Woodlawn Associates

Management Consulting

Energy » Solar

Tax Equity 201: Partnership Flips in Detail

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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

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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.

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YieldCo Cost of Capital

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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.

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Energy Storage 301: Solar + Storage Economics

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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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SolarCity Customer Acquisition Cost and What Really Matters

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We are regularly asked to comment on customer acquisition cost (“CAC”) in the solar industry because we’ve calculated it for so many firms.

In 2012 we published a report on CAC called Solar Marketing Effectiveness.  We concluded the average CAC was $5373 / customer, or $0.89 per Watt.  We have since helped several firms with CAC on a proprietary basis and the numbers we’ve seen in those projects aren’t too different.

It’s not uncommon for us to get objections that go something like this: “SolarCity says their customer acquisition cost is only $2500.” or “Other sources say it is only $0.50 or $0.60 / Watt.  Why are your numbers different?”

In both cases it comes down to how expansive the definition of CAC is.  Our approach is not unlike that of a sculptor.  We start with a solid block of material—all costs, as captured in a company’s books—and we cut away everything that is not CAC.  Thus, we are unlikely to overlook certain acquisition costs just because we forgot or did not know to ask for them.

How straightforward this is depends on the financial detail we have.  If we have access to a company’s general ledger, we can review each transaction to determine if it is related to customer acquisition.  It can be more difficult if we only have access to the P&L.  Some lines on the P&L may contain certain expenses that are CAC and others that are not.  For example, a company might have one line for “marketing & advertising” and another for “salaries & wages”, but that doesn’t give us enough information because we should realize that some—but not all—of the salaries and wages line is for the marketing and sales teams.

Nonetheless, it is often possible to make an CAC estimate from financial statements and other reasonable assumptions.  For example, we estimate that SolarCity’s residential customer acquisition cost in for the quarter ended March 31, 2014 is about $1 / Watt installed or $0.70 / Watt booked.

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