Emerging Solar Lending Opportunities for Community Development Financial Institutions

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2015-04-24

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Abstract

Financing and investment structures in solar development are maturing. Community development financial institutions (CDFIs) and other mission-focused lenders have opportunities to fund solar photovoltaic (PV) projects with debt, but this lending can be challenging. A National Renewable Energy Laboratory (NREL) review found renewable energy lending to be limited due complexity. Loans are typically large, with unusual collateral valuation requirements, negotiation of intercreditor agreements, and new standard-setting required for assessing default risk.

Despite these obstacles, in 2013 and 2014, Self-Help Credit Union in Durham, North Carolina provided $76 million in debt financing for solar electricity development. These installations occurred as the solar industry soared; with growth over five years from 1.2 gigawatts (GW) to 18.3 GW of operational solar, the U.S. solar market value will exceed $15 billion in 2015. Continued annual growth averaging 7.5% through 2040 is projected, setting the technology on track to become a primary generation source with 48 GW of capacity.

State and federal incentives shape both utility-scale solar growth and financing models, which often include developer project equity, tax equity, and debt. In North Carolina, a corporate state tax credit for renewable generation expires at the end of 2015. A decrease in the federal solar Investment Tax Credit (ITC) from 30% to 10% also looms at the end of 2016. As the industry matures and subsidies decline, companies are exploring new financing solutions with different parallels to more familiar asset classes such as real estate, infrastructure, stocks, and esoteric asset-backed securities, prompting a wider range of investors to enter the field. Self-Help and other CDFIs are well-poised for impact due to familiarity with tax-credit incentivized deals with project-level finance; solar incentives are structurally similar to community development real estate transactions that utilize New Markets Tax Credits (NMTCs) and Low-Income Housing Tax Credits (LIHTCs).

Nationally, banks, CDFIs, and other mission-focused lenders are now beginning to provide both construction and term debt to solar developers as part of a project finance model for utility-scale projects large enough to warrant the complexity of these transactions or portfolios of smaller installations. Participation is growing in both scale and scope. In 2014, 94 banks engaged in some type of energy project finance, a 20% increase from 2013. Half of contributing banks were small players similar to Self-Help, with overall levels of activity less than $200 million each. Some of the largest recent examples of project finance for solar development are Seminole Financial Services, Hannon Armstrong, National Cooperative Bank, and a variety of European and Japanese commercial banks. More providers are needed as the U.S. solar industry gears up to grow from 10 GW 2015 to more than 16 GW by 2017. Other community financial institutions and lenders may use Self-Help’s experience as a springboard for action and make real impact in the industry, as including debt in the financial structure for development can reduce levelized costs of solar electricity by 20% or more.

In its first section, this report reviews CDFI missions and how partnership between these groups and the solar industry creates mutual benefit, including environmental health, economic growth, social good, CDFI returns, and sustainable investment influence. In its second section, the experience of both environmental justice and clean energy leadership in Warren County, North Carolina is noted as a case study of these current and potential impacts. In its third section, this report provides a solar finance primer for use by both community lenders and the solar industry, including project-level finance background, structures, sources, budget components, and projections. In its fourth section, the report describes the project-level risks a CDFI must mitigate in order to lend successfully. The accomplishments of Boston Community Capital, a Boston-based CDFI, are highlighted as a case study in the report’s fifth section. Next, the report describes collateral review for solar lending, including valuation, appraisals, intercreditor agreements, and other risk mitigation. In the seventh section, the report outlines the potential for solar development to benefit minority farm owners. Then, despite CDFI solar lending promise, barriers are reviewed in the report’s next section, including the current complexity of deal structure requiring industry-specific knowledge and human capital at CDFIs, collateral limitations, scale, and intercreditor agreements. The report concludes with information on the potential for future CDFI leadership with next steps including unconventional repayment terms, community solar models, loans with non-rated private off-takers, and other opportunities.

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Williams, Jennifer (2015). Emerging Solar Lending Opportunities for Community Development Financial Institutions. Master's project, Duke University. Retrieved from https://hdl.handle.net/10161/9687.


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