As new and old solar investors seek investment opportunities in distributed generation (DG) solar, there are a number of parallels that can be drawn between the residential and commercial sectors. While residential solar developers have had significant success in obtaining financing for their solar projects, growth has been more sluggish in the commercial and industrial (C&I) sector, which we define broadly as projects that are behind the meter and are either rooftop or adjacent to a host. Despite several differences between residential and C&I, we think there are three basic lessons that C&I can learn from the residential space.
1. Develop Portfolios, Not Projects
Residential solar companies aggregate large portfolios of solar assets and finance tranches of around 5,000-10,000 solar energy systems at a time. This distributes financing risks across thousands of assets. Although C&I portfolios will not comprise thousands of solar assets anytime in the foreseeable future, it is certainly easier to finance a portfolios of several 200-to-900-kW projects than it is to finance one-off projects.
To facilitate portfolio development, developers should ensure individual C&I projects share similar characteristics — like shared incentive regimes, legal documents, and host characteristics. If a developer does not have a full portfolio of commercial projects that will be ready for financing at the same time, they may work with a finance firm that can build a synthetic portfolio of projects from a variety of developers. Even so, investors will prefer to work with developers who can demonstrate a continued stream of “real” pipeline that will translate into future projects and portfolios.
2. Rescind the Redlines
Residential solar companies have excelled at a “one size fits all” approach to customer acquisition. For example, residential solar lease contracts are typically form documents that leave little or no room for negotiation. The promotion of standardized legal documents has allowed residential solar deals to be closed in one sweep without much review, significantly lowering legal costs.
Standardization is more challenging within the C&I space because businesses are more inclined to redline legal documents than the average residential customer. Despite this challenge, developers should hold fast to proven, standardized legal documentation, or even prohibit legal document negotiation for projects under a certain size threshold.
3. Consider the Credit Box
Major residential developers have clear parameters on credit requirements, and will not target or service homeowners who do not fit within the boundaries of that “credit box.” Likewise, C&I developers should be wary of hosts with bad credit – even if they have high quality solar sites in multiple locations.
Over the last few years, many commercial and industrial solar developers have learned this lesson the hard way, but while it is a good idea to avoid hosts with bad credit, we think the pendulum may have swung too far. Sol Systems sees a lot of potential in ”non-investment grade” hosts, such as churches, non-profits, and privately held companies. The trick is to understand the difference between a financeable and non-financeable host. This is difficult because investors have unique credit requirements and review processes, some of which are flexible in different markets.
At Sol Systems, we have found success financing new types of hosts by working with a diverse pool of investor clients and gaining a detailed understanding of the types of risks each investor is willing to take.
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