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Insights from the Solar Industry in Rural Peru

In the mountains of rural Peru, solar power organizations are finding footholds. Their experiences may illuminate the challenges of electrifying remote areas. The Clean Energy Solutions Center hosted a webinar on Nov. 18 in which solar organizations in rural Peru described their practices.

Peru has just announced a national contract to leverage solar power for universal access to electricity. The experiences of these solar organizations may provide valuable insights for businesses in Peru and in other countries.

“In the jungle and the very high Andes, in areas that are very far away from different cities… there is a great amount of people without energy.” said Rafael Escobar, energy program manager at the nonprofit Practical Action.

50 million people in Latin America lack electricity, Escobar said. The population of rural Peru is around 7 million. In the area where Practical Action operates, 93.4 percent of the population lacks electricity.

“The government of Peru just in the last week has announced plans to award a large contract to Ergon Power SAC to bring renewable power to those who do not have access,” said Richenda van Leeuwen, executive director of the United Nations Foundation’s Energy Access Initiative.

“We are working in more than 100 little villages in an area with a lot of difficulties in transportation and communication,” said Carmen Becerril Martinez, president of ACCIONA Microenergia Peru.

Peru has a very dispersed population, van Leeuwen said. Solar companies there cannot take a regular commercial approach because there are very low profit margins. Affordability can also present a challenge.

Several of the presenters said the new contract should be implemented in a way that is community-oriented and appropriate for local homeowners.

In Peru, unlike some other nations, decisions about solar power appear to be made on a community basis. ACCIONA Microenergia held community discussions about distributed solar.

“Some people were a little bit skeptical,” Martinez said.

The communities that were interested in solar power created three-person photovoltaic electrification committees.

“One of the members of the committee has to be a woman,” Martinez said. “This is a way to enhance the role of women in these areas.”

Communities in rural Peru face substantial difficulties when they consider introducing renewable energy, so partnerships with businesses and other organizations are necessary.

“There is a lack of capacity for local governments to promote energy development,” Escobar said. “These governments are not able to foster these energy projects. There is a lack of support for technical issues and maintenance.”

“Operation and maintenance are key elements of this project,” Martinez said. She said ACCIONA Microenergia has committed to operate in Peru for at least 20 years to make sure the solar systems remain in good shape.

ACCIONA Microenergia’s program, Luz en Casa, broke even at the end of 2013. Default rates for this program have been lower than 1 percent, Martinez said.

“The Luz en Casa Program has proved that rural electrification with solar home systems can be economically sustainable and affordable to the very poor people,” Martinez said.

Luz en Casa focuses exclusively on home lighting and does not provide any other electrical amenities.
“The standard system we are installing includes three lamps and one socket,” Martinez said.

ACCIONA Microenergia is structured as a social microcompany, not as a foundation. The solar lighting is partly funded by a social tariff. Profit margins have been tight. “We need around 2,500 clients to ensure that the economics works,” Martinez said.

“This has to be economically feasible to ensure the project can become bigger and can cover all the needs we can identify,” Martinez said.

Martinez said the company works with AMP, a public provider of electricity, to supply basic electricity service to almost 4,000 households in poverty and extreme poverty via solar home systems with a fee-for-service model.

The households pay around $3.50 USD monthly, Martinez said. Previously, they spent 50 percent more to buy candles, kerosene, and mobile charging.

“The important thing is that these people are now having an income after managing their own energy systems,” Escobar said.

Practical Action has a training center that is working with technicians and politicians to plan renewable energy projects.

The organization is developing financing plans for a long list of renewable energy projects including wind, solar and hydropower. It is in the process of securing financing and collaborating with local communities.

This article was originally published by Clean Energy Finance Forum, a news website sponsored by Yale University. To subscribe to our newsletter, please visit our website.

January 6, 2015 1 comment

Renewable Energy

Retail Investment Expands in Clean Energy Markets

written by Kat Friedrich

Retail investment in clean energy is starting to flourish. Historically, investments in clean energy were only available to institutional investors. Recently, access has become available to retail investors through new investment vehicles such as solar bonds.

