As the microgrid market evolves, so does microgrid project finance. That’s leading some finance providers to be more proactive in identifying promising deals and striking up working partnerships.
Developers will gain an advantage if from the earliest stages they work closely with financiers that have the expertise and capital to execute deals and see projects through to fruition, according to Coleman Adams, Crescendo Power co-founder and managing director.
Crescendo Power was created with just that in mind. Co-founded by Adams and Todd Price, Crescendo last year announced it had secured $30 million to finance and acquire mid-tier, behind the meter, projects in the 1-10 MW range. The firm is focusing on the commercial, industrial, higher education and hospital segments of the market.
Microgrid Knowledge recently spoke with Adams for insight into the state of play for microgrid project finance, and Crescendo’s approach, plans, execution and distinct place in the market.
The expanding, diversifying realm of microgrid project finance
There were 1,869 microgrid projects with a combined capacity of 20.77 GW in operation, under development or proposed as of 4Q 2017, according to Navigant Research’s latest market research report. Commercial and industrial microgrid capacity surged during the quarter, in very large part due to deployment of a 2,200 MW microgrid by Schweitzer Engineering Laboratories for a Saudi Aramco gas-oil separation plant.
Price and Adams launched Crescendo Power in March 2017, after working for Hitachi Consulting and Hitachi Energy Solutions. Urs Gisiger, also from Hitachi, joined them as a managing director in November.
“There are more technology vendors and EPC (engineering, procurement and construction) firms doing development, as well as more ‘pure play’ developers active, in the market today,” Adams said. “They’re looking for more assurance regarding how they can exit and cash out on projects. We believe we can provide that by working more collaboratively with independent developers from the outset to assure successful exits. In that way we can give them, and off-takers, a much greater level of confidence and comfort regarding the viability of and the ability to successfully execute their technology and business models.”
Crescendo Power is zooming in on the mid-tier market as it identifies promising prospects after establishing what management intends to be the first of the company’s microgrid project investment funds. The firm took the next, big step along its strategic path in March, entering into a microgrid co-development and project funding agreement with Hawaii’s Kokua Aina Energy Partners.
Establishing a microgrid co-development partnership
Working together, Texas-based Crescendo and Kokua Aina will finance and develop microgrid projects in the US, its territories and Canada. This includes the Hawaiian island chain. “Our interest in Hawaii comes from a demand standpoint, and really stems from a willingness to engage in the market,” Adams said.
“Hawaii is very attractive. Residents and businesses want clean, renewable – and less expensive, local – energy and the utility sector is trying its best to figure out how to provide it. Our local partner understands the market and they have a good, local network to help us with that. We’ve been talking to them for a while and we like their background. They have experience developing projects on various islands along the chain. It’s very important to have a local partner with proven ability to execute.”
More broadly speaking, Adams explained Crescendo’s modus operandi as follows: “Crescendo Power’s niche and focus is to efficiently and flexibly finance, across the full capital stack (including tax equity), small to medium size projects (1-10 MW in size) that many larger equity companies don’t want to service because the projects may be too small.”
The microgrid market: state of play
Offering a generalized view of the state of play and conditions in the microgrid market, Adams said: “We are seeing good projects out there that can make a good business case for customers, developers and investors. They take teamwork to define and refine through iterations of design trade-offs with the customer. Are these projects easy or cookie-cutter yet? No, they take work and a level of patience to carry across the goal line successfully.”
A wide variety of design options, as well as technologies, features, performance expectations, incentives and types of revenue streams exist when it comes to microgrid project financing, he said.
“They all vary by project, location and utility jurisdiction. We don’t see this becoming narrowing or becoming more standardized in the next five years. The necessity of microgrid financing is determined by the client or off-taker, and right now there is a need for developers to offer financing to bring projects to market on behalf of their clients.”
That’s why developers and engineering, procurement, and construction (EPC) companies can benefit substantially by working closely with microgrid project finance partners from the start — or establish some form of working partnership with them, he added.
“In our process, we devote more time upfront to define partnership/teamwork parameters in an agreement so that there is a strong foundation to jointly work from and focus on solving the end customer’s problem in the best manner possible. Waiting until later stages to define roles, responsibilities and financial parameters is a recipe for driving a project off the rails late in the process,” Adams said.
Is there one fatal flaw that project developers and off-takers are prone to make when seeking microgrid project finance?
“We don’t see one, common fatal flaw per se, but I would say project developers, and all market participants, can benefit by avoiding waiting until the last minute to clear a last hurdle and obtain project financing. It’s far better to gain an understanding of financing options and structures from the beginning. So we collaborate early and often between off-takers, developers and funders so as to establish a solid, underlying financial arrangement early on in the project development cycle.”
Identifying the challenges
Turning to current challenges confronting microgrid market participants, Adams cited the recent US tariffs on global imports of solar photovoltaic (PV) cells and modules and the phasing out of the federal solar investment tax credit (ITC). The credit is slated to be reduced to zero between 2019 and 2022.
“There has been a project slowdown in recent months…but business is picking up again,” he said. “The folks procuring panels are becoming more confident setting prices for projects [in light of the new import duties]. They’re a bit higher, but overall that’s a good thing.”
As for the solar ITC, Adams said microgrid project developers have had to change the structure of some deals in light of the ratcheting down and phasing out of the federal tax credit. “In some cases, it makes things a bit more complicated, but extension of the tax credit was a very good thing, as well. A lot more in the way of projects will be deployed as a result.”
Headquartered in Carrollton, Texas, Crescendo Power has an office in Dallas and will soon open another in Boston. Crescendo is among the team of financiers participating in The Microgrid Financing Connection, a program being launched at Microgrid 2018, May 7-9. Selected project developers will have an opportunity to meet one-on-one with financiers. Apply here.