19 February 2016



Secondary market looks for new tricks after yieldco hiccup

Author: Jason Deign & Susan Kraemer, Solarplaza

Solar investors are looking for new formulas to boost the secondary market after yieldcos, the most popular vehicle to date, took a beating last year.

“In the US market you are limited to how you can access the secondary market because of the tax recapture rules,” said Elias Hinkley, who leads the energy group at law firm Sullivan & Worcester’s Washington DC office. These “can claw back the tax credits claimed on the project if it is sold within the first five years of operation,” he said. “This limitation means that transfers are all of equity interests that represent the later years of operation or debt.” Consequently, “we have seen some securitized debt transactions and some similar structures into the private markets on the debt side for both utility-scale and residential portfolios,” Hinkley said. Similarly, “we see a healthy amount of activity in the private markets for the equity pieces, but other than the yieldcos not much on the public market side.”  

I do think there is a huge amount of available institutional capital looking at these kinds of assets because the profile of a proven operating solar asset is a very appealing stable infrastructure investment.

Such investors “are still learning the market and looking for consistency in asset pools at scale,” said Hinkley. Standardised contracts could be an important way to achieve that consistency, according to Jigar Shah, founder of SunEdison. "Secondary markets only happen when there is a certain standardisation that occurs with projects," according to him.

Shah’s current firm, Generate Capital, aims to standardise financing documents for sustainable firms so it is easier for secondary market players such as insurance companies, university endowments and general pension funds to become involved. That could cut the cost of solar financing, since secondary investors typically charge less for finance.

And by restricting the loans to just one standardised contract, regardless of technology, Generate Capital could also make a large group of sustainable startups more attractive to a secondary market, with its lower cost finance. It can do this by conglomerating multiple smaller loans with the same standard terms and conditions. In order to sell seamlessly into a secondary market, loans have to be standardised with no variations.

"You might be issuing million-dollar loans in a primary market but the secondary market generally is buying $100 million at time, so they are buying 100 of your $1 million loans at a time," Shah explained. Not everyone is convinced, however. Benjamin Cohen, chairman and chief executive of T-REX Group, a renewable energy finance analytics vendor, said: “In theory it would help, but nobody’s going to adapt [their contracts].

SolarCity is not going to change their standard documentation to be the same as Sunrun.

Instead, Cohen said the use of technology platforms could help bring greater transparency and efficiency to secondary market transactions. T-REX Analytics, for example, helps fixed-income investors analyze, assess and price the risk associated with renewable energy investments. Nevertheless, Hinkley said there could still be a role for standardized contracts. “In the small utility style, commercial and industrial distributed solar, and virtual power-purchase agreement markets it would help a great deal,” he said.

“Consistency will lower transaction cost and make it easier to consolidate pools of assets for future investors. We spend a lot of time working towards this consistency, but so far success has been limited to relatively small pools of assets.”

 Elias Hinkley and Benjamin Cohen will both be speaking at the Solar Asset Management North America conference, on March 16 and 17 in San Francisco. Register now for your early bird discount.

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