Finding good sponsors for solar projects and portfolios can be like learning about bigfoot. We’ve seen sightings with grainy pictures, and the folk lore continues. Now to qualify “good sponsors”, we should put some caveats around what that means.

Investors in this asset class traditionally were looking for a few things. They wanted to enjoy the benefits of a tax credit and the cash that came off the project. This was done for decades under the auspices of a partnership flip.

In addition, if we look back historically, we lived in a low interest rate environment since the mid 2000’s. Layer in the tax advantages, depreciation, coupled with climbing electricity rates and public awareness, this asset class grew. In parallel, the cost of the equipment on a CAGR declined, making it more affordable for additional markets.

What has changed and what is coming?

As interest rates continue to climb, so do sponsor equities options. They have many vehicles to park their resources to get a return. Today, it could be considered that solar assets are riskier. Staying in the investment for 5-6 years could be less appealing, especially with the impacts of the public policy changes in recent years.

The difficulty of driving down costs for a solar asset for the sponsor to make their return profile is causing the development community to shave off costs. The challenge is, these projects have multi-year development cycles and the carrying cost for those loans continue until a buyer is found.

In addition, over the last few years, projects demanded a premium when they were bought and sold, pre-NTP, leaving developers and IPP’s with projects that no longer penciled for sponsor equity. The expectations 2 years ago have changed and that has caused less interest in them participating in the market.

Their focus has shifted to investment grade offtakers, with predictable cash flows that usually have 20-year plus agreements with municipalities, community solar, or feed-in-tariff style offtakers. This doesn’t entirely remove all of the risk, but it provides some shelter in this stormy period we’re experiencing right now.