MERCATUS
Distributed Energy Insight Report
June 2015
Volume III
MercatusTM Analytics
This document contains summary information and insights derived from energy
projects processed in the Mercatus™ platform.
COPYRIGHT © 2015 MERCATUS INCC O N F I D E N T I A L
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ABOUT THE MERCATUS DISTRIBUTED
ENERGY INSIGHT REPORT
Today, the Mercatus Energy Investment Managment (EIM) software solution is used by the energy
industry’s top independent power producers, utilities, institutional investors, and global developers
to screen, process, consolidate and manage investments into over 50 GW of distributed generation assets.
The Mercatus Energy Insight Report is compiled to provide energy investors with key insight into
conditions and trends that are emerging in the distributed generation market. The following information is based on data consolidated on over 3000 projects processed in the Mercatus EIM platform between 2013-2014 in the US Commercial and Utility solar markets. It aggregates solar projects from more than 350 developers and investors, accounting for roughly 60% of the U.S. market.
[email protected]
1735 Technology Drive, Suite 250
San Jose, CA 95110
USA
www.gomercatus.com
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EXECUTIVE SUMMARY
*Increased competition and flow of low cost capital is putting downward pressure on IRR
for projects seeking financing.
*A sharp spike in project development for 2016 is driven by the land grab environment prior
to potential expiration of the ITC.
*Companies historically focused on US Solar are rapidly diversifying into international markets and other technologies such as storage and wind to plan for an ITC reversion and respond to increased competition from Independent Power Producers that are offering comprehensive energy solutions.
In the last several months, the Mercatus EIM platform has increased the volume of projects processed internationally and across varying technologies. The findings in this report reflect the underlying market conditions that are driving diversification amongst companies historically focused on
investment in US Solar. Two key factors emerge that are propelling diversification – sustained appetite and competition for projects, and a nearly 80% drop in project development between 2016
and 2017 in anticipation of the potential reversion of the Investment Tax Credit (ITC).
One of the most prominent trends to emerge in the report is a decrease in IRR for solar projects
seeking financing through 2014. This indicates that investors are eager to fill pipeline, but growing
competition means financing projects with lower returns.
While the report highlights that the growth of YieldCos has contributed to a lowering cost of capital, and has thereby opened of new market segments through 2014, rising US bond yields are
likely to stifle the trend toward cheaper capital looking forward. The more prominent effect of the
YieldCo will actually be a sustained appetite for new projects, even in the context of tighter margins.
At the same time, the report also illustrates that there are limited opportunities for investment in
the US Solar market post-2016. Roughly 85% of US solar projects processed in the Mercatus platform have Commercial Online Date targets before 2017, with a precipitous 80% drop in project
development between 2016 and 2017.
Ongoing demand for projects and diminishing opportunities in the US solar market necessitates a
systematic shift toward diversification. Historically US solar focused developers and IPPs will:
•Expand beyond solar into new technology segments. This trend has already emerged as prominent market leaders have made major investments into wind and storage technologies.
• Expand beyond the US Market. Key opportunities for project development and acquisition will
be met in emerging markets with growing energy demand and favorable regulatory and economic environments.
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KEY FINDINGS
Key markets for growth before the potential ITC-Reversion
• A majority of MWs originated in Mercatus during 2014 have Commercial On-
line Dates targeted in 2015 and 2016.
• Solar developers are not relying on an extension to the credit and are rushing to capitalize on the remaining time under the incentive program.
• The US South contributes a growing portion of project development by tar-
get COD through mid 2016. This trend is largely driven by states with Renew-
able Portfolio Standards.
The cost of capital and its effect on hurdle rates
• YieldCos are driving a thirst for project acquisition and lowering hurdle rates.
• Downward pressure on hurdle rates makes more projects investable, opening new market segments for development and financing despite lower returns.
The regional see-saw
• Swings in regional market share are exaggerated by an inability of investors to both grow pipeline while also investing in projects.
• SREC programs continute to have a direct impact to acclerate market growth.
However, these programs also contribute to market volatility without a clear
policy framework to support their long-term sustainability.
The importance of non-financial risks
• The strongest markets not only provide favorable yields, but also maintain a balance of strong economic returns within a stable investment environment.
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TABLE OF CONTENTS
1. DECREASING HURDLE RATES PUT DOWNWAR PRESSURE ON OVERALL RETURNS
2. GEOGRAPHIC TRENDS - THE WEST SWINGS BACK
3. KEY METRICS FOR DEVELOPMENT
4. LOOKING FORWARD - MARKET DYNAMICS BEFORE THE ITC REVERSION
5. STATE BY STATE DATA CHART
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1
DECREASING HURDLE RATES PUT DOWNWARD
PRESSURE ON OVERALL RETURNS
Overall, Internal Rate of Return (IRR) has decreased in key regions in the US from 2013 to 2014. The
relative portion of projects originated in the US-West and the strong decline in IRR in the US-South
account most strongly for this trend, even though IRR has gone up slightly in the US-Midwest and
US-Northeast.
