Solar developers in states with SREC markets, like Massachusetts or New Jersey, usually assume some revenue from selling SRECs in their project pro formas. This assumption, in part, helps sets their expected Dev Fee for the project. When it comes time to fund a project though, most solar investors will assume that the SRECs are worthless. Frustratingly, this often reduces the Dev Fee. Is there a way to fix this issue? As investors at SolRiver Capital, we know the answer is yes. Below we’ll explain what it takes to make your SRECs financeable. To do that, we need to start with why investors don’t usually count on SREC revenue in the first place. After you understand that, we’ll look at (1) the primary solution and (2) an alternative plan if that doesn’t work.
Investor Perspective on SRECs
Most developers calculate a project’s expected SREC revenue based on current spot pricing. Like any market though, SREC prices are unpredictable and will fluctuate over time. That means that SREC revenue based on spot pricing isn’t a sure thing at all. The actual revenue received could be higher or lower, but it’s impossible to guarantee at the spot price. Understandably, solar investors usually won’t value unguaranteed revenue. As a quick and easy fix, investors will zero out all SRECs and then structure their investment accordingly. In doing so the Dev Fee gets cut down, which puts the Developer in a tough spot. So how do you convince an investor to count your project’s SRECs?
Solution: SREC Forward Contracts
The issue is that selling SRECs at the spot price is unguaranteed revenue. So how can you guarantee it? With a forward sale contract. An SREC forward contract enables the Developer to sell SRECs at a pre-determined price over a set time period. Typically, forward contracts will last from 2-5 years.
The contract terms are simple. The two main elements are (1) the price per SREC, which is a dollar amount per MWh generated, and (2) contract length, which is how many years the SRECs are sold for. Say you secured a contract to sell all your system’s SRECs at $150/REC to a buyer for 4 years. To see the revenue, just plug in your SREC price for each year and multiply by the MWh generated in those years.
A forward contract locks in the SREC sale price for the length of the contract. Investors count that revenue and price their offer appropriately. Of course, any SREC revenue outside of the years covered by the contract won’t be counted. That’s why it’s critical to assign all future SRECs after the forward contract terminates to yourself. This concept is explained in more detail below.
Plan B: Retain SREC Ownership
SREC forward prices may be far less than current spot prices. This discount often grows as the contract length increases, meaning a 1-year forward will offer higher $/SREC than a 5-year forward. Another important consideration is that non-investment grade SREC sellers (i.e. most smaller developers) often see additional price discounts applied.
It’s possible that the forward contract price is too low to justify entering an agreement or that securing an agreement at all is just unfeasible. If your investor is unwilling to accept spot pricing, unfortunately you’ll have to strip SREC revenue from your model completely. From there, try to restructure your Dev Fee to adjust for removing that revenue. This usually means a lower Dev Fee. Thankfully, there’s still a plan B.
As an alternative compensation method, assign ownership of all SRECs to yourself (as the Developer). That means you’ll be able to sell SRECs at the spot price over the project’s life and keep 100% of the sale proceeds. This gives you the entire upside of the SREC value in the event you have to settle for a lower Dev Fee. You’ll specify this assignment in your agreement with the investor. If you’re the sole owner and selling 100% of the project, then you’ll include a clause in the Purchase & Sale Agreement that carves out this assignment. This may sound difficult to negotiate but it usually isn’t. At SolRiver Capital, we actually encourage developers without forward contracts to do this. It’s fairly easy to negotiate with most other investors too. That’s because if an investor prices the deal as if the SRECs aren’t worth anything, they shouldn’t mind if you retain ownership of them. In addition, if you do have a forward contract, you should be sure to assign any SRECs not covered by the contract to yourself. You can accomplish this relatively easily through a Purchase & Sale Agreement or equivalent contract.
Developers shouldn’t be discouraged if an investor doesn’t recognize SREC revenue. A forward contract is a well-established method to fix this issue. However, if that isn’t a feasible option, then the Developer can still get paid via ownership assignment of the SRECs. In both cases, the Developer has a path towards preserving their bottom line.
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