On Nov. 18, Clean Edge presented a webinar exploring this topic. The event, “Clean Energy Retail Investing: The Rise of Bonds, REITs, Yield Cos, and other Investment Vehicles,” was co-hosted by SolarCity.

The webinar featured panelists with expertise in this changing market environment. They explained the details of these newly-available investment options, described the impetus behind these changes in the market, and examined the future for retail investors in this burgeoning space.

“Whenever you have a disruptive technology, you have massive investment opportunities,” said Tim Newell, vice president of financial products at SolarCity. “There hadn’t been much opportunity for retail investors to invest in solar. We wanted to attract individuals by giving anyone the opportunity to invest.”

To attract investment into clean energy, SolarCity began offering an innovative option for individual investors through solar bonds. These are corporate bonds issued by SolarCity with interest rates of up to 4 percent. Typically, they have a one-year duration.

“The investors attracted to this option range from individuals who are putting some small savings into solar bonds to people putting in hundreds of thousands of dollars,” Newell said. “They also attract people who don’t necessarily have access to solar energy in their homes. So now, with solar bonds as an option, even though they may not be able to save money on solar, they can earn money on solar.”

When speaking about the risk profile of these bonds, Newell said that the one-year duration of the SolarCity bonds provides more liquidity than a longer duration might offer. However, the bonds are unrated since they are corporate bonds issued through SolarCity, which is unrated at this time. SolarCity wanted to give individuals access to solar quickly, so the company started with unrated bonds. This may change if SolarCity becomes rated.

Investment in clean energy has seen growth from both institutional investors and retail investors. Newell said this is the result of the cost of solar coming down dramatically in the past five years. It has now become the economical option for consumers. Newell believes technological innovation as well as financial innovation will continue to drive growth.

Nancy Pfund, founder and managing partner of DBL Investors, said there is an innovation cycle in clean energy which will continue to drive impact investing now and in the future. “It’s where value meets value – the ability to invest in opportunities that make returns but also create solutions that achieve your personal values, such as improving the environment and helping with climate change.”

“To avoid global warming issues and achieve our emissions goals, we need to get significant investment,” said Amy Davidsen, executive director of North America for The Climate Group. “About one trillion dollars of new investments are needed, which is about triple what is done today, so we really need to scale the solutions even faster. New investment vehicles have the ability to bring in money from retail investors as well as more investment from institutional investors.”

Pfund said it is realistic to be able to scale up investments in clean energy to the point where we can significantly impact carbon reduction. “Now that solar is showing that it can be the more economical option for consumers, there is significant opportunity in the space and the ability for solar to surpass fossil fuels.”

Disclaimer: Nancy Pfund is a member of the advisory board of Clean Energy Finance Forum.

This article was originally published by Clean Energy Finance Forum, a news website sponsored by Yale University. To subscribe to our newsletter, please visit our website.

The author, Randall Brown, is an MBA candidate at Yale University. He writes regularly for the Clean Energy Finance Forum, a news website which is sponsored by the Yale Center for Business and the Environment.

January 6, 2015 1 comment

Renewable Energy

Alternative Market Solutions Could Ignite Renewable Energy Finance

written by Kat Friedrich

How can alternative financing solutions help expand clean energy through capital markets? Industry experts convened at this year’s Asset-Backed Securities (ABS) East conference in Miami on Sept. 20-23 to discuss these possibilities. Yieldcos, crowdfunding or peer-to-peer (p2p) markets, and property-assessed clean energy (PACE) financing could supplement the role of securitization and may deliver the capital the renewable energy industry demands.

John Joshi, head of capital markets at Plant and advisor to National Renewable Energy Laboratory, said, “We started doing these panels four years ago or more and were looked upon as the hippies. Now we have rock stars – Fortune 500 companies, Fortune 100 companies, and energy companies; it’s an amazing evolution.”

