For information summarizing iSolarGen’s offering to prospective customers, please see How iSolarGen’s solar utility works
Interconnected Solar Generation LLC (“iSolarGen”) is an urban solar electric utility company. iSolarGen installs, owns and operates rooftop photovoltaic (solar) power plants to generate renewable energy for commercial businesses with large rooftops. The system will take advantage of the local utility power grid as a secondary power source. iSolarGen provides customers with an on-site source of daytime power that …
- Reduces the customer’s cost of electricity
- Evens out their cash flow for electricity over a year’s time
- Provides one invoice for electricity each month
- Has a positive environmental impact
- Helps the local economy
The company’s target is the State of California where market conditions are supportive for creating a profitable business. iSolarGen will install, own, operate, and service these systems as an urban solar electric utility company and sell the power to the rooftop owner or the tenant(s) of the building under long-term power-purchase agreements (PPAs).
iSolarGen has sourced financing totaling $100 million in the form of tax-equity investment and debt for the first round of development and expects to access the market for the next tranche a year later after the first tranche has been deployed. iSolarGen has already engaged in positive discussions with businesses representing near-term projects worth over $10 million and has identified other potential projects worth $100 million.
iSolarGen has been formed by three principals with extensive industry experience and complimentary skill sets. The principals have studied the solar industry and power markets, waiting for the right opportunity to launch a commercial solar utility company. The founders have installed photovoltaic generation equipment in California over the past 10 years.
A number of market conditions have emerged that make this business model viable and profitable going forward. The primary driver has been the dramatic reduction in the cost of solar panels over the past several years. The other main drivers include the high cost of power in California, continuation of Federal and California State incentives for renewables, limited competition pursuing this commercial market, and the California mandate for 30% of power derived from renewables by 2020.
The project’s economics offer healthy returns on equity and strong debt-service coverage ratios over the term of the loan. The installed price for solar power has now reached an all-time low of $3 per Watt, which, according to our analysis, is the breakthrough price for making solar generation competitive with conventional generation. And the cost continues to decline over time. This translates to a price of $.17 per kWh, which is competitive with power prices in California. iSolarGen will only pursue projects that deliver a minimum return on equity with creditworthy customers.
The investment’s project economics depend upon the inclusion of tax-equity investors who are able to utilize the federal 30% Investment Tax Credit (ITC) and the accelerated depreciation benefits that renewable projects generate. There are three established structures that could be adopted for the tax-equity part of the deal: 1) partnership flip, 2) sale leaseback, and 3) inverted lease. The financing alternatives and projected financial performance are described in more detail in the business plan.
The market for rooftop solar installations on commercial buildings is huge and largely untapped. The targeted market also includes government, industrial and not-for-profit rooftops. California has an estimated 6.6 billion square feet (237 square miles) of commercial rooftop space available. Assuming 50% of each rooftop is available for solar panels, the current penetration rate is less than 1%. iSolarGen will target specific power markets where prices are high and that offer variable pricing during peak periods into which solar generation dovetails perfectly. The competition for this targeted market is currently very limited. Companies have been targeting industrial-scale projects and residential rooftop installations. There will be new competition for this market; however, as previously mentioned, the market is huge and virtually untapped.
iSolarGen has formed a strategic partnership with ABC Solar Inc. for installation services and maintenance and with several leading PV panel manufacturers for generation equipment. Although there are preferred vendors, iSolarGen is not limited to these vendors and will use others when circumstances dictate. iSolarGen will gradually build out marketing, administrative and installation capabilities. Initially all meter reading and billing will be completely computerized by using ABC Solar’s existing systems.
Investment risk will be minimized by only drawing money from the debt and equity commitments once long-term PPAs have been signed with creditworthy entities. iSolarGen expects to take approximately one year to execute contracts worth $100 million in capital cost which will enable development of between ten and twenty projects generating a total of approximately 40 megawatts of electricity. In the event of a default by a PPA customer, iSolarGen will have the ability to stop selling power to that customer and sell directly to the local utility. In this way a strong revenue stream can be maintained from that project regardless of the financial stability of the building tenant. In addition, iSolarGen will focus on customers in high-cost electric markets where it will sell power to the customer at a price that is discounted approximately 10% below that of their local electric utility.
Summary for Investors
For tax-equity investors who expect to be full taxpayers over the depreciable life of the asset, the opportunity to invest with iSolarGen is competitive with other tax-equity investments. The price of electricity in California is unlikely to decline in the foreseeable future. iSolarGen generates the most electricity during the time of day when the price per kWh is the highest. During the summer months when the likelihood of utility brownouts is the highest, iSolarGen isolates its customers from utility-imposed rolling brownouts.
Photovoltaic equipment consistently generates electricity with minimal maintenance over 30 years with approximately 15% degradation in generating capacity by year 30.
This investment strategy delivers to the tax-equity investor a return on investment of 30% ITC almost immediately upon deployment of the capital in the form of tax deductions. The tax-equity investor also earns depreciation through the term of the investment, expected to be 6 years.
To the debt provider, project economics show a strong debt service coverage ratio over the term of the loan.
The commercial structure of the relationships in the deal is illustrated here:
How iSolarGen’s solar utility works