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The Solar Trends: Capital Costs Drop, While Solar Companies Re-invent Themselves

Edit: Kewell Technology Development Limited    Date: Oct 13, 2017

Mercatus just released its North America Solar Trend Report for the first half of 2014. It’s worth paying attention to, as it highlights some interesting industry trends. For those new to Mercatus, the company started in 2009 with the express goal of creating a software platform that would provide more transparency to investors. The idea, according to CEO Haresh Patel was to close “a massive gap between capital markets and developers building projects. They weren’t finding each other, or speaking the same language.” As a result, there were significant inefficiencies that needed to be addressed.


Mercatus has come a long way since 2009, and now serves 60% of the U.S. commercial and utility-scale solar market Solar Trends, including some of the biggest developers, investors, utilities and independent power producers. To date, the company has assessed 22,000 megawatts of projects, with a software-as-a-service platform offering that is an “all-in-one solution for solar energy investors to screen, diligence, and manage a portfolio of projects, and a platform for developers and asset owners to solicit projects and portfolios to investors and the capital markets.”


By providing this service to much of the industry, Mercatus is extremely well placed to offer informed observations about the industry and emerging trends. I recently spoke with Patel as well as Director of Finance Tom Vogt, who offered their observations of an industry in the midst of significant transition.


Patel noted that one big theme emerging from their review of the information from 2,500 projects – representing approximately 60% of the U.S. market over the past two years – is that the cost of capital has fallen dramatically. He compares this trend to the competitive dynamic that occurred with the solar panel wars in recent years, which commoditized panels and drove the costs down significantly.


The last remaining leg of the stool has been the cost of money and project acquisition. Market forces have taken care of that…Just a year ago, money was in mid to high teens (percentages) for tax equity. That has compressed down. Overall, yieldcos are bringing tremendously lower costs of capital while there is massive potential for REITs (real estate investment trusts) and MLPs (master limited partnerships) to similarly impact the market.


Patel observes that this is a healthy trend, bringing the cost of tax equity money into the low teens, and resulting in bigger and more attractive projects.

He further notes that the overall costs of solar projects have moved from the low teens into the single digits, with the yieldcos putting ever more pressure on the cost of capital. This matters because lower financing costs have a direct and significant impact on the overall price tag.

For every 1% point in lower capital costs, you are seeing a reduction of 20-30 cents per watt in project costs. You are now seeing projects below $2.00 a watt…It’s good for the industry so we can stand alone without subsidies by the end of 2016.


In short, the entire competitive dynamic has changed, with money no longer enjoying the upper hand.

I think the other underlying behavioral change with more money available is that it has to be competitive. Investors are better at providing customer service, responsiveness and speed now that capital is no longer in control.


Image: Mercatus - money gets cheaper, IRR thresholds drop

Vogt and Patel both emphasize that there is another, growing, trend that is beginning to emerge on the radar, and one that may eclipse in importance the falling cost of money. That trend is the movement of some of the major solar companies away from being mere providers and financiers of panels towards becoming energy companies.


about Solar Trends Patel sees it this way,

SunEdison’s acquisition of FirstWind is the first shift of the tectonic plate saying ‘OK we are going to be an energy player’. But the NRGs, Exelons, and EON in Germany are not sitting idle. This whole battle is shaping up about who is going to be your future energy provider. It’s not just about solar. To me, this is a bigger story than the cost of money – it’s a recognition that this is about energy solutions.


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