Analysis: Solar firms seek new financing as subsidies fade (Reuters) - U.S. solar power developers are banking on a new set of financing tools to provide the cash for smaller projects as the pipeline for large power plants slows. Growth in solar installations in the United States has outpaced forecasts in recent months as low panel prices pushed down costs, but the expiration of two key government subsidies last year has constrained financing. About $1.9 billion in new U.S. projects totaling 506 megawatts were completed in the first quarter, down from the fourth quarter's record $3.1 billion but well above the $1.46 billion in the first quarter of 2011, according to renewable energy research firm GTM Research. As subsidies shrink, banks and the companies that build solar projects are trying to package several smaller installations into stand-alone equity vehicles or portfolios that can be packaged into bonds. The new financing tools may ultimately benefit manufacturers, such as First Solar Inc, SunPower Corp and Suntech Power Holdings Co Ltd. Their shares have been pummeled amid an industry shakeout caused by a collapse in panel prices that sent weaker rivals into bankruptcy. Driving the growth has been a surge in mid-sized projects -- constructed by developers like Borrego Solar Systems, SolarCity and MEMC Electronic Materials Inc's SunEdison -- which reached record levels in the first quarter, rather than the large, utility-scale power plants the industry sought to develop in recent years. The market for mid-sized projects, between 500 kw and 20 megawatts, is growing rapidly since they can often be built on the rooftops of big-box retailers, warehouses, schools and government buildings and are less expensive to build and get approved. Financing for the projects can be structured in various ways, but are usually funded by development companies and their outside investors or by property owners who benefit from lower power prices or by selling excess electricity back to a local utility at retail prices under "net metering" programs. The market has been lucrative for privately owned Borrego, which saw revenues double last year. "We've proven that it works and it's low risk," said Michael Hall, chief executive of Borrego. We can deliver to investors high-single or low double-digit returns. A one-megawatt project can cost between about $2.8 million to $4.5 million to develop, and can often be bundled with other similar-sized projects to attract financing. "There are going to be fewer and fewer megadeals getting done," Hall said. In addition, municipalities can issue tax-exempt bonds to fund the projects, keeping borrowing costs low. The profitable smaller projects are driving the industry's efforts to create solar REITs (real estate investment trusts) that bundle projects and create securities that can trade like stocks. Others in the industry hope to persuade the U.S. Congress to alter the tax code to allow solar plants to be bundled under "Master Limited Partnership" (MLPs) rules, similar to ones used by the oil and gas industry. The MLPs pay virtually no corporate taxes as they deliver nearly all profits to owners of the MLP's units, which are traded like stocks. A newly introduced bill by U.S. Senators Chris Coons, Democrat from Delaware, and Jerry Moran, Republican from Kansas, would expand the MLPs to include renewable energy projects, but industry experts have said any effort to expand tax breaks would face a tough fight in Washington this year. Still, proponents pointed to a study released in May that showed that as of 2011, the oil and gas industry had established dozens of MLPs worth more than $270 billion, mostly in the pipeline and fuel storage business. Expanding the tax breaks to solar power plants would attract between $3.2 billion and $5.6 billion in new investment by 2021, according to the Southern Methodist University study. While the large utility-scale projects that sell power into the wholesale markets will bolster installation figures as they come on line over the next two to three years, few new utility projects are getting built because of the difficulty in financing them without government loan guarantees. Low natural gas prices have also made gas-fired power generation a cheap alternative to solar, and many of the state requirements to add renewables, including California's, are close to being met with projects under construction. The industry is relying mostly on the "tax equity" market, in which solar developers sell off federal tax credits worth 30 percent of a project's cost to financial players who use the credits to reduce their own tax burdens. Only about 15 companies are actively buying up credits from solar developers, but experts hope returns in the high-single to low-double digits will draw investors in the credits. "The cost of tax equity is still pretty high, and that makes it attractive for new people to come into the market," Orrick's Meyers said, citing the technology sector as a likely group to invest in solar. Google Inc has led the way, sinking about $915 million into solar. Oil giant Chevron Corp is also pouring millions of dollars into funding new projects. SolarCity, one of nation's largest installers of solar arrays on homes and businesses, recently announced its sixth fund designed to attract tax equity investors to its projects. "The returns are good," said Darren Van't Hof, director of renewable energy investments at U.S. Bank, a unit of U.S. Bancorp, which took part in SolarCity's new $250 million fund. Reporting By Matt Daily; editing by Patricia Kranz and Jeffrey Benkoe