SITTING at a mostly empty 20-person conference table in his Houston headquarters, William “John” Berger, CEO of Sunnova Energy International, looks relaxed and confident. The top of his crisp white shirt is unbuttoned, and no strands of gray yet spoil his shock of black hair. At 50, this Texas-born Aggie engineer with a Harvard MBA has built Sunnova into the nation’s second-largest residential solar power developer, with 2,000 megawatts of generation on the rooftops of 390,000 homes. And yet, he quips, if you like cliffhangers, “you’ve come to the right place.”
Sunnova has lost $330 million on $722 million in revenue in the last 12 months. Its shares are trading around $10, off 80% from their 2021 high. Wall Street is nervous about its bonds: Its $400 million 2021 senior unsecured debt issue, maturing in 2026, initially paid 5.75%, but now yields 14%—high even for junk. But the big test, Berger says, will come if there’s a recession or difficulty raising money (which he fears more than high rates). In the worst case, he says, he could slash costs by 50%, stop seeking new business and fire himself.
The glory days for residential solar power in the United States weren’t that long ago. In 2022, a record six gigawatts of peak generating capacity were installed on 700,000 rooftops, bringing total residential solar power to 40 GWs—nearly enough to power Los Angeles and Philadelphia combined. The boom was partly fueled by falling prices for solar panels and inverters as more countries, including the U.S., jumped in to compete against China. Topping it off, in August 2022, President Biden signed the Inflation Reduction Act, an orgy of renewable energy subsidies which boosted the solar tax credit from 26% to 30% and extended it through 2032—meaning Uncle Sam is on the hook for maybe $8 billion a year for at least a decade.
Despite all this, the residential solar industry is in serious trouble. Sharply rising interest rates have sapped both growth in demand for new residential systems, which are typically financed, and the value of $21 billion in debt issued to install existing systems. High interest rates are what Sunlight Financial, a residential solar financier, blamed when it filed for bankruptcy in October. (It went public in 2021 via a SPAC.) Two days after Sunlight sought Chapter 11 protection, San Francisco– based Sunrun, the largest player in residential solar with annual revenue of $2.3 billion, said it was writing off $1.2 billion in goodwill, primarily from the $3.2 billion acquisition of Vivint Solar in 2020.
The interest rate spike is drawing attention to other problems in an industry built not only on cheap money but also on suspect accounting and a tax credit regime (born in 2005) that has invited aggressive—and in some cases fraudulent—claims. Sunrun, whose stock is off 90% from its 2021 high, faces continuing pressure from short sellers who allege it has claimed inflated tax credits. As Warren Buffett famously observed, “you don’t find out who’s been swimming naked until the tide goes out.” In emailed responses to Forbes, Sunrun defended all its practices as proper.
The shorts have some company. One industry whistleblower has told the IRS that inflated tax credit claims are endemic across the residential solar industry. The IRS isn’t talking, but the whistleblower’s attorney believes the agency is still investigating the man’s claims, which could eventually earn him a fat reward of 15% to 30% of any funds recovered.
Gordon Johnson, whose New York boutique equity research firm serves mostly short sellers, goes so far as to compare the residential solar industry’s current peril to the subprime mortgage debacle of 15 years ago: “It’s a debt Ponzi. They perpetually issue more debt to fund these projects that don’t generate the cash they say.”
This isn’t just short sellers talking their own book. “There is going to be some kind of reckoning,” predicts John Berlau, director of finance policy at the Competitive Enterprise Institute, a libertarian think tank in Washington, D.C. “Because of the perceived goodness of the industry, they did not receive all the scrutiny that other sectors would have."
The residential solar business has always faced one big obstacle: high upfront costs. A new 7.5-kilowatt residential rooftop solar system costs between $20,000 and $45,000. That expense is mitigated somewhat by the tax code, but claiming federal subsidies is not simple. An individual federal tax credit should eventually kick back 30% of that tab to the homeowner, but the credit is nonrefundable- meaning you can claim it only against income taxes you paid or owed in the year you installed the panels. You won't get a subsidy check from Uncle Sam, though you can roll any unused credit forward to offset taxes in future years. The bottom line: Most families can't or won't-pay out of pocket for the upfront cost of installation.
