On August first, Acciona Energy closed financing on Nevada Solar One, in the first leveraged lease structured financing in the United States.
This begs two questions:
- What in the world is a leveraged lease structured financing?
- Why do we care?
What in the World?
An in-depth analysis of the economics of leverage leasing for all three parties involved is available here. Structured financing is a generic term for any form of financing more complex than a loan or a rental. For those of you who need to remain awake, here’s the short version: a leveraged lease is a way of obtaining financing that allows the three parties (lenders, equity investors, and lessee) involved to parcel out the risks, tax benefits, and income streams in a way that suits each of their needs.
Why We Care
While using structured finance can lead to substantial financial benefits for the parties involved, the deal can only be done if the lenders believe that the cash flows from the underlying asset, in this case Nevada Solar One, a Concentrating Solar Power (CSP) plant, are sufficiently reliable that they are willing to loan money in exchange for a share of those cash flows.
In other words, the lenders believe that Acciona (ACXIF.PK) will be able to operate the CSP plant with sufficient reliability to earn enough money to eventually pay off the $266 million they put up for the deal. The equity investors believe that the CSP plant will retain some value at the end of the lease, so they will not be left holding the bag.
The completing of a leveraged lease is implicit proof that all the financial institutions involved have a degree of confidence in CSP technology, which they would not have in a development stage technology. By their actions, lenders Spain-based Banco Santander and BBVA, and Portugal-based CAIXA Geral de Depositos and equity investors JPMorgan Capital Corp., Northern Trust (NTRS) and Wells Fargo (WFC), are all saying, "Concentrating Solar Power is a main-stream technology, and we are confident of its predictable operation for the lifetime of the lease." Just as important, they’re putting their money where their mouths are.
When lenders believe in predictable cash flows, they reduce the interest rate they charge to finance a project, just as a mortgage company will charge a lower rate of interest to a married couple with steady jobs than they would to a single man who has never worked in his life (if he could obtain a loan at all.) A lower interest rate translates into a lower discount rate when calculating the Levelized Cost of Energy which a technology can produce.
With financial innovation, a group of Iberian and American financial institutions have reduced the cost of energy which will have to be paid by this plants and future CSP plants in the United States just as surely as any technical innovation would. Everyone who wants clean energy at affordable prices should care.
UPDATE: 9/13: In this article on CSP by Fortune/CNN columnist Marc Gunther, he quotes an executive at CSP developer Ausra, saying "As soon as we can build solar power projects with the same cost of capital as building conventional coal or natural gas plants, we’ll deliver electricity at the same cost as coal." (emphasis mine.)
DISCLOSURE: Tom Konrad and/or his clients do not have positions in any of the companies mentioned here.
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If I like the prospects for CSP, what should I invest in? Thanks.
Most pure-play CSP companies are private at this point. In the US, FPL owns most of the old CSP plants (SEGS). Other companies with involvement are Acciona and Iberdrola, but only for people who with the capital and knowledge to trade in foreign markets.
Given these difficulties, my favorite way in is to invest in transmission companies.
See these articles:
Stocks: Bringing Wind Power to Where it’s Needed
The use of a leveraged lease is more a product of the long-lived nature of the assets and type of tax credits and depreciation allowances for which solar projects are eligible. You could not, for instance, use such a structure for a wind plant. The partnership flip financing structures common on wind projects are much more complex, since they involve a much more intricate split of the project’s revenues. The leveraged lease, which is also very common for owners of the older type of coal plant, allows for a much cleaner division. But Acciona, in common with most of its peers, is unlikely to wish to trumpet the extent to which the economics of the project, some of which have been passed through to the debt and equity providers, are the creation of the US tax code. Easier just to say “it’s very clever” and pat the outside capital on the back.
I agree that the choice of the leverage lease over other form of financing is a product of the tax code. But saying that this is just the product of the tax code misses the point. A leveraged lease for a coal plant is the product of financiers considering that technology viable. If coal actually paid the true cost of its emissions, there would be a lot less leveraged leases in coal plants, just as there would be less leveraged leases in CSP without tax credits.
My main point is that the predictability of cash flows is a necessary condition for structured financing, so using a leveraged lease is akin to saying “these cash flows are predictable.”
CSP is now an engineering project, not a science project.
Tom, all understood. I just wanted to stress that it being structured and a lease wasn’t a vote of confidence in the technology. The key here is leveraged. That a group of lenders is willing to assume SOME of the operational risk (we don’t know how much, and I highly doubt that Acciona would be willing to share the details of its residual exposure to the project) is an important vote of confidence. Because the US lacks a sensible incentive system for renewable producers the gussied up lease financing is necessary, but not, in itself noteworthy.
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