In reference to low-to-moderate-income consumers, Joshi said, “ABS has a chance to do tremendous good.”

Yieldcos

Currently, yieldcos may be a preferable financing alternative to securitization. Panelists noted that yieldcos could eliminate many of securitization’s challenges and attract lower costs of capital.

For example, SolarCity’s first and second securitizations saw yields of 4.8 and 4.6 percent, respectively, while yieldco investors can expect slightly lower dividend yields of 3-5 percent. According to Allan Riska, senior manager at SunEdison, investors find yieldcos appealing because this dividend is expected to grow.

A yieldco is a publicly traded company that is created for the purpose of owning assets that produce cash flow. Some yieldcos specifically focus on renewable energy assets. The income from these assets is generally distributed to the shareholders as dividends.

Yieldcos and securitization are fundamentally different. “Equity markets are more liquid than any fixed income market,” Sullivan said. “You will [have] different volatility, a different investor set, a different tax strategy and a different target market.” Sullivan said both options add value because they bring in capital that wouldn’t otherwise be tapped.

While yieldcos are structured as normal taxpaying corporations, yieldcos that own renewable resources can use the tax benefits associated with clean energy investment to avoid paying corporate-level taxes. These tax benefits, called net operating losses (NOLs), must be used and carried forward to deliver dividends.

Yieldcos do not eliminate all risks. Dividend growth is reliant upon a sufficient pipeline of assets and the associated NOLs. A yieldco partnered with a strong developer that can keep feeding the pipeline will mitigate that risk, said Dan Sullivan, principal at PriceWaterhouseCoopers.

“We have a lot of projects from the SunEdison pipeline that are going to go into the yieldco and grow that cash flow,” Riska said.

Interest rate risk is another major concern which is ultimately managed by investors. But these fears may be overstated. Andrew Giudici, senior director of the Structured Finance group at Kroll Bond Rating Agency (KBRA), said interest rates will rise over time but investor demand should keep rates relatively low compared to the broader market.

Riska said SunEdison is currently looking at how the equity from its yieldco, TerraForm Power, interacts with the cost of debt. This will allow SunEdison to optimize its cost of capital. Financing projects with debt at the leverage ratios they had before may not be optimal.

“We might be leaving money on the table. We might have securitization and yieldcos work in the same structure to optimize cost of capital for us,” Riska said. To do this, SunEdison would securitize at the project or fund level before the project goes into a yieldco.

Crowdfunding and P2P

Crowdfunding and p2p networks are also an emerging financing alternative. Clean Power Finance operates an online business-to-business platform that connects institutional investors and lenders with residential solar professionals who need solar finance products to grow their businesses.

Clean Power Finance is interested in any conduit that provides the cheapest cost of capital to pass through to homeowners and installers, said Kristain Hanelt, senior vice president of the company. He said that, for crowdfunding, even major platforms get most of their funding from banks and most are venture-backed. He said he has not seen costs of capital extremely dissimilar from those on Wall Street.

According to Dan McMahon, senior vice president of Hannon Armstrong, the problems with p2p are achieving scale and deploying small increments of capital efficiently. In some respects, he said, Hannon Armstrong and SunEdison are crowdfunding at around $14 to $20 a share because “the whole point of going public was to hit a broader investor base.”

“I just don’t know how you can service and manage such small investments from so many different people,” McMahon said.

PACE

In PACE financing, an assessment is placed on a property to install a clean energy project, which is paid for over a 15- to 20-year period.

Renovate America recently issued over $104 million in PACE-backed bonds, which were rated AA by KBRA. According to Giudici, the HERO transaction by Renovate America had an advance rate of 97 percent.

The advance rate is the maximum percentage of the value of a collateral that a lender is willing to extend for a loan.

KBRA’s credit analysis of the HERO transaction proved it was impossible to break the deal, Giudici said.

