New NREL Report: Impact of Financial Structure on the Cost of Solar Energy

Travis Lowder's picture

A new report from the finance team models the effects of tax equity partnership structures on the levelized cost of energy (LCOE) from utility-scale concentrated solar power and PV facilities. The analysis covers three tax equity structures in particular—all-equity partnership flips, leveraged partnership flips, and sale leasebacks—as well as a single-owner structure that uses internal tax appetite. To determine each one's influence on LCOE, the authors employed the System Advisor Model (SAM), a performance and financial modeling software developed by NREL in conjunction with Sandia National Laboratories, which is available for public use. A few highlights from the analysis are as follows:

  • All-equity financial structures yield higher LCOEs than those that incorporate project-level debt (which is less expensive than tax equity). In practice, however, the process of securing debt has transaction costs that are unaccounted for in SAM.
  • Extending the tax equity partner's payback period can improve LCOE (e.g., a delay from year eight of the project to year nine can reduce LCOE by 7%-27%)
  • The analysis indicates that projects utilizing PV technology generally have lower LCOEs than projects utilizing CSP (trough and tower) technologies. However, a portion of CSP's higher costs derive from its perceived technology risk and therefore heightened financing costs. CSP project demonstration and development experience could improve LCOE by lowering debt and equity yields.
This chart shows lower real LCOEs for solar PV and  generally higher real LCOEs for CSP-Trough and CSP-Tower for all financial structures modeled.  All equity-flip financial structures had the largest range in real LCOEs for all technologies modeled.

Figure 1. LCOE spreads between low and high cases for PV, CSP-Trough, and CSP-Tower

  • Loan guarantees have the potential to reduce LCOE by as much as 20% from the base case.
Table 1. LCOE Impact of Loan Guarantee Financing Case – PV, CSP-Trough, and CSP-Tower ($/kWh)
  Single-Owner Reference Case
($/kWh Real)
DOE Loan Guarantee
($/kWh Real)
Difference
($/kWh Real)
% Difference
PV $0.134 $0.114 -$0.020 -15%
CSP-Trough $0.171 $0.138 -$0.033 -19%
CSP-Tower $0.139 $0.114 -$0.025 -18%
  • Based on interviews conducted for the report, many developers are anticipating a 2%–4% increase in the cost of tax equity as demand picks up (with the expiration of the 1603 Treasury grant) and supply remains flat.
  • Interviewees also indicated that the selection of financial structure was often ultimately the decision of the tax equity investor. Other factors that may influence the choice of structure include: project size, investor/developer experience, and comfort with the structure, the strength of the developer's balance sheet, the ability to use tax credits, and the investor's risk tolerance and preferences.

Impact of Financial Structure on the Cost of Solar Energy is an installment in a three-part series that provides an analytic overview of the U.S. utility-scale solar market. There are two companion reports—one on utility-scale solar technologies and market segments, and the other on the federal financial policies affecting utility-scale solar deployment (forthcoming).