Mercatus just released its
North America Solar Trend Report
for the first half of 2014. It’s worth paying attention to, as it
highlights some interesting industry trends. For those new to Mercatus,
the company started in 2009 with the express goal of creating a software
platform that would provide more transparency to investors. The idea,
according to CEO Haresh Patel was to close “a massive gap between
capital markets and developers building projects. They weren’t finding
each other, or speaking the same language.” As a result, there were
significant inefficiencies that needed to be addressed.
Mercatus has come a long way since 2009, and now serves 60% of the
U.S. commercial and utility-scale solar market, including some of the
biggest developers, investors, utilities and independent power
producers. To date, the company has assessed 22,000 megawatts of
projects, with a software-as-a-service platform offering that is an
“all-in-one solution for energy investors to screen, diligence, and
manage a portfolio of projects, and a platform for developers and asset
owners to solicit projects and portfolios to investors and the capital
markets.”
By providing this service to much of the industry, Mercatus is
extremely well placed to offer informed observations about the industry
and emerging trends. I recently spoke with Patel as well as Director of
Finance Tom Vogt, who offered their observations of an industry in the
midst of significant transition.
Patel noted that one big theme emerging from their review of the
information from 2,500 projects – representing approximately 60% of the
U.S. market over the past two years – is that the cost of capital has
fallen dramatically. He compares this trend to the competitive dynamic
that occurred with the solar panel wars in recent years, which
commoditized panels and drove the costs down significantly.
The last remaining leg of the stool has been the cost of money and
project acquisition. Market forces have taken care of that…Just a year
ago, money was in mid to high teens (percentages) for tax equity. That
has compressed down. Overall, yieldcos are bringing tremendously lower
costs of capital while there is massive potential for REITs (real estate
investment trusts) and MLPs (master limited partnerships) to similarly
impact the market.
Patel observes that this is a healthy trend, bringing the cost of tax
equity money into the low teens, and resulting in bigger and more
attractive projects.
He further notes that the overall costs of solar projects have moved
from the low teens into the single digits, with the yieldcos putting
ever more pressure on the cost of capital. This matters because lower
financing costs have a direct and significant impact on the overall
price tag.
For every 1% point in lower capital costs, you are seeing a
reduction of 20-30 cents per watt in project costs. You are now seeing
projects below $2.00 a watt…It’s good for the industry so we can stand
alone without subsidies by the end of 2016.
In short, the entire competitive dynamic has changed, with money no longer enjoying the upper hand.
I think the other underlying behavioral change with more money
available is that it has to be competitive. Investors are better at
providing customer service, responsiveness and speed now that capital is
no longer in control.
Image: Mercatus - money gets cheaper, IRR thresholds drop
Vogt and Patel both emphasize that there is another, growing, trend
that is beginning to emerge on the radar, and one that may eclipse in
importance the falling cost of money. That trend is the movement of some
of the major solar companies away from being mere providers and
financiers of panels towards becoming energy companies.
Patel sees it this way,
SunEdison’s acquisition of FirstWind is the first shift of the
tectonic plate saying ‘OK we are going to be an energy player’. But the
NRGs, Exelons, and EON in Germany are not sitting idle. This whole
battle is shaping up about who is going to be your future energy
provider. It’s not just about solar. To me, this is a bigger story than
the cost of money – it’s a recognition that this is about energy
solutions.
Image: Sun Edison; TerraForm 1+1>2?
To outsiders, this observation may be striking, although one sees
other signs of this, such as SunPower’s recent public statements during
their
November Analysts Day presentation
that they intend to offer a broader suite of services including
storage. Solar City has made similar pronouncements, indicating that
storage will be a standard part of their offering in a few years. But
Patel indicates that this dynamic has been in the works for some time.
We had been hearing this input about two years before it surfaced.
We have been retooling our platform to allow our customers to use our
platform for solar, wind storage –any distributed asset class. We
announced the expansion of our platform into other technologies because
our customers have been asking for it.
What does this mean for the industry? For one, it means that it may
not simply be ‘the solar industry’ in the future. It may instead be the
energy services industry that includes solar as well as numerous other
technologies and offerings. It may well come down to owning the
customer.
What this also means, according to Vogt, is that the industry may
well need to re-tool itself, as it increasingly shifts from
utility-scale to distributed energy projects behind the meter at the
customer’s site.
What does it mean to your organization when the industry shifts like
this? You need entirely new types of people. A lot of this is about how
do we scale the financing, analysis, and sales team to be able to
support tons of projects. It’s shifted from ten big projects to numerous
smaller ones. And these practices will shift from solar to wind. For
example, you are seeing people asking ‘How do I get repeatable loans in
place and set up for secondary market financing?
Finally, the team from Mercatus forecasts an increasing focus on the
commercial sector, on the projects from 50 kilowatts up to 10-15
megawatts. Vogt expects a pincers movement coming from both sides of
the industry.
The large utility-scale guys are saying ‘we are going to buy into
this because we want to be in this middle sector.’ Meanwhile, the
experts in residential solar are moving to larger projects. There is a
lot of movement by both sides to grab this middle market.
Patel feels that while the pending reduction of the Federal
Investment Tax Credit from 30% to 10% at the end of 2016 will create
some hangover, its long run effect will be beneficial.
I think it’s good to be without subsidies. Eventually people get
over the fact ‘well its not 30% but its still 10%’. There may be a bit
of pain in 2017, but every month there’s a new state where solar is
cheaper than the utility’s levelized cost of energy. It’s when you
abruptly change subsidies that we’ve seen markets collapse. Those that
plan will do fine, and those that don’t will have problems.
In the end, this is all about market maturity and sustainability of
an industry that has existed for decades but just came of age in the
last 1,500 days or so, led by states with subsidies such as California,
New Jersey, and Massachusetts. The industry is maturing and spreading
rapidly, Patel says.
It used to be all about California, and then California and the
NorthEast. But now solar is popping up almost everywhere. When you see
five MW popping up in coal country, you know it’s mature. We are
starting to see other states light up as well.
Image: Mercatus – California shares the wealth
Cheaper money, a transformation into energy services companies, and
the increased ability to stand on its own with fewer and fewer
subsidies. Who would have predicted that five years ago? Only the
lunatics, the dreamers, and the extremely farsighted. Like the folks at
Mercatus who in 2009 set out to build a platform for an industry that
was more notion than reality. Just imagine where we may be five years
hence. If you want to know, the folks at Mercatus might be some of the
right people to ask…