KBRA found that, under a default scenario based on historical trends, a default will result in a temporary disruption of cash flows while the property owner is in foreclosure, but ultimately those payments will be made.

Giudici said a tax assessment for $2,000 would not drive a property foreclosure. Even if foreclosures by Fannie Mae and Freddie Mac occurred, credit supports like excess spread would absorb those losses. Additionally, many municipal districts do not allow homeowners to make partial payments on their tax roll assessments.

Excess spread is the difference between the interest rate received on the underlying collateral and the coupon rate paid to investors. The excess spread is usually deposited into a reserve account and serves as the first line of protection against losses for security holders.

According to Giudici, PACE is an attractive security structure conducive to ABS.

PACE steps away from many issues that solar securitization currently faces – including operational costs, tax equity, and credit enhancements – and is one of a multitude of options that will be around for a while, Sullivan said.

This article was originally published by Clean Energy Finance Forum, a news website sponsored by Yale University. To subscribe to our newsletter, please visit our website.

The author, Marley Urdanick, is a student in the Master of Environmental Management program at the Yale School of Forestry and Environmental Studies. She writes regularly for the Clean Energy Finance Forum, a news website which is sponsored by the Yale Center for Business and the Environment.

November 10, 2014 0 comment

Renewable Energy

Political Capital Needed for Clean Energy Finance to Flourish

written by Kat Friedrich

Private-sector investment in clean energy continues to grow as costs come down and free-market dynamics begin to replace government subsidies. But this influx of financial capital is still not enough, according to speakers at “Creative Power: New Models for Growing Clean Energy Investment,” a discussion held at Bloomberg L.P. in Manhattan on Sept. 20 as part of New York Climate Week.

“We need leaders to invest political capital in the [climate policy] process,” explained Greg Barker, the UK envoy on climate change. The UK has thus far decreased its own emissions 20 percent below 1990 levels, he said. To continue this trend, he explained, “innovation will fundamentally come from the private sector – but the market failure [around carbon emissions] is so strong that there is a role for government action.”

This market failure is the fact that the international economy has not attached a cost to carbon and other climate-changing gases.

“Climate change is the largest market failure known to man,” said Rasmus Helveg Petersen, Denmark’s minister of climate and energy. “We need innovative finance to make the transition.”

Balancing the roles of the public sector, the private sector, and innovative public-private partnerships can be tricky. Alfred Griffin, president of the New York Green Bank (NYGB), pointed out that the NYGB wants to focus on deals that would not happen otherwise without its involvement.

“Our first question when responding to a proposal is, ‘Are we needed?’” Griffin said. To this end, the NYGB does not consider itself to be providing subsidized capital. Instead, it hopes to support the private sector in understanding and mitigating risks to enable investment.

As clean energy market risks are perceived to be decreasing, less government support will be needed for these markets. Panelists stated that they feel the perception of technological risk associated with renewable technologies is dissipating. In fact, in light of the power outages during Hurricane Sandy and other severe weather events, the resiliency of renewable, distributed generation is an emerging part of its value proposition.

At the same time, the risk of traditional fossil fuel assets, such as coal, is seen as increasing. As the specter of climate change and its associated dangers loom, “certainly coal is being thought of as a risky asset,” said A.J. Sabatelle, associate managing director of corporate finance for Moody’s Investors Service. This summer’s downgrade of coal stock Peabody Energy by Deutsche Bank supports his assessment. At Moody’s, Sabatelle said, “the sale of older coal-fired assets is viewed as credit-positive.”

This article was originally published by Clean Energy Finance Forum, a news website sponsored by Yale University. To subscribe to our newsletter, please visit our website.

The author, Carol Rosenfeld, is the Program Director for the Coalition for Green Capital, where she advocates for financing for clean energy. Carol graduated from the Yale School of Management with an MBA in 2014 and holds a degree in Civil and Environmental Engineering from Princeton University. She is a LEED-Accredited Professional and a Senior Fellow in the Environmental Leadership Program.

November 10, 2014 0 comment