Solco eyes $100m fund to attack cost of capital

The listed solar wholesaler and distributor Solco is looking at the possibility of bringing together a range of investors to create a $100 million special purpose fund to aid in the roll-out of renewable energy projects in Australia.

The newly appointed CEO of Solco, Anthony Coles, wants to base the fund around US models, which have attracted of a range of high profile investors, investment funds and even solar supply companies to invest in projects.

Coles said the new investment vehicle would seek to address two market barriers: the difficulty in obtaining power purchase agreements, and the cost of capital.

“We want to be able to attract funds into a vehicle that can invest in large projects – and offer a better finance model,” he told RenewEconomy in an interview. “We are quietly confident of pulling together a $100 million fund.”

Coles said the fund – and similar vehicles in the US – represented a shift in money from venture capital type investments in R&D and manufacturing further downstream in the renewables industry to the deployment of projects.

He noted the emergence of SolarCity, Sungenvity and SunRun in the US, which have mobilised large amounts of money from companies such as Google to fund development on residential and commercial and industrial rooftops.

“It’s where you can value add, and get better returns,” Cole said.  As McKinsey & Co highlighted in its report, Solar power: Darkest before dawn, the best returns in the solar industry may be made downstream.

Apart from Google investing in residential solar projects, and gaining tax benefits for doing so, and SunEdison tapping funds from financial provider First Reserve, McKinsey also anticipates the establishment of solar real-estate investment trusts, which would give an opportunity for retail investors to provide funding for solar projects or offer options that let distributed-generation customers pay for their solar investments via their monthly utility bill.

“The cost of capital is often the most crucial factor determining returns on solar projects,” McKinsey noted. “The entities that structure solar investments often achieve better returns than the companies that manufacture or install modules.

“Companies are increasingly likely to turn to institutional investors, asset-management firms, private- equity firms, and even the retail capital markets to raise the sums required to finance expected demand for solar, which could add up to more than $1 trillion over the next decade.”

Solco, meanwhile, is also looking to focus more on the mid- to large-scale commercial solar energy projects, as well as investing in projects driven by build-own-operate models and power purchase agreements.

Coles said the main fear of the solar industry at the moment was that the federal government would remove the remaining multiplier for small-scale systems, which has already been reduced from five to three. The multiplier is due to be cut to two on July 1, but there is a belief in the industry that the government may cut it immediately to one.

“The industry is preparing to operate in a post rebate world,” Coles said. “We’re bearish that the government is going to can the multiplier, and it might drop from 3 to 1. They might do that overnight. That will double the price.”

He said that Solco may also investigate the possibility of creating a model that will allow its wholesale clients to sell rooftop solar systems with no up-front payment, as Sungevity is now proposing, and his former employer SolarShop, in a more modest proposal previously. “To maintain and survive the industry, you need finance solutions to take the capital cost out of the way.”