Tax Equity 201: Partnership Flips in Detail

Posted on February 9, 2017 by Josh Lutton and Micah Sussman

Our primer on tax equity investments (Tax Equity 101: Structures) explains that renewable energy project developers often use structures such as the partnership flip, sale-leaseback, and inverted lease to monetize the federal tax benefits for such assets.

Here, we dive deeper into the actual mechanics of and accounting for partnership flips. As we will see, the structure has several built-in inefficiencies relative to a single owner that can monetize all of the tax benefits internally. This is not an indication the structure is undesirable, but an acknowledgement of the imperfections in what is often the best available alternative for an owner without its own tax liability. [Read more…]

Tax Equity 101: Structures

Posted on February 9, 2017 by Josh Lutton and Shirley You

This post was updated on February 9, 2017. The original version was published in March 2013.

The three main pillars of competitiveness in the solar industry are the ability to acquire customers at low cost, install inexpensively, and achieve low cost of capital. To realize a low cost of capital, solar developers must often partner with so-called “tax equity” investors due to the structure of federal solar incentives. This paper summarizes the main financial arrangements used for such financing: sale-leasebacks, partnership flips, and inverted leases (which are also called lease pass-throughs).

The examples in the paper are from solar, but many of the same principles apply to the wind industry as well.

[Read more…]

YieldCo Cost of Capital

Posted on May 10, 2016 by Shirley You and Josh Lutton

Large renewable energy project developers often use a type of financing vehicle colloquially known as a “YieldCo” to finance portfolios of assets that are expected to have stable cash flows over relatively long periods, such as solar or wind farms. In theory, investors should be willing to accept lower returns on investments in these “safe” assets than they would on investments in the developers themselves, thus reducing the cost of capital for such assets and increasing their value.

We thought it would be useful to see how this has worked out in practice. In this post, we show how we determine the cost of capital for a yieldco using 8point3 Energy Partners, a yieldco formed by SunPower and First Solar to own and operate solar systems, as an example. Then we show the results of using the same methodology across a number of public yieldcos with a variety of asset types. On average, we find a cost of yieldco equity is 7.01% levered and 5.46% unlevered.

This relatively low cost of capital has implications for the value of projects held or purchased by yieldcos. It should allow developers that have yieldcos to sell their projects at attractive prices, and allow their yieldcos to pay more than many other project investors for projects they purchase from independent developers.

[Read more…]

Energy Storage 301: Solar + Storage Economics

Posted on November 17, 2015 by Micah Sussman and Josh Lutton

In this post we examine the economics of solar + storage. We examine the value of solar and storage for two commercial buildings in each of three markets: California, New York, and Hawaii. We find solar and storage are strongly synergistic in all three markets.

The NPVs of solar + storage investments are greater than the sum of the NPVs of solar investments and storage investments alone because, among other reasons:

The combination allows for much larger demand charge reductions than either technology can achieve on its own
Pairing storage with solar allows the owner of the storage system to claim the federal Investment Tax Credit on the storage system, subject to certain constraints on how it is charged

(We looked at the returns to storage alone in an earlier post.)

We are grateful to Geli, a provider of intelligent energy storage software solutions, which provided the building load profiles, solar production estimates, and storage system operating profiles for the analysis. Thanks to this cooperation we were also able to validate the economic calculations in our model versus those in an independently developed model.
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Energy Storage 201: Commercial BTM Energy Storage

Posted on September 4, 2015 by Josh Lutton and Micah Sussman

This is the third in a series of posts on grid energy storage. Earlier, in Energy Storage 101 and 102, we attempted to elucidate the applications of energy storage for various customer types and discussed the technologies and value chain. In this post, we examine the economics of behind-the-meter (BTM) storage for commercial customers. We model the returns to a hypothetical commercial BTM storage customer in New York City, San Diego, Honolulu, and Des Moines. We show how it is possible to optimize returns by sizing the battery intelligently with a software model.

For economy, we use the term “commercial” here to represent any non-residential end user of electricity, including commercial enterprises, schools, non-profits, government entities, etc. Also, we assume the host is the owner of the storage system.

Applications of Commercial Energy Storage

As we mentioned in Energy Storage 101, commercial customers have several potential sources of value for energy storage (Figure 1):

Figure 1: Sources of Value from commercial Btm energy storage

Storage can be used for peak shaving and/or backup power. Many buildings already have segregated wiring for systems they want running in case of an outage (e.g. elevators or emergency lighting), but in most cases a battery designed for peak shaving will not have enough capacity to run an entire building. Here, we focus here only on the economics of peak shaving only because modelling the value of back-up power relies heavily on the importance of continuous power to a specific building.

In some markets, storage can also generate grid services revenue. For example, a storage system owner could sell frequency response services to an ISO or “generation” capacity to a utility.

Finally, storage could create value in conjunction with solar if storage would allow a larger solar system than would otherwise be allowed or economic and solar is otherwise less expensive than the grid. A battery system installed together with solar would also be eligible for an investment tax credit (30% through 2016, 10% thereafter). For simplicity, we don’t consider solar + batteries in this analysis. We will come back to this in a future post.

[Read more…]