Al, I'm trying to figure out who makes money on what here. Anyway I think this artical sheds some new light on this arrangement.
In recent years, several start-ups have emerged that attempt to blend the techniques of venture capital, project finance, and even public-private partnerships to develop viable solar projects. In this effort developers are particularly drawn to California, known both for its plentiful sunshine and generous incentives.
But the key to understanding Solar Integrated Technologies (SIT), one of the market leaders, and a recipient of $9.5 million in funding from GE Commercial Finance, is not to see it as an energy company. SIT is much more of a roofing contractor, and the financing makes sense in the context of the Californian incentives system.
Among the myriad perks for developers are grants, tax deductions and breaks for new developments. In particular, the California legislature passed a bill in 2002 that mandated that all state buildings install solar energy equipment. It also provides for a state-level solar energy tax credit.
California also has an aggressive 20% renewable portfolio standard, and thus projects that dispatch into the grid are likely to benefit from the sale of renewable energy certificates. But the SIT systems are less about distributed generation than about self generation. They are, in essence, a way for its clients to save some money on energy bills.
Keith Rutledge, the director of corporate finance at SIT, calls its service an "on-site utility". This means that clients sign up for efficiency savings and roofing services, as well as the power provided by the solar systems installed at their sites. SIT has installed the systems at the plants of snack-maker Frito-Lay and a Coca-Cola bottling facility. SIT's systems use a single-ply roofing membrane from Sarnafil, combined with flexible Amorphous Silicon Photovoltaic Cells from Uni-Solar. And SIT will be responsible for maintenance at the project sites.
The developer has been listed on London's Alternative investment Market since May 2004, and its management has decades of experience in the roofing industry, but SIT is not well-capitalised enough to take advantage of all of the incentives on offer, in particular the section 36 credits, which are available against expenditures in renewable energy on property.
For that, the solar developer requires what smaller wind developers also need – a partner with tax capacity to spare. The partner in this instance is GE Commercial Finance Energy Financial Services (GECFEFS), formerly the Energy division of GE Capital Structured Finance.
Since the tax credits are best utilised by large corporates, GE and other financial players are likely to be to the US solar industry what the private individuals that constitute the KG system have been to the German solar industry. The key to attracting such players is the ability to sign long-term energy contracts.
Here San Diego's schools provide an opportunity for funding providers – since they can sign energy savings agreements, which resemble maintenance contracts, with the developer. A total of 14 San Diego schools have so far signed up for the systems, with additional installations to follow over the next two years.
The 20-year contracts for roofing and energy management services come backed by the credit of the city's Unified Schools District. Schools are very good subjects for solar PV installations – they are largely in use during daylight hours, but have significant energy needs. The solar arrays do not provide all of the power needs for the schools, but any surplus production can be dispatched, and earn credits against future consumption from the grid in a process known as net metering.
The GE financing is described by Daniel Gross, senior vice president of renewable energy at GECFEFS, as "a project finance-type solution, and a pretty sophisticated one that uses a portfolio approach, but it isn't debt at all." Gross described the structure as a proprietary one, and declined to give details of the financing, but the San Diego Schools district describes GE as the owner of the projects, and Rutledge confirms that the financing resembles an equity investment.
The tax benefits also include accelerated depreciation, as well as 10% federal tax relief, part of which can be shared with an equity provider, with the school district benefiting from a low, and predictable, element to its power costs. The school district could potentially save millions in power costs over the 20-year project.
The current installed capacity, spread over the above 14 sites, comes to 2MW, with the smallest installation 60kW, while SIT has identified another 4MW of potential sites. GE's current commitment is $17 million, of which $9.5 million has so far been funded, while it says that it has the right of first refusal over another $500 million. Replicate this process over the schools of the other major conurbations of the rapidly growing south and southwestern US, and potential is enormous.
More importantly, it provides a hint of how project finance lenders and their advisors might adapt to a world in which distributed generation becomes the norm in commercial, governmental, and even residential facilities. The assets could range from future fuel cell applications to small scale (single-turbine) wind installations or emerging wave technology applications.
San Diego Schools
Status: Closed April 25, funded May 16
Size: $17 million
Location: San Diego, California
Description: 2MW solar PV project spread across city's schools
Developer: Solar Integrated Technologies
Equity: GE Commercial Finance Energy Financial Services
Legal counsel to the developer: Orrick
Terms & Conditions Privacy Statement © 2005 Euromoney Institutional Investors PLC |
