by Cedric Brehaut, Executive Consultant, SoliChamba Consulting
The U.S. market experienced its busiest year in 2016, largely driven by a spectacular amount of construction in the utility segment. Per GTM Research, when the dust settles and all the numbers are in, the cumulative capacity of utility PV operating in the U.S. will have increased by more than 70% in a single year. But who owns these assets? The recently released report ‘Megawatt-Scale PV O&M and Asset Management 2016-2021’ features a list of the top 40 U.S. utility-scale PV asset owners, and the table below identifies the top five players:
A few days ago, Solarplaza also published GTM Research’s list of the top 25 U.S. utility-scale PV project owners. The two lists are derived from the same ‘U.S. utility PV tracker’ database but you may have noticed that the top 5 players and associated megawatt counts are not the same. How can two ‘top owners’ lists produced by the same research firm show different results? Answering this question requires us to dive into the underlying data and some of the U.S. market dynamics.
First let’s address the obvious: the table above comes from an O&M and asset management report that analyzes asset ownership information at the end of Q3 2016, while GTM’s top 25 project owners list also includes some projects added during the fourth quarter. But this difference only has a minor impact on the top players list, and the bulk of the gap stems from other factors, explained below.
U.S. Project Pipelines Often Exceed Operational Asset Pool
The top project owners list is based on total project capacity, including both operational assets as well as contracted projects that are still in development or under construction. In contrast, the top asset owners list from the O&M and asset management report only analyzes operational plants because it considers the installed base as the current addressable market for asset management and O&M services. Since the U.S. remains a booming market for construction and development of utility-scale PV plants, the two metrics differ by a large amount.
Net Capacity Differs from Gross Capacity
"Two partners may have an equal stake in the asset but ownership structures can be uneven, with a majority investor and a minority investor (or several)"
A common notion in the power industry, the concept of net capacity rarely gets mentioned in the solar PV world, so let’s start with definitions. A power generation investment portfolio’s gross capacity represents the total capacity of the assets owned, regardless of the ownership stake. Its net capacity, however, is the product of gross capacity and ownership stake for each asset. For example, Sempra U.S. Gas & Power and ConEdison Development each own 50% of the 250 MW Copper Mountain Solar 3 power plant, so this project contributes to each of their portfolios 250 MW in gross capacity but only 125 MW in net capacity. In this example the two partners have an equal stake in the asset but sometimes ownership structures are uneven, with a majority investor and a minority investor (or several). For example, GE Financial Services owns almost 1 GW of utility PV assets based on gross capacity but only an estimated 300 MW based on net capacity, because the firm often acts as a minority investor.
Among the top 5 owners of operational assets listed at the beginning of this article, two players have similar numbers for net and gross capacity (Duke Energy and BHE Renewables) while the three other players show net capacity numbers significantly lower than gross capacity numbers: NextEra Energy Resources (22% lower), ConEdison Development (39% lower), and Southern Power (41% lower). Some of these figures are estimates because investment partners do not always disclose the details of shared ownership structures.
Ownership of Pipeline-Stage Projects is Temporary
"First Solar leads the pack in the top project owners list but only ranks in 25th place in the top asset owners list"
Developers often own projects during pipeline, development, and construction stages, and sell the plants when they approach or reach commercial operation. Consequently, any list of top owners that includes contracted pipeline is bound to feature project developers as prominent owners, even if they don’t end-up owning the operational asset. First Solar is a perfect example: the integrated module manufacturer leads the pack in the top project owners list but only ranks in 25th place in the top asset owners list from the O&M and asset management report. Other developers like Recurrent Energy and SunEdison follow the same pattern: most of their projects get sold to third-party investors or Yieldcos when they reach commercial operation.
So the proverbial million-dollar question is…
Who Will Own the Assets Currently in Development or Construction Stage?
Independent power producers (IPPs) with in-house project development like NextEra Energy Resources, Cypress Creek Renewables, and NRG Energy typically own the asset when it becomes operational, or sell it to an affiliated Yieldco (such as NextEra Energy Partners and NRG Yield).
When it comes to projects owned by developers that do not have an IPP business, like First Solar, Recurrent Energy, 8minuteenergy, and SunPower, there is no way to know with certainty who will be the highest bidder for these assets in the next year, let alone in 3 or 4 years (for the tail end of the contracted pipeline), but we can make an educated guess based on current trends.
"IPPs remain the most likely buyers of assets that are currently in pipeline stage, especially those IPPs that do not develop their own projects"
GTM Research’s O&M and asset management report finds that IPPs represent 14 of the top 20 owners of U.S. utility-scale PV assets in operation, and 23 of the top 40 owners. Many of them are unregulated affiliates of utilities who invest in PV plants outside of the utility affiliate’s regulated territory. These 23 IPPs account for 8.9 GW, or 64%, of the capacity managed by the top 40 players, and more than a third of the total asset pool in operation. Consequently, IPPs remain the most likely buyers of assets that are currently in pipeline stage, especially those IPPs that do not develop their own projects. Of course, each individual IPP’s appetite depends on factors such as their tax equity appetite and their desire to acquire solar PV plants vs other renewable or non-renewable generation assets.
This dominance of IPPs in the ownership landscape has the potential to profoundly impact both asset management and O&M landscapes in the years to come: While financial investors and funds often act as “passive investors” and outsource both asset management and O&M, IPPs are owner-operators of power generation assets, and most of them are likely to consider performing these functions in-house as they do for conventional power plants and often for wind assets.
In the next article, I will discuss the U.S. asset management and O&M providers landscape and identify the top 5 players in each category.