Despite continuing cost reductions in solar, IRR continues to decline as the market is increasingly
defined by consolidation and low-cost capital financing mechanisms. These factors, combined with
buyers that are eager to fill their pipeline, are putting downward pressure on hurdle rates and making more projects bankable. As a result new market segments are opening for development and
financing despite lower returns.
Key Take-Aways:
• The need to continually fill YieldCos with more operating projects in order to pay dividends is driving a thirst for project acquisition and lowering hurdle rates.
• Innovations in financing appear to be driving down the cost of capital.
• Solar developers are soliciting projects with lower IRRs particularly in the US-West where less high yield opportunities remain, but non-financial risk factors are perceived to be more benign.
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GEOGRAPHIC TRENDS - THE WEST SWINGS BACK
Between the first and second half of 2014, projects in the US-West overtook the US-Northeast
in number of projects originated in Mercatus. This swing is largely explained by the continued
strength of the California solar market along with strong pipeline growth in Hawaii.
The declining share of solar development in 2H of 2014 in the US-Northeast should also be appropriately viewed in the larger context of a drastic spike in the region’s project development in 1H
of 2014. In many states where the underlying market conditions have not drastically changed, this
trend demonstrates that investors have trouble maintaining the organizational bandwidth to both
originate and close simultaneously. Swings in regional market share are, therefore, exaggerated by
an inability to continue to grow pipeline while also investing in projects.
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Key Take-Aways:
• Investor’s operating in the US-Northeast generally shifted focus away from origination
toward closing from 1H 2014 to 2H 2014.
• SREC programs in states like New Jersey and Massachusetts clearly assist growth in their respective markets as they contribute to a large portion of the US-Northeast region’s market share. However, these programs also contribute to market volatility without a clear policy framework to support their long-term sustainability.
• The SREC-1 cliff in the end of 2013 in Massachusetts and fluctuating SREC prices in New
Jersey contributed to a spike in projects seeking financing in 1H 2014 that was not
sustained in the second half of the year.
• While Massachusetts’ SREC-2 program should help rebound the state’s share of the
market, the effects of the program –instated in the spring of 2014 - were not felt at the
financing and project acquisition stage by 2H 2014.
• New York’s decreased market share in 2H 2014 is likely influenced by the NYSERDA
PON-2956 deadline in July 2014, after which, fewer projects were seeking financing in
the state.
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At the state level, Avg-IRR does not necessarily correlate with overall market share of projects in
Mercatus. In some instances this is simply a factor of lags between average-IRR and the larger investment market’s ability to recognize higher returns in a specific region. However, high IRR at the
state level can also reflect a weak regulatory environment for solar projects. In these states, indeed,
the risks and/or uncertainties to project development are so high that only the projects with very
strong returns seek financing. This indicates that investors are extremely sensitive to non-financial
risks. The strongest markets not only provide favorable yields, but also maintain a balance of strong
economic returns within a stable environment.
Key Take-Aways:
• California saw the most growth over 1H and 2H 2014 despite slight downturn in Avg-IRR.
• Connecticut, New Jersey and New York all lost market share despite increases in their
average IRRs in each market.
• Hawaii saw a significant drop in average IRR while growing market share, indicating
investors are becoming more comfortable with risk factors in the state despite contentions over net metering policy.
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KEY METRICS FOR DEVELOPMENT
The charts below show how various states performed in 2014 in terms of two key inputs used by
investors to screen project-financing opportunities. Green states have gained market share over 2H
2014, while red states lost market share.
Results are influenced by various factors, including: prevailing utility rates for energy, labor markets,
maturity of regional solar industries, local taxes and incentives, solar resources and technology fit.
Key Take-Aways:
• Hawaii’s strong returns are largely powered by off-take rates that can compensate for higher installed costs.
• Lower Avg. Installed Cost in Texas is explained by larger average project sizes.
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LOOKING FORWARD - MARKET DYNAMICS
BEFORE THE ITC REVERSION
With the anticipated reversion of the ITC deadline, US solar development is poised to take a steep
drop in 2017. A majority of MWs originated in Mercatus during 2014 have Commercial Online
Dates targeted in 2015 and 2016. This indicates that solar developers are not relying on an extension to the credit and are rushing to capitalize on the remaining time under the incentive program.
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Key Take-Aways:
• Unsurprisingly, the US-West holds a steady grip on a major portion of project
development planned for 2015 and 2016.
• The US-Northeast projects a dominant share of MWs in the beginning of 2015 as a result of a development spike in the 1H of 2014, but with a corresponding tapering-off of market
share forecasted thereafter.
• Notably, The US-South contributes a growing portion of project development by target COD through mid-2016. This trend is largely driven by states with Renewable Portfolio
Standards. Texas accounts for the largest share of the South’s projects (taking a major
portion of MW DC due to larger average project size) followed by North Carolina
and Maryland. Georgia is the fourth largest contributor.
About Mercatus
Mercatus is the global leader in Energy Investment Management (EIM) software and distributed
energy data solutions. Mercatus’ EIM solution helps distributed energy investors simplify energy
investing and deploy capital faster and smarter. Over 50 GW of renewable energy across 35 countries has been processed through Mercatus and forms the foundation of unique data services and
industry insight. With its end-to-end software solution and breadth of data, Mercatus helps investors quickly grow investments in distributed energy, gain visibility into their pipeline and simplify
the delivery to the secondary market.
