Soft costs can be pretty tough. The cost of solar installations can be generally separated into "hard" costs — representing primary components such as modules, racking, inverters — and soft costs including legal, permitting, and financing. While the former group — particularly modules — have dropped dramatically over the last several years, the latter have not. According to a recent NREL analysis, these costs represent roughly 30% of both residential and utility installations (slightly less for commercial-host systems). See Figure 1 below.
Figure 1: Solar PV system installation costs
In fact, soft costs are so critical to the overall success of solar adoption, their reduction is a primary focus of the Department of Energy's SunShot Initiative to make solar energy cost-competitive. In order to reduce the cost of financing, NREL recently completed and continues to work on various efforts to tap public capital markets and enable other vehicles that securitize project portfolios.
Doing so requires standardized contracts, interconnection agreements, and other relevant documentation so these projects can be easily aggregated with a consistent set of risk factors. Unfortunately, a myriad of unique state renewable portfolio standards (RPS), interconnection protocols, and/or permitting processes prevent the possibility of solar projects becoming routine.
Last year, SunRun issued a report that local permitting costs $0.50/watt, or roughly $2,500 for every residential installation. Further, every state has unique rules by which RPS requirements are implemented and renewable energy credits (RECs) are bought and sold. According to Paul Kuehn of Deutsche-Eco, a developer with projects in New Jersey, Tennessee, and other eastern states, the array of rules and protocols surrounding the sale of RECs, and the financing of solar projects, is particularly complex. "For a solar project developer, it can be a difficult and expensive process to maintain the legal and analytic expertise and effort to play in each state market. States with policies that provide the market with consistent signals — such as New York, Connecticut, and Tennessee — improve the situation, but much more work needs to be done to streamline the requirements."
Importantly, unique state regulations not only increase costs, they limit the opportunity to package projects into one of several securitization mechanisms, such as asset-backed securities used for auto loans or covered bonds frequently used for municipal debt. Asset-backed securities (ABS), including securitized auto loans and mortgages, have an average size of $800 million. An initial solar ABS — under consideration by SolarCity — was expected to be much smaller, in the range of $75-$100 million, but is expected to get much larger.
Assuming 75% of the installed cost of residential solar project are sold into the securitization pool and a 5 kW average system size, a $100 million fund can source roughly 4,700 systems. To put that in perspective, that's roughly the entire number of "pipeline" projects under development in New Jersey, the second most active state in the country (which likely includes some projects of much larger size). In effect, residential-only projects from less active states could benefit from standard contracts, evaluation practices, and other protocols to enable access to public capital markets.
So, what can be done? NREL is initiating an effort to build consensus among industry players to standardize contracts, develop datasets to assess performance and payment risk, and harmonize public utility commission regulations to foster a common set of requirements across state jurisdictions. The effort, funded by DOE, is designed to bring the renewable development, finance, utility, and regulatory communities together, standardize the development and contracting efforts of solar facilities, and in turn, enable the market to access low-cost capital through easily tradable securities. Along those lines, NREL recently developed a "contracts library" to enable the industry to compare and contrast and build consensus on standard versions.
If you would like to participate in the standardization and harmonization effort, please let us know.
This article was originally published on NREL Renewable Energy Finance and was republished with permission.