The industry's two main solutions both depend on cheap money. One is to lend creditworthy homeowners the full installation price, which they can theoretically cover (typically over 20 or 25 years) with lower electric bills and the tax credits they eventually receive. Installers sometimes offer below-market rates on these loans, wrapping the additional interest expense into their upfront charge. The consumer loans are then securitized and sold. That’s the model used by now-bankrupt Sunlight and by GoodLeap, the solar loan market leader. When rates are low, it’s an extraordinarily lucrative business. GoodLeap’s cofounder and CEO, Hayes Barnard, has ridden this cheap money express all the way to a net worth of $3.7 billion, enough for a spot on the Forbes list of the 400 richest Americans.
The other approach is older. The installer—Sunnova or Sunrun, say—continues to own the panels on the roof, and the homeowner signs a typically 20-year power purchase agreement (PPA) to buy the juice. That allows the solar companies, or their investors, to claim a similar 30% investment tax credit for solar energy. This financing method was losing market share, but the Inflation Reduction Act gave it a boost by allowing the outright sale of renewable energy tax credits.
Even before the Inflation Reduction Act, however, the Sunruns and Sunnovas of the world were able to raise billions by selling tax credits indirectly to profitable corporations with big tax bills to offset. These “tax equity” investors put up 30% of the cost, then get nearly all their money back within two years in the form of tax credits, plus the halo of investing in green energy, and an additional return. Big players in this market include Alphabet, Meta, Bank of America, JPMorgan Chase, U.S. Bank and Wells Fargo.
In this model, debt financing—in the form of asset backed securities—covers most of the other 70%. And when interest rates were at alltime lows, fixed-income investors lined up to buy solar bonds priced like high-grade corporate debt. Sunnova has issued $4.5 billion and Sunrun $3.5 billion in asset backed securities in the past decade. But now that investors can get a riskless 5% on money market funds, they’re demanding much higher yields. “You’ve got to reflect the fact that interest rates have moved up, so your cost structure is higher,” says Sunnova’s Berger with a sigh.
Carson Block first made a name for himself exposing dubious accounting at Chinese companies; his Austin, Texas, firm, Muddy Waters Capital, is named after a Chinese proverb that says you catch more fish in muddy waters. For more than a year, the 47-yearold lawyer turned activist short seller has been targeting Sunrun, arguing it has used unduly aggressive assumptions to inflate appraisals for residential solar systems, misleading investors and claiming excess tax benefits.
One might be forgiven for thinking that establishing the basis of a solar system for tax credit purposes is straightforward: What did it cost to buy the panels, inverters and gear, then hire a few guys to screw it to a roof? That's the way homeowners do it.
By contrast, in the PPA segment, the customary practice-so far allowed by the IRS-is to appraise the value of rooftop systems for the purposes of both the investment tax redit and financing, based on the net present value of the income they produce. That involves lots of assumptions: adding up all the expected future cash flows, mostly from customer payments for electricity over 20 years, and subtracting forecasted maintenance and other costs, then applying a discount rate.
Block claims that as part of these calculations, Sunrun has underestimated both annual maintenance costs and the rate at which a solar system’s output degrades while failing to reserve cash to cover the future liability of sending workers out to unscrew the old panels from the roof in 20 years. Sunrun defends its accounting, saying, for example, that it doesn’t need to reserve for removals under Generally Accepted Accounting Principles because the systems have a useful life beyond 20 years.
Another Sunrun appraisal practice Block considers egregious: When tallying up expected future cash flows, Sunrun includes the value of the forthcoming 30% investment tax credit. That is, the appraised value of a system, submitted for the purpose of claiming a tax credit, includes the value of that very tax credit. “It’s an absurd interpretation of what Congress intended,’’ Block says.
Sunrun contends that the practice “is industry standard” and reflects the economics of the deal, since the corporate tax investors are counting on it. But last June the U.S. Court of Federal Claims, in an opinion denying a motion for summary judgment, found that Alta Wind, a big onshore wind farm in California, was not entitled to include in its cost basis for tax credit purposes any “premium associated with the anticipated value of a grant” of renewable energy subsidies. Attorney Keith Martin, who specializes in deals and taxes at Norton Rose Fulbright in Washington, warns the IRS or future courts could apply the same logic to the residential solar tax credit.
In late October, Block raised another red flag: Sunrun reported more working customers to investors than to the government, which mandates that companies detail the number of systems that are completed, hooked up and in service. Block’s report says the discrepancy makes it appear that in 2022, Sunrun claimed $205 million in tax credits for 14,390 systems that don’t exist. Sunrun says both sets of numbers are accurate but measure different things: Only customers being actively billed are reported to the feds, whereas its reports to investors include “customers who prepaid their service contract or whose system is installed but billing has not yet begun.”
