Nathan Homan, Managing Partner, Wiser Capital
It’s no secret that today’s market is an uncertain one. Investors are searching for secure investments that offer high returns as well as diversification. These benefits, along with an attractive return on investment, can be found in an area that has nothing to do with equities or bonds — medium-scale solar energy projects.
Government incentives for solar power investments at the federal and state levels continue to drive interest in photovoltaic (PV) solar projects from third-party investors. According to the Solar Energy Industries Association, more than 100,000 individual solar power systems will be installed in the U.S. by the end of this year, giving the U.S. an all-time-high 13% share of global solar installations. This is more than double the 5% global share that the U.S. possessed in 2008. As for the PV area of the solar energy industry, 832 megawatts of PV power were installed in the U.S. in the second quarter of 2013, a 15% increase in installations from the first quarter of 2013.
The ongoing growth in solar energy projects in the U.S. represents a tremendous opportunity for investors. Through power purchase agreements and solar equipment leases that can last for over 20 years, investors can secure returns and tax incentives by financing the PV systems and selling electricity to the host facilities where the systems are installed. These arrangements also benefit the host facilities because they can obtain solar power at an attractive and regular monthly cost without any required upfront investment.
However, PV projects have historically been associated with complex accounting, high transaction costs, long sales cycles and other challenges. As a result, in order to be economically viable, these projects needed to have sufficient size (entailing systems that produce greater than one megawatt of energy) to overcome these obstacles. On the other side of the size spectrum, very small residential PV projects (producing less than 20 kilowatts of solar energy) are usually one-size-fits-all transactions that lower costs for property developers, but numerous projects must be completed in order for investors to reap substantial profits.
This leaves medium-scale PV projects (which have systems producing between 100 kilowatts and one megawatt of energy) in the dark when it comes to capital and expertise. These investment opportunities have historically carried the same expenses as their larger counterparts, but lack the additional capital needed to absorb the high costs and other liabilities. Nevertheless, medium-scale PV projects offer the greatest number of investment opportunities in the PV sector and standardization and automation practices, such as those underway at Wiser Capital, are making advancements in this area. According to Port Washington, N.Y.-based research firm NPD Solarbuzz, PV solar projects producing between 100 kilowatts and two megawatts of energy accounted for more than 60% of the U.S. PV installation pipeline as of May 2013.
In addition, NPD Solarbuzz reported that municipalities and schools have been taking a strong interest in medium-scale PV projects backed by third-party investors. Since government entities and educational institutions are unable to benefit from tax incentives for solar energy projects, developers have stepped in with PV projects backed by third-party financing in states where these arrangements are allowed. Many of the planned U.S. medium-scale PV projects involve installing PV arrays at multiple sites within a municipality that are bid out as a single project to save costs.
Medium-scale PV projects currently offer annual returns on investment of up to 10% to 15%, with the ability to fully recapture the initial investment capital within one to five years. These attractive returns, along with the long lengths of the contracts, make medium-scale PV projects a viable option for investors seeking steady and long-term sources of capital.
Furthermore, the due diligence process has become easier with the advent of centralized online PV project deal platforms, making this an especially compelling time for investors and their advisors to enter the space. For example, my firm, Wiser Capital, recently launched an online platform to evaluate PV system integrators and host facilities seeking capital, and match them with investors looking to finance PV projects. We consider several different variables to determine the creditworthiness of each potential deal for investors.
Medium-scale PV projects and the overall solar energy arena continue to attract investment capital, even in the present economy, because there are very few moving parts in solar energy projects. They consist of a fixed asset that produces power for years with proven technology at facilities eager to reduce energy costs. As long as investors and their financial advisors perform thorough due diligence, they can participate in an extremely predictable investment opportunity with lucrative returns — while achieving the satisfaction of having done something to benefit the planet.
Nathan Homan is Managing Partner of Wiser Capital, a Santa Barbara, Calif.-based investment firm that enables new sources of capital to participate in the funding of financially attractive, stable and secure sources of renewable energy projects.