In a previous post, I said Woodlawn Associates believes solar project sponsors (i.e., equity investors other than tax equity) expect to earn an 8-11% after-tax internal rate of return on their investments. As I said in that post:
Whether 8-11% is a good deal for the financier depends on its cost of capital. If a financier’s cost of capital is 10%, the net present value of its investment is essentially zero. On the other hand, if its cost of capital is 5-7%, the NPV of each solar system is several thousand dollars.
So how does one determine cost of capital for a project sponsor? First, we have to understand what we mean by “sponsor”. I use the term to mean the company that invests regular equity in project companies, which is usually a holding company subsidiary of a parent solar financing company:
Figure 1: Simplified Subsidiary Structure of Solar Finance Company,
and Sources of Capital
In this post I will first examine the cost of capital for project companies and then for sponsors/holding companies (the green boxes in Figure 1).