While the short sellers have aimed their heaviest fire at Sunrun, the wo...
Sunnova has lost $330 million on $722 million in revenue in the last 12 months. Its shares are trading around $10, off 80% from their 2021 high. Wall Street is nervous about its bonds: Its $400 million 2021 senior unsecured debt issue, maturing in 2026, initially paid 5.75%, but now yields 14%—high even for junk. But the big test, Berger says, will come if there’s a recession or difficulty raising money (which he fears more than high rates). In the worst case, he says, he could slash costs by 50%, stop seeking new business and fire himself.
The glory days for residential solar power in the United States weren’t that long ago. In 2022, a record six gigawatts of peak generating capacity were installed on 700,000 rooftops, bringing total residential solar power to 40 GWs—nearly enough to power Los Angeles and Philadelphia combined. The boom was partly fueled by falling prices for solar panels and inverters as more countries, including the U.S., jumped in to compete against China. Topping it off, in August 2022, President Biden signed the Inflation Reduction Act, an orgy of renewable energy subsidies which boosted the solar tax credit from 26% to 30% and extended it through 2032—meaning Uncle Sam is on the hook for maybe $8 billion a year for at least a decade.
Despite all this, the residential solar industry is in serious trouble. Sharply rising interest rates have sapped both growth in demand for new residential systems, which are typically financed, and the value of $21 billion in debt issued to install existing systems. High interest rates are what Sunlight Financial, a residential solar financier, blamed when it filed for bankruptcy in October. (It went public in 2021 via a SPAC.) Two days after Sunlight sought Chapter 11 protection, San Francisco– based Sunrun, the largest player in residential solar with annual revenue of $2.3 billion, said it was writing off $1.2 billion in goodwill, primarily from the $3.2 billion acquisition of Vivint Solar in 2020.
The interest rate spike is drawing attention to other problems in an industry built not only on cheap money but also on suspect accounting and a tax credit regime (born in 2005) that has invited aggressive—and in some cases fraudulent—claims. Sunrun, whose stock is off 90% from its 2021 high, faces continuing pressure from short sellers who allege it has claimed inflated tax credits. As Warren Buffett famously observed, “you don’t find out who’s been swimming naked until the tide goes out.” In emailed responses to Forbes, Sunrun defended all its practices as proper.
The shorts have some company. One industry whistleblower has told the IRS that inflated tax credit claims are endemic across the residential solar industry. The IRS isn’t talking, but the whistleblower’s attorney believes the agency is still investigating the man’s claims, which could eventually earn him a fat reward of 15% to 30% of any funds recovered.
Gordon Johnson, whose New York boutique equity research firm serves mostly short sellers, goes so far as to compare the residential solar industry’s current peril to the subprime mortgage debacle of 15 years ago: “It’s a debt Ponzi. They perpetually issue more debt to fund these projects that don’t generate the cash they say.”
This isn’t just short sellers talking their own book. “There is going to be some kind of reckoning,” predicts John Berlau, director of finance policy at the Competitive Enterprise Institute, a libertarian think tank in Washington, D.C. “Because of the perceived goodness of the industry, they did not receive all the scrutiny that other sectors would have."
The residential solar business has always faced one big obstacle: high upfront costs. A new 7.5-kilowatt residential rooftop solar system costs between $20,000 and $45,000. That expense is mitigated somewhat by the tax code, but claiming federal subsidies is not simple. An individual federal tax credit should eventually kick back 30% of that tab to the homeowner, but the credit is nonrefundable- meaning you can claim it only against income taxes you paid or owed in the year you installed the panels. You won't get a subsidy check from Uncle Sam, though you can roll any unused credit forward to offset taxes in future years. The bottom line: Most families can't or won't-pay out of pocket for the upfront cost of installation.
The industry's two main solutions both depend on cheap money. One is to lend creditworthy homeowners the full installation price, which they can theoretically cover (typically over 20 or 25 years) with lower electric bills and the tax credits they eventually receive. Installers sometimes offer below-market rates on these loans, wrapping the additional interest expense into their upfront charge. The consumer loans are then securitized and sold. That’s the model used by now-bankrupt Sunlight and by GoodLeap, the solar loan market leader. When rates are low, it’s an extraordinarily lucrative business. GoodLeap’s cofounder and CEO, Hayes Barnard, has ridden this cheap money express all the way to a net worth of $3.7 billion, enough for a spot on the Forbes list of the 400 richest Americans.
