Revolutions in financing have cemented solar energy as a mainstay of U.S. energy production in the residential and utility market segments. But one segment of the solar market still struggling to find its footing among finance professionals is the commercial and industrial (C&I) segment.
The untapped C&I market suffers from myriad challenges that prevent its full exploitation, some of which we have chronicled elsewhere. Underexplored, however, is the detrimental effects that market fragmentation—something that is rapidly disappearing in the residential and utility-scale markets—is the deep disconnect that is frittering the limited financial resources that exist away.
In short, what the C&I market needs is the emergence of national players to spur its development on a scale the residential and utility markets have already done.
Segment Comparison: Residential v. C&I
Since utility-scale solar adheres more closely to traditional electricity-generation models (large centralized solar farms that produce energy and distribute it from there), I’m going to focus on the two distributed-generation (DG) markets that mirror each other more closely. The different paths followed by the residential and C&I markets illustrate exquisitely why market fragmentation in C&I is harming its long-term ability to expand.
Recent data show that more than 50 percent of residential solar business is being handled by two or three national companies. Clearly, the consolidation of that market has already taken place. These companies set the standards for the residential market, providing financiers stability combined with a more cookie-cutter project profile. Finance companies can easily understand residential solar because one deal is not all that different from another deal. It’s predictable—and financiers love nothing if not easily reproducible returns.
The C&I market, on the other hand, is much harder to grasp at a glance. There are three reasons why C&I is more challenging:
- Unlike residential solar, C&I solar places an outsized importance on knowing the particular subtleties of local markets. Close relationships with local utilities, interconnection rules and other project minutiae is often critical to making C&I projects work.
- It’s nearly impossible to create cookie-cutter project plans in the commercial segment because each presents its own complexity. In the eyes of financiers, the difficulty of providing predictable results makes it difficult to sell C&I projects to their bosses. As a result, many don’t even bother trying—leaving prospective C&I clients to fend for themselves. When set adrift in a confusing market, many potential customers decide to avoid the headaches by not investing in solar.
- The creditworthiness of C&I projects isn’t always easy to ascertain. Unlike residential and utility-scale projects, there are often more variables in the creditworthiness of C&I clients. Apartment buildings and strip malls, for example, have rotating tenants. Schools and governmental entities are often cash-strapped. Without more stability on the credit of potential customers, many projects fail to launch.
As C&I companies scramble to get new-project contracts signed, bottlenecks at the customer-origination points stifle consistent growth for companies who want to focus on this untapped market. So how do C&I companies combat these natural barriers to success?
The same way residential markets have done it: C&I installer consolidation.
The Logic of Consolidation
To attract financing on a large and consistent scale, C&I installers need appropriate project volumes, but as the market stands now, few companies have the bandwidth and financial wherewithal to procure the volume by themselves.
If the state-level and regional C&I players consolidated, the new companies could achieve the volumes necessary to interest bigger financial institutions in the market. Once stimulated, the appetite for C&I projects among the bigger banks and other financing options would grow exponentially—creating a virtuous cycle and tapping a market in desperate need of stimulation.
For small, regional C&I integrators, the fear of losing their “independence” shouldn’t preclude the important step the segment has to take. It’s worked in the residential space and in the manufacturing supply chain. Now’s the time for C&I installers to consolidate and create national companies to streamline the installation process from customer origination to operations-and-maintenance (O&M).
It’s the only way to guarantee that the market in which we all see enormous untapped potential will take its rightful place next to the residential and utility-scale markets in the eyes of financiers.
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Lead image credit: h080 | Flickr