Financing is the lifeblood of solar projects, and the key to a sustainable energy future. If you want to understand the health of the solar market and where it’s headed, the state of financing is a good place to start, especially in a year with as much disruption and uncertainty as 2020. What does the solar development market look like right now, and what does 2021 hold? Here are four trends I’m watching right now.
1. COVID-19 caused setbacks, but won’t have major, lasting effects. The overall impact of the coronavirus pandemic has been less of a major sea change, and more so a bunch of delays and adjustments. Solar developers experienced the same supply chain woes as many other industries, with some suppliers unable to get modules as quickly as they normally do. Like many organizations, off-takers and customers wanted to restrict physical access to their properties, which caused construction delays.
The same issue delayed utilities. When it takes longer for utilities to get out and turn on a project, that not only slows down the build process, but also the financing process because many of the funds raised are released in accordance with construction milestones. There have been delays in contracts and paperwork because many customers and municipalities weren’t prepared to work from home — some didn’t even have laptops for their employees.
While funding for solar fell in the first half of 2020, tax equity providers are still active. Financial raises are on par with what they were before the pandemic. There might be a slight uptick in pricing as the full impact of 2020 becomes clearer, and we’ll probably see changing contract language that builds in some flexibility to account for any delays due to circumstances like a pandemic.
Overall, however, the long-term trajectory of the industry hasn’t wavered much despite some of the toll 2020 has taken. According to the American Council on Renewable Energy (ACORE), investors are “as confident in renewable energy growth over the next three years, on average, as they were in 2018-‘19.” More than half of the financial institutions ACORE surveyed plan to increase investment by over 10 percent year over year in 2020.
2. Acquisitions saved projects during the pandemic. The pandemic brought uncertainty to smaller developers. Some were working on multiple projects and ran low on capital to complete them. Others had been planning to sell projects, only to find there were suddenly fewer buyers. Without the right financing in place, a lot of solar projects have been delayed at every stage of the process.
As a result, acquisitions are heating up. Developers with access to capital or had already committed capital for the year are jumping in to save projects that otherwise might not have made it through construction, based on the financial state of the owners or developers.
This has given smaller developers some breathing room, allowed the acquiring companies to add more assets under management and helped the banks and lenders working with the acquirers to deploy the necessary capital. Ultimately, acquisitions have turned a tough economic situation into a win for everyone involved.
3. Expect more consolidation. The industry is still fragmented, but that might change moving forward. Smaller solar development shops can typically do well for themselves with a couple projects per year, but at that pace and market share, they rarely earn much of a recognized brand name that customers come to rely on.
Given this year’s uncertainties, we may see some consolidations where two local companies join forces. One might have a decade or more of experience, another might be newer to the market but specializes in an area that resonates with customers. By pooling their local expertise, they can form a market leading company that stands above the rest. With a larger pipeline and more customers, the consolidated developer will be more appealing to the capital markets and will have an easier time securing financing.
4. Demand continues to grow (carports, for example). Five years ago, many property owners were reluctant to pursue solar canopies and carports. They thought they couldn’t afford to lose 10 parking spots for a few weeks at a time during the construction process. They didn’t see the long-term benefits, and thought customers weren’t going to enjoy parking underneath a canopy.
But there’s been a positive trend among retail companies as they realize their customers appreciate having a spot to park in the shade or to keep their car out of the rain or snow. It also gives retail customers a direct view of the solar system, rather than a rooftop system that is invisible to shoppers. As a result, retailers are getting a lot more value out of solar canopies and carports while keeping customers happy. This is just another sign of the growing demand for solar as even those who were once opposed are starting to see the benefits.
What’s next? No one knows when the headwinds caused by COVID-19 will fully taper off, but I’m still seeing many positive underlying trends. Acquisitions, consolidation and growing demand are all good signs that, despite the delays and setbacks in the first half of 2020, the future of the solar industry is on strong footing.
Ian Manchester is Senior Associate, Structured Finance at Distributed Solar Development