Contact Us:
[email protected]
1735 Technology Drive, Suite 250
San Jose, CA 95110
USA
www.gomercatus.com
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STATE BY STATE DATA CHART
The chart below offers a breakdown of the costs for various elements of solar projects in different
states.
5/15/15
(The chart contains
only
states with
the highest volume of projects in Mercatus)
trend
report
table
!State
AR
AZ
CA
CO
CT
FL
GA
HI
IL
Project!Type
Avg!Energy!Yield
Avg.!Total!Installed! Avg.!Offtake!Rate!
Cost!($/W)
($/kWh)
Avg!offEtake!
Escalation!!%
O&M!($/W)
Insurance!
($/W)
Groundmount
1,693.50
1.78
Rooftop
1,400.00
2.53
0.07
0.14
3.00
0.02
Groundmount
1,823.15
2.52
0.08
3.44
0.01632
0.00635
Rooftop
1,791.45
0.11
1.59
0.01737
0.00907
Carport
1,509.49
2.66
0.10
2.87
0.01802
0.01023
Groundmount
1,968.22
2.19
0.09
0.69
0.01817
0.00881
Rooftop
1,601.50
2.91
0.12
2.12
0.02112
0.01111
Ground!Mount
1,938.08
2.21
0.08
2.09
0.01719
0.00441
Rooftop
1,609.50
0.10
1.29
0.01589
0.01000
Carport
1,315.00
3.21
0.13
3.00
Groundmount
1,313.25
2.06
0.12
2.63
0.01939
0.00947
Rooftop
1,176.37
3.20
0.10
1.92
0.01684
0.01171
Groundmount
1,470.95
2.20
0.11
1.75
0.01390
0.00836
Rooftop
1,359.33
0.02129
0.01306
Groundmount
1,602.68
1.97
0.11
0.01522
0.00586
Rooftop
1,434.33
2.33
0.13
0.01641
0.00763
Groundmount
1,469.00
3.40
0.23
1.00
0.02042
0.00833
Rooftop
1,589.11
4.67
0.23
2.22
0.02483
0.00990
Ground!Mount
1,256.00
2.57
0.05
3.00
0.01500
0.00808
Rooftop
1,209.00
2.22
0.14
3.00
0.25
1.21
IN
Groundmount
1,392.84
1.56
0.15
0.60
0.01748
0.00639
KS
Rooftop
1,435.00
2.29
0.12
3.00
0.01800
0.00290
KY
Groundmount
1,253.36
1.21
0.06
3.01
0.01750
0.00590
Groundmount
1,273.13
2.76
0.10
1.43
0.01571
0.00902
Rooftop
1,190.10
2.63
0.10
1.99
0.01875
0.00925
Groundmount
1,462.71
1.86
0.07
1.42
0.01628
Rooftop
1,268.80
2.61
0.07
2.44
0.01712
0.00980
Groundmount
1,396.29
2.11
0.09
1.63
0.01582
0.00779
Rooftop
1,368.21
2.41
0.07
1.00
0.01100
0.19768
Groundmount
1,316.00
1.57
0.18
3.00
0.01060
0.00770
Groundmount
1,463.97
2.31
0.08
0.03
0.01621
0.00729
Rooftop
1,600.00
Carport
1,171.86
2.53
0.11
1.32
0.02370
0.00987
Groundmount
1,269.25
2.56
0.09
1.36
0.01921
0.00822
Rooftop
1,217.64
2.92
0.11
1.87
0.02107
0.01091
Groundmount
2,024.60
1.64
0.09
1.92
0.01704
0.00669
Groundmount
2,065.75
0.07
1.97
0.01638
0.00635
Rooftop
1,798.02
1.87
0.06
2.00
0.01800
0.00265
Carport
1,354.10
2.55
0.16
1.00
Groundmount
1,276.03
2.27
0.13
1.33
0.01567
0.00617
Rooftop
1,232.67
2.47
0.18
0.49
0.01834
0.00868
GroundMount
1,285.02
3.07
0.09
2.55
0.01658
0.00877
MA
MD
MN
MO
NC
NJ
NM
NV
NY
OH
0.07
OR
GroundMount
1,322.00
2.50
0.07
2.00
0.01367
0.00587
PA
Groundmount
1,293.47
1.97
0.11
2.50
0.01043
0.00517
Groundmount
1,321.00
2.16
0.15
0.01205
0.00472
Rooftop
1,265.75
2.48
0.21
0.01286
0.00827
TN
Groundmount
1,580.92
2.11
0.06
4.13
0.00840
0.00620
TX
Groundmount
1,894.50
0.06
0.81
0.01418
0.00567
0.01577
0.00574
0.01645
0.00554
RI
UT
Groundmount
1,942.11
2.11
0.08
2.71
VA
Rooftop
1,359.90
2.40
0.12
2.57
VT
Groundmount
1,202.23
2.39
0.22
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