The other approach is older. The installer—Sunnova or Sunrun, say—continues to own the panels on the roof, and the homeowner signs a typically 20-year power purchase agreement (PPA) to buy the juice. That allows the solar companies, or their investors, to claim a similar 30% investment tax credit for solar energy. This financing method was losing market share, but the Inflation Reduction Act gave it a boost by allowing the outright sale of renewable energy tax credits.
Even before the Inflation Reduction Act, however, the Sunruns and Sunnovas of the world were able to raise billions by selling tax credits indirectly to profitable corporations with big tax bills to offset. These “tax equity” investors put up 30% of the cost, then get nearly all their money back within two years in the form of tax credits, plus the halo of investing in green energy, and an additional return. Big players in this market include Alphabet, Meta, Bank of America, JPMorgan Chase, U.S. Bank and Wells Fargo.
In this model, debt financing—in the form of asset backed securities—covers most of the other 70%. And when interest rates were at alltime lows, fixed-income investors lined up to buy solar bonds priced like high-grade corporate debt. Sunnova has issued $4.5 billion and Sunrun $3.5 billion in asset backed securities in the past decade. But now that investors can get a riskless 5% on money market funds, they’re demanding much higher yields. “You’ve got to reflect the fact that interest rates have moved up, so your cost structure is higher,” says Sunnova’s Berger with a sigh.
Carson Block first made a name for himself exposing dubious accounting at Chinese companies; his Austin, Texas, firm, Muddy Waters Capital, is named after a Chinese proverb that says you catch more fish in muddy waters. For more than a year, the 47-yearold lawyer turned activist short seller has been targeting Sunrun, arguing it has used unduly aggressive assumptions to inflate appraisals for residential solar systems, misleading investors and claiming excess tax benefits.
One might be forgiven for thinking that establishing the basis of a solar system for tax credit purposes is straightforward: What did it cost to buy the panels, inverters and gear, then hire a few guys to screw it to a roof? That's the way homeowners do it.
By contrast, in the PPA segment, the customary practice-so far allowed by the IRS-is to appraise the value of rooftop systems for the purposes of both the investment tax redit and financing, based on the net present value of the income they produce. That involves lots of assumptions: adding up all the expected future cash flows, mostly from customer payments for electricity over 20 years, and subtracting forecasted maintenance and other costs, then applying a discount rate.
Block claims that as part of these calculations, Sunrun has underestimated both annual maintenance costs and the rate at which a solar system’s output degrades while failing to reserve cash to cover the future liability of sending workers out to unscrew the old panels from the roof in 20 years. Sunrun defends its accounting, saying, for example, that it doesn’t need to reserve for removals under Generally Accepted Accounting Principles because the systems have a useful life beyond 20 years.
Another Sunrun appraisal practice Block considers egregious: When tallying up expected future cash flows, Sunrun includes the value of the forthcoming 30% investment tax credit. That is, the appraised value of a system, submitted for the purpose of claiming a tax credit, includes the value of that very tax credit. “It’s an absurd interpretation of what Congress intended,’’ Block says.
Sunrun contends that the practice “is industry standard” and reflects the economics of the deal, since the corporate tax investors are counting on it. But last June the U.S. Court of Federal Claims, in an opinion denying a motion for summary judgment, found that Alta Wind, a big onshore wind farm in California, was not entitled to include in its cost basis for tax credit purposes any “premium associated with the anticipated value of a grant” of renewable energy subsidies. Attorney Keith Martin, who specializes in deals and taxes at Norton Rose Fulbright in Washington, warns the IRS or future courts could apply the same logic to the residential solar tax credit.
In late October, Block raised another red flag: Sunrun reported more working customers to investors than to the government, which mandates that companies detail the number of systems that are completed, hooked up and in service. Block’s report says the discrepancy makes it appear that in 2022, Sunrun claimed $205 million in tax credits for 14,390 systems that don’t exist. Sunrun says both sets of numbers are accurate but measure different things: Only customers being actively billed are reported to the feds, whereas its reports to investors include “customers who prepaid their service contract or whose system is installed but billing has not yet begun.”
While the short sellers have aimed their heaviest fire at Sunrun, the wo...
You're reading a preview of
Forbes (Digital) - 1 Issue, December 2023 - January 2024