News & Press

Loss of cash grant could be boon for some solar developers

SNL Financial

July 15, 2011

A shakeout is looming for solar developers after the loss of federal stimulus funds that spurred a wave of solar projects across the country, according to market players at the Intersolar North America conference held July 11-14 in San Francisco.

The U.S. Treasury Department's Section 1603 cash grants in lieu of tax credit program was originally slated to end in December 2010, but got a reprieve on the back of an end-of-year budget deal in Washington, D.C. It is not expected to be treated as kindly this year. The loss of the program will hurt the industry overall, but some companies are more vulnerable to its absence than others.

"I think when the Treasury grant was extended it gave a new life to a lot of bad actors," said Bill Bush, CFO of Borrego Solar Systems, a commercial solar project developer. "We have run into crazy underfunded companies, who hurt the market for everyone else. When the grant goes away, it could be an opportunity. You are going to see consolidations and [closures], but it won't happen right away, we might start to see it by March though."

With a 30-year track record, Borrego is banking on being one of the survivors. On June 21, Borrego closed on an investment fund with East West Bank and U.S. Bank that brought its total tax equity portfolio over the $100 million mark. The funds are slated for new projects in Massachusetts, New Jersey and California with a total capacity of 9 MW. Companies like Borrego, who are able to tap into the tax equity market, will have an advantage when the shakeout starts next year.

"I think a lot of people are going to have a backlog of projects they'll be working through; even after March they are still going to be burning cash trying to develop new projects. I think it will take quite a bit longer before you actually see anyone go out of business, before you see any meaningful consolidation among developers," said Shayle Kann, managing director at market analysis provider GTM Research. "That said, it's hard to call who will do well and who won't in a post-1603 world. The obvious way to look at it is who has shown success at already raising tax equity, even during the tax grant program. That's where Borrego comes into play because they are one of the ones who have [shown success]."

Borrego also has the advantage of a deep pockets investor, Walsin Lihwa Ltd., a copper wire manufacturer and one of the largest public companies in Taiwan, which owns 70% of the developer. At the time of the investment, Borrego also formed a captive sponsor equity fund called Greenlake Capital, the company said.

"To an extent, Borrego benefits from being really financially savvy," Kann said. "They raise tax equity, they structure deals well. They have been able to operate well in some of the [solar renewable energy certificate] markets which are more complicated. It is tricky to play in those markets, and they have done well with that. A good example is that they have a good base in Massachusetts and that's a market that is complicated and ripe with opportunity. They put in the time there to really understand how the market works, which is no trivial issue."

Based in San Diego, with offices in Berkeley, Calif., and Boston, Borrego shed its residential business in 2009 and has a portfolio of projects that range up to 15 MW, but it is now looking to bid on 15- to 20-MW proposals, the company said.

"I think that the companies that are ultimately going to do well will be adaptable, because every given state market has a different ideal project size, and that shifts over time within the state," Kann said. "Borrego, for example, historically in California has done a lot of sub-1-MW projects, projects that qualify for the California Solar Initiative. But the California Solar Initiative is now frozen in two of the utility territories, so Borrego is positioning itself to now look at larger projects that feed into some of the utility projects."

With strong national competitors, such as MEMC Electronic Materials Inc. subsidiary SunEdison LLC, which have many of the same strengths, Borrego will need to continue to stay nimble as incentive programs evolve around the country.

"There is definitely an advantage to the geographically diversified companies," Kann said. "If you have only operated in California commercial historically, then right now you are in a lot of trouble. If you are Borrego and you have operated in California and Massachusetts and Pennsylvania, and wherever else, then you certainly can weather a downturn in an individual state market better. The companies that will do well have figured out the growth markets first and invested there and recognize that it is not going to be a growth market forever, and have the ability to adapt."

Visit Publication Website