This week the solar world descends on Orlando, Florida for the 2012 Solar Power International (SPI) conference.
For three days, an estimated 25,000 solar industry professionals will promote their products, make connections, and learn from their colleagues about the latest thinking and design. This year, more than any other, the theme of this conference will be project finance; how deals are getting done and who is doing them are the largest questions facing the industry in the post-1603 cash grant world.
SPI is presented by two non-profit solar organizations; SEIA and SEPA with proceeds going to market-building and educational initiatives. They are the heavyweights in the solar industry, and solar is big business. Former President Bill Clinton will keynote this year’s event with attendees from over 100 countries expected over the three days. Talk of volts, amps, watts, dollars and cents will fill the convention hall and multi-megawatt project pipelines, both real and imagined will be touted and pursued.
Our firm, DG Energy Partners, a financial advisor to the solar industry, is sending its entire staff to this year’s event and we suspect that we are not alone. Everyone from panel manufacturers and multinational EPC firms, to single-person solar installers and developers of all sizes and niches will be in attendance.
The significance of Solar Power International comes not from the number or diversity of its attendees. Rather, this year’s conference matters because it comes at a time of rapid innovation and change in the industry. These changes affect so many aspects of the business that players need to constantly update their understanding; to be just a month behind puts you at a competitive disadvantage.
What’s changed since Dallas?
SPI 2011 was held last October in Dallas, Texas. Since that time, the industry landscape has changed drastically, specifically with regard to how projects are getting financed. In any given month, DG Energy Partners sees dozens of MWs of projects seeking financial partners. Regardless of where these projects are located, the underlying trends remain the same; hardware prices have continued to fall, EPC margins have continued to shrink and projects have grown increasingly difficult to complete. And we haven’t even mentioned what changes we can expect in 2013.
a) The end of safe harbored deals – If your project is not currently at NTP, you’re likely looking at an ITC transaction. In just three short weeks, ITC investment will be the only way to finance your transactions and we expect the market to be flooded with stranded cash deals. Whether or not these deals can be restructured as ITC transactions will depend on a variety of things but most importantly, it will depend on the off-takers’ willingness to accept a potentially higher PPA rate. This will be most relevant in New Jersey, Massachusetts and other SREC markets where EPCs or third party financiers had signed deals when the SREC markets could support cheap PPA prices.
b) SREC Prices Crash – We’ve all watched the painful decline of the New Jersey SREC market over the past 2 years and it certainly hasn’t gotten any better since we left Dallas almost a year ago. Currently, you can sell a 3 year strip in New Jersey for $100 compared to $200 only one year ago. Similarly in Massachusetts, a 3 year strip is now worth $185 compared to $325 in 2011. These marks have put immense downward pressure on EPC pricing and upward pressure on viable PPA prices. Neither scenario paints a rosy picture for EPCs or their customers.
c) New Incentives – All is not lost. While New Jersey, Massachusetts and the rest of the SREC markets no longer present the investment opportunity they once did, FIT and fixed rate auction markets have taken their place. On the east coast, Connecticut (ZREC), Long Island (FIT) and Rhode Island (FIT) present desirable investment opportunities. We’re also seeing valuable opportunities in Indiana (FIT) and in Colorado through various Xcel programs. Although New Mexico isn’t rich with incentives, we’re seeing good returns on projects based on strong PPA pricing, high altitude and high production.
d) Panel Prices Crash – Remember $5/Watt projects? You should. They were getting built last year. But as the Treasury began to actively dictate project pricing, module manufacturers began to ship hardware at increasingly cheaper rates. If you spoke to any panel manufacturer last October in Dallas, they would have sold you panels for roughly $1.25/Watt. If you go back just one year earlier to SPI 2010 in Los Angeles, you were looking at paying $1.85/Watt for panels. Currently, the average panel pricing is roughly $.75/Watt. We estimate that panels may have been sold for as little as $.65/Watt in some cases. Despite its recent decline, we suspect that panel pricing is near or at its low, thus stabilizing turnkey pricing and EPC margin.
We believe that there is real money to be made in 2013 and beyond. The key to being a successful and profitable firm in this environment starts with recognizing that the current status of the solar market is fundamentally different from the past; $1Million/MW profit margins are (forever) gone. Tighter margin is a hard pill to swallow, but margins are thin everywhere and this is simply the current nature of our business. Successfully navigating the ‘new’ solar environment of thinner margins on better projects will result in more projects that get built. This is good for EPCs, it is good for PPA providers and developers, it is good for the customers and it is good for the industry.
The items above are admittedly domestically focused and represent only a small fraction of what has happened in the industry over the last twelve months. This is why we will be there, talking about our services but also listening intently both to the formal speakers and our fellow delegates. Attending SPI can be an exhausting experience; it carries the energy and intensity of an industry pushing ever forward. Thankfully, at the end of each day participants can choose from dozens of cocktail receptions where the pace does not slow so much as evolve as conversations and deal making continue into the night. Look for us there; our staff will be handing out beer koozies noting our upcoming Solar Finance Boot Camp training course. Ask us about it if you like, but better yet, tell us what you’ve been doing these last eleven months.
See last month’s article; “Financial Education for the Solar Industry”.
Mike DellaGala is a director at DG Energy Partners in New York City. Jonathan McClelland is DG Energy’s chief of operations and strategy, and a member of the Breaking Energy editorial advisory board.