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The buffet is closed.

posted May 30, 2016, 3:10 PM by Nate Shanklin

Solar developers feel the pinch in the return to normal IRR requirements

SunEdison’s recent bankruptcy was decidedly the largest failure in the industry and has sent ripples far and wide.  One effect of this bankruptcy has been the sudden availability of projects.  Developers that had set their sights on SunEdison are now scrambling to find a new home.  While this might appear to be a boon for alternate investors, a trend has become apparent with these deals, they nearly universally have single digit IRR’s.  SunEdison’s loss leader buying strategy has yielded a crop of developers that have been trained to think an unlevered 6% IRR is a solid opportunity and one that earns them bargaining chips.

As a rule, renewables, being alternative investments operating single high capital requirement projects, should demand IRR’s from 8-11% based on credit.  This has been the rule for much of the industry’s history.  As a fact, the required returns were one to three points higher than that historically due to the infancy of the industry and banks inability to accurately price associated risk. 

Some project geographies are just not going to produce high IRR’s, Pennsylvania, since the SREC crash has struggled to produce a project above an 8% unlevered IRR. While there are reasons many of these markets produce thin deals, others really don’t have a foot to stand on.  Markets such as New Jersey, for example, are an understood entity.  With the number of installed projects, there are few legitimate reasons to see significant development cost overruns.  So when a developer comes forth with the excuse that they had 30% more engineering than other comparable projects and similar overruns in permits and public hearings, you know they are trying to defend a rapidly decaying margin.

While it is easy to become frustrated with developers, it is frequently not their fault. For the better part of the last two years yeildco’s and similar market instruments have been teaching developers that low IRRs are acceptable as long as the projects are large.  This, however, is just not the case.  As private equity has stepped in to fill the capital void left by the yieldco’s IRR requirements have  returned to normal levels, leaving many developers grumbling.

While this change has caused a fair amount of friction in the development community, there is hope. Large projects are valuable if managed properly, and when presented with prospect of NTP buyouts, or similar treatments, agreements are being reached.  No diet is fun, but just like with our own midsections, effective trimming will leave the solar market looking better and in a far healthier condition. 

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