A recent Wall Street Journal blog post highlighted a new approach to solar financing. Diamond Castle Holdings LLC has committed up to $225 million of equity to KDC Solar LLC to develop solar projects in New Jersey. The company will finance the project completely with equity, which will give them increased freedom with their SRECs over the more traditional method of financing solar projects by taking out debt.
The genius behind this strategy from an SREC perspective is simple: most solar projects today are financed with debt. The off-taker of that debt requires an SREC contract with a suitable counter-party. Bilateral long-term contracts have been hard to come by and have traded at a significant discount to ACP levels. This is one reason we’ve seen such growth in our long-term SREC contract markets and Diamond Castle is solving the problem yet another way. Rather than giving up this value, it seems the private equity firm is forgoing the leverage and financing the projects with equity suggesting they believe the discount in a long-term SREC contracts wipes out the benefit of taking on leverage.
This groundbreaking strategy could prove influential in SREC markets moving forward, illustrating an alternative model for the financing of solar projects. It highlights the issues that many developers face in financing projects in the SREC market world. More importantly, it demonstrates that despite the challenges created by a market-based structure for subsidizing solar, private industry will always find a solution. This is at the core of why the U.S. favors SREC markets over the state-controlled Feed-In-Tariffs that are popular abroad. A fixed subsidy for solar energy may be a whole lot easier to implement on day one, but in the long-run, a successful market-based mechanism is an optimum solution (not to mention, far more American).
When New Jersey passed the 2010 version of its SREC program, the most important takeaway wasn’t the increasing of the requirements, the creation of a safety net or the extension of the program through 2026: it was the overall statement coming from the legislature that this program is here to stay and it is only getting stronger. Now it is time for the industry to come up with its own solutions for playing within the parameters of the SREC market. The companies that solve those solutions creatively will be successful while the rest wait around for something to change. Hopefully the banks will find a way to participate, but until they do, firms like Diamond Castle will lead the way.
For more information on this story in the Wall Street Journal blog, see here.