. 46, September 9, 2009.

[11] The  Pilot Pricing Program currently has several pricing options. The PTR rate currently permits residential customers to pay standard residential tariff rate for all consumption used during a billing period; however, during critical peak periods, customers are credited for consumption they reduce below their normal use in the amount of the difference between the critical peak rate and the standard tariff rate. The credits range from $0.29823 per kWh during non-summer critical peak periods to $0.48612 per kWh during summer critical peak periods. Source:  Verified Application of the Public Service Company of Colorado before the Public Utilities Commission of the State of Colorado.  For more information on California’s Solar Initiative, please see DSIRE database for California here.

Gregory Burkart is a managing director in the Detroit office of independent financial advisory and investment banking firm Duff & Phelps. His 13 years of experience includes specialization in the structuring and negotiating of government-sponsored economic development incentive packages. Having previously served as former Michigan Governor Engler’s Environmental Ombudsman, Gregory is an expert on domestic and international site selection; economic incentives negotiation; decision analysis; and demonstrating development projects’ economic and fiscal impact to state and local governments. More information on Duff & Phelps is available at www.duffandphelps.com.