1. Keith Martin keith.martin@nortonrosefulbright.com
What’s New
Keith Martin

3. The market is moving to a corporate PPA and hedge market, with a growing number of utility BOT arrangements mixed in.  Corporate buyers want to shed shape risk.  Banks are the interesting new buyers having gotten past regulatory issues.  NextEra reported Q was one of its strongest origination quarters in company history.

4. The next big thing is smaller corporates pooled together
The next big thing is smaller corporates pooled together.  Buyer long-term creditworthiness is the sleeper issue.  An anchor tenant structure that saw Apple join three smaller companies -- Akamai, Etsy and Swiss Re -- to buy 290 MWs of wind may point the way.  Developers report hit rates in corporate RFPs of below 10%. 

5. Electricity prices continue to fall
Electricity prices continue to fall. DOE reported in August that the national average price for wind electricity was $20 a MWh in The average installed cost for wind was $1.6 million a MW. The winning power prices bid into the Xcel auction in the spring were in the low teens for wind and low 20s for solar. 112,000 MWs 238 projects batteries: $7 premium

6. Utilities are looking for ways in BOT structures to raise tax equity, but to shed normalization.  Most corporate PPAs are virtual PPAs.  Basis risk, meaning the risk that the hedged price will differ from the actual price at which electricity is sold into the grid, is becoming a greater concern for lenders and tax equity investors.

7. The large number of banks chasing deals has pushed term debt rates to L bps and construction debt to less than L bps.  There is a debate about whether rates are reaching bottom.  Rates in the term loan B market have widened by 50 bps since March.  However, a recent refinancing of a 594-MW gas plant in Rhode Island closed more than 2x oversubscribed at L  

8. Most debt in the renewables market is back-levered debt
Most debt in the renewables market is back-levered debt.  Lenders are not charging any premium above senior debt rates.

9. Rising corporate profits have brought more tax equity investors into the market.  Flip yields are in the 6% to 7% range for contracted utility-scale solar.  They are 300 bps higher for rooftop, with C&I and community solar all over the map.  The partnership flip structure is 80% of the solar market and 100% of the wind market.  Many investors are agreeing to DROs of 50+%.

10. The market is finding a way to finance community solar projects and projects with California CCAs as offtakers, even though there is a risk that the customer base will move. subscription rates shadow ratings

11. We are in a frothy M&A market with sponsors looking to sell at peak prices. Discount rates for valuing assets are mainly in the 6.5% to 7.5% for solar and 8% to 9% for wind. Asset buyers can now deduct the full purchase price immediately. Proposed depreciation bonus regulations in August also let any premium paid when buying a partnership interest be deducted immediately. foreign pension funds development platforms

12. The next few years should have strong deal volume absent a major downturn in the US economy as tax credits start to roll off at the end of 2019 for solar and 2020 for wind. Wind developers with stockpiled equipment are increasingly focused on ERCOT and SPP where projects can be built quickly. more orders

13. Solar companies are starting to focus on what they should do by the end of next year to start construction of as many projects as possible. Tax equity investors advise stockpiling solar panels and inverters rather than relying on physical work at the site or on equipment, like transformers, at the factory. equipment loans?

14. Batteries are taking hold more quickly than expected
Batteries are taking hold more quickly than expected. Sunrun already has a 20% take rate in California, up from 5.25% a year ago. The multiple potential revenue streams are complicating financings. Financiers are capping the percentage of residential systems that can have batteries due to fire risk. PPAs GTM: 55% annual growth

15. A decision is expected in a closely-watched case later this year over payment of developer fees in renewable energy projects. Invenergy paid itself a 12.3% developer fee on the California Ridge wind farm. The Treasury disallowed the entire amount. The trial in late July lasted four days. tax equity reaction

16. Some developers had switched earlier this year in tax equity deals from paying developer fees to selling the project company to the tax equity partnership near the end of construction as a better way to step up tax basis. However, after a US appeals court decision in the Alta Wind case in late July, that strategy seems no better than developer fees. PPA value?

17. EIA numbers released last week show the output from non-hydro renewables increased 7.04% in H compared to H1 2018, but fossil fuel output increased 8.8%.  CO2 emissions from energy consumption were up 3.8%.  Solar accounted for 25.4% of the renewables increase and wind accounted for 11.2%.

18. The draft environmental impact statement released by USDOT last week in connection with a plan to roll back auto-emission and fuel-efficiency standards, and to revoke the authority of California and other states to impose stricter standards than those imposed nationally, says global warming is expected to push temperatures up by 7 degrees Fahrenheit by the end of the century. drop in the bucket

19. Kevin Brady (R-Texas) said he hopes to take up tax extenders in a lame-duck session after the November elections.  Senator Rand Paul (R-Kentucky) asked the Treasury in May to take a tougher line on what it takes for a project to be considered under construction and to deny PTCs on electricity sold at negative prices.  Look for gridlock if the Democrats take back the House.

20. Developers are angling to take advantage of "opportunity zone" dollars
Developers are angling to take advantage of "opportunity zone" dollars. The December tax reforms offered investors a carrot to roll over investments to free up dollars to invest in projects in low-income areas. The carrot is deferred taxes -- or even no taxes -- on the rollover dollars. This is not a good tradeoff for renewable energy projects. no tax basis

21. The 25% steel tariffs and 10% aluminum tariffs are starting to bite
The 25% steel tariffs and 10% aluminum tariffs are starting to bite. The tariffs tend to push manufacturing of wind turbines and towers offshore. A wind tower uses 200 tons of steel. Trump slapped a 10% tariff on another $200 billion of Chinese products on September 24. The rate will increase to 25% on January 1. inverters

23. The term for fear of long words: hippopotomonstrosesquippedaliophobia
hippopotomonstrosesquippedaliophobia

24. Keith Martin keith.martin@nortonrosefulbright.com
What’s New
Keith Martin