SunEdison entering phase of rapid expansion with new financial structures

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SunEdison is racing to build significant scale to its PV power plant project business, while SolarCity has just successfully added a new financial business model to its bow.

Not content to follow the rapidly expanding downstream PV business model, whereby PV power plants are financed, built and sold to an increasing range of end customers (utilities, enterprises and pension funds etc), SunEdison will also retain an increasing number of projects in its portfolio (retained value) that are designed to provide optimised long-term revenue and profit gain for the company and its shareholders.

However, to successfully execute the strategy, two critical elements need to be in alignment: project development scale and low cost finance.

Value per watt: scale

SunEdison has decided to follow a path to differentiate itself from other PV energy providers (PVEPs) such as First Solar and SunPower by becoming the “most respected and profitable” (valuable) business in the sector.

“In Solar Energy, our mission is to be the most respected and profitable platform in the industry and hence, the most valuable,” noted Ahmad Chatila, CEO of SunEdison in prepared remarks during its Q3 2013 conference call. “To be the most valuable, our megawatt growth rate has to be healthy, the value per watt extracted from our installation must be high and the balance sheet must be strong.”

The company had previously guided plans to significantly ramp the number of projects under construction as well as build its project pipeline sufficiently to generate a quarterly run rate of 200MW to 250MW per quarter in 2014, achieving a target in the 1GW range, while extending that target in 2015.

SunEdison is already in the throws of this rapid project building phase, noting that 558MW was currently under construction, compared to 200MW in the second quarter of 2013.

The company also noted that its PV project pipeline stood at 3.1GW at the end of the third quarter, 231MW higher than at the end of the previous quarter.

According to Chatila, without the significantly higher quarterly run rate of projects, it, like other smaller project developers, has a greater requirement to actively seek to sell all projects completed in a quarter to maintain liquidity and project business flow.

Value per watt: Retained verses sold

However, reaching the target of a 200MW to 250MW run-rate level, different business and financial instruments can come into play.

“At a run rate such as 200 to 250MW per quarter that we have projected for 2014, we have new opportunities to optimise the value per watt we create. Our business today generates around US$1.97 for every watt of solar we install. This is discounted cash flow value of a project over its life. At the midpoint of our guidance of 2013 for 523MW that means we have created over a US$1 billion of value in our downstream business in 2013,” explained Chatila.

In a chart to reflect this value creation per project, SunEdison would have only realised around US$0.75/W under the previous level of quarterly installations if the project was simply sold.

“Today, this value per watt is shared by [the] downstream value chain. About two-thirds goes to solar project buyers and one-third to our company in the form of gross margin on project sales,” noted Chatila. 

According to the SunEdison executive, PV project buyers are the largest beneficiary of the project value as they reap the long-term IRR (investor rate of return) of a fully functional PV power plant and the associated PPA or other earnings mechanisms such as feed-in tariffs.

There are three main reasons for this disparity, according to Chatila:

1. The IRR that a single investor requires is higher than using a public vehicle financial instrument. The high discount rates for solar projects due to the perceived higher earnings risks, despite the now demonstrated low-risk profile of PV projects operating in the field.

2. Buyers only pay for the first 20 years of the project life, despite the fact that the project will produce power for at least 30 years, which discounts the true residual value of a PV power plant.

3. There is ‘friction loss’ between project developer and buyer, due to negotiations, including disagreement on panel degradation rates and overall project output.

Therefore, SunEdison has already retained 25MW of completed projects in the third quarter to monetise later using ‘public vehicles’ such securitisation’, a method recently employed by SolarCity, or other routes to maximise the value of projects.

However, the company acknowledged that a larger portfolio would be required and accumulated before offering this to the market.

According to Shayle Kann, VP research at GTM when speaking to PV Tech over the securitisation deal by SolarCity, the analyst noted that: “For a long time there has been talk of somebody lowering the cost of financing by [debt] securitising a portfolio of solar assets that trade in public markets ultimately with a much lower cost of capital.”

Like Khann, SunEdison’s management believe that the solar financing market is about to reach a significant inflection point, due to the opening up of new financing options that substantially lower project costs and therefore generate the higher returns that have benefited project buyers but could now greatly benefit project developers.

Not surprisingly, SunEdison is not switching to this business model overnight and took time to stress in the conference call that it was working to strike a balance between the value creation and long-term cash generation, cash flow and liquidity requirements.

It also means for a period of time that because projects are retained they are not recognised as revenue or margins compared to a sale of a project.

Yet the key would seem to be to pick a portfolio of projects on a regular basis to retain and reap higher returns over the lifetime of the projects, through repeatable, recurring revenue streams, while continuing to sell projects in the traditional way.

Ultimately, a significantly higher percentage of business could be attributed to public vehicles. SunEdison noted that the underlying risks associated with the asset class and SunEdison-developed projects were quickly becoming understood by the market, and yields were settling towards 6% returns.

“As these public vehicles are developed, we believe we will be able to capture much of the US$1.23 per watt that we are giving up today in a direct sale to a third party while enjoying the benefits of the repeatable, recurring revenue streams and doing this all in a very capital-efficient manner,” noted SunEdison’s CFO, Brian Wuebbels.

“We believe there is a significant value created by building selected projects and retaining the value of those associated cash flows. The industry is in the early innings of a re-rating of the cost of capital, and we plan to be a large participant in this, which we believe will drive significant value in our company.”

With SolarCity having now put its toe in the public debt mechanisms and SunEdison making a potentially even bigger move to such markets, major PVEPs are bound to follow.

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