With its excellent renewable policy, California leads the nation in solar. Over the years both the Renewable Portfolio Standard and the California Solar Initiative drove utility scale and residential solar deployment. But without the same drivers pushing commercial and industrial buildings to go solar, California’s offices, warehouses, hospitals, farms, factories, universities, hotels and restaurants have lagged behind.
Now that appears to be turning around fast. A growing number of leaders in the solar industry see a very bright future for Commercial and Industrial (C&I) solar, beginning in 2015. A lot has to do with the introduction of PACE financing for C&I solar.
Vivint Solar recently unveiled $150 million in financing for the C&I solar market together with Sungevity. Vivint, currently valued at $1 billion, is already a major player in residential solar. Through its parent company Blackstone Group, Vivint obtained an inside track to almost $100 billion worth of real estate assets in a vast assortment of C&I properties. And with its $2 billion acquisition in July by SunEdison, it is clear that this market is valued.
In April, SolarCity, America’s largest installer nationally, launched a $1 billion fund for the C&I market. In the last 45 days, Figtree Financing has funded nearly $4.5 million in projects using commercial PACE (Property Assessed Clean Energy) financing.
It is a potentially huge market. Taken together, C&I energy users account for more than half of U.S. electricity consumption. Commercial users like big box stores and office buildings use 19 percent, and industrial users like farms and factories make up 33 percent of US electricity consumption for a 52 percent total.
A Perfect Storm
Developer experience, falling solar prices and increased environmental understanding all play a part in the breakthrough. The utility-scale developer NextEra Energy has identified non-utility buyers of renewable energy as a “big piece of our business over the next three to five years,” according to development SVP Mike O’Sullivan.
Developer experience with the stability of utility solar PPAs is increasing confidence. NRG Renew owns and operates more than 4.5 GW of solar and wind projects, and since 2012 has been selling power from its 20 MW Blythe project to SCE in a 20 year PPA.
“Energy prices from solar energy like our Blythe project have made it easier to enter into long term off-take agreements with companies like Cisco,” said Tom Doyle, President of NRG Renew, which has just announced it will supply CISCO energy from a dedicated 20 MW PV project at a set price in a PPA for 20 years.
Better understanding of the financial and environmental value of solar by large corporate bodies led by the likes of Apple, Google, Walmart and Cisco helps too, leading by example.
“We’re continually seeing more companies set sustainability goals because they understand the business and environmental value in doing so,” said Doyle.
Falling solar price is another factor. Not only are solar prices now competitive with today’s retail prices, but developers can lock them in at current rates for a typical contract period around 20 years. By contrast, utility prices are unpredictable, and rise over time.
But the biggest driver is the newly available PACE financing in California.
PACE Extended to C&I in California
PACE financing has been available to residential homeowners in many cities and counties in California since Berkeley First introduced it in 2008. The municipality advances the local homeowner the money to install a solar system. The property owner pays it back via a property tax lien over time.
By incorporating the billing into property tax bills, low-money down long-term low interest rates can be available to homeowners with less than perfect credit. With upfront costs spread out over the years of use, solar energy is cheaper than retail utility rates.
Now, PACE funding in California has been extended to C&I property owners, operating through California’s PACE program administered by Renew Financial. The agency that runs the program issues low-interest rate municipal bonds and advances the proceeds to the property owner to pay for the solar system. Solar companies have been quick to see the benefit.
Figtree Financing’s Commercial PACE Program has set aside $60 million in committed capital for clean energy upgrades for a very diverse range of commercial users ranging from $50,000 to $1.5 million in size. It has seen a 10-fold increase in project activity in 2015.
Two Florida-based firms, Conergy and Demeter Power Group have joined forces to leverage PACE financing by combining it with third-party ownership, an innovation funded with an incubator award from the DOE SunShot Initiative. Their estimate is that ninety percent of commercial property owners cannot get a solar project financed.
PACE traditionally has been used by building owners to pay for improvements in the form of a debt investment, like having a loan. But by combining third-party ownership with the PACE model, Conergy and Demeter have transformed it into a form of equity finance.
As previously described by Ed Feo, managing director of USRG Renewable Finance, “you could take the proceeds received under a PACE funding and use them to prepay a lease or power contract and combine low-cost debt with the benefits of third-party ownership of the asset itself. The structures are essentially leveraged tax equity deals. The cost of capital is lower if you can put tax equity and debt together.”
Ultimately, Conergy is the investor and owner of the project. Because PACE is backed by property value, the credit analysis is simplified, making this hybrid model workable for the hard-to-finance small commercial market.
Because of the certainty of property tax repayment, under PACE, solar developers are better able to finance C&I projects. Because both the energy-producing property and the property tax payments automatically transfer to any new owner when the building sells.
This means potentially lower transaction costs, according to Mary Kathryn Lynch, director of strategic initiatives at Renewable Funding. Until now, the C&I market has been harder to finance than either the residential or the utility-scale market.
State mandates have forced California utilities to increase the percentage of renewable energy, and utilities are creditworthy off-takers, so financing utility-scale solar PPAs has been relatively straightforward. Similarly, California homeowners have long been driven to solar by high prices and between third-party ownership of leases and PPAs, loans and PACE, it has been relatively easy to supply this residential market too.
As a result, by 2012, utility-scale solar, and by 2014, residential solar had eclipsed the C&I market. But now utility-scale experienced developers armed with cheaper solar panels are connecting with more environmentally responsible businesses who for the first time have access to PACE financing with third-party leases. C&I solar may soon become as easy to finance as either residential or utility-scale solar.