Every year the solar industry gathers for North America’s largest annual conference, Solar Power International (SPI). The event, which attracts nearly 18,000 solar developers, installers, lenders, investors, and other important stakeholders, is hosted by the Solar Energy Industries Association (SEIA) and the Smart Electric Power Association (SEPA).
Recently, SEIA formed the Solar Finance Initiative to help coordinate efforts among SEIA members and stakeholders to expand solar deployment in the commercial building sector. Property Assessed Clean Energy (PACE) was quickly identified as a key tool to help open up this solar market. On Sept. 16th, opening day of SPI, the Finance Initiative held a PACE Strategy Summit.
The roundtable event, intended to foster a dialogue on how PACE could support solar deployment in the small commercial sector, attracted nearly 100 attendees, representing solar contractors, developers, capital providers, and other existing PACE stakeholders. Since the inception of PACE in 2008, commercial PACE (C-PACE) has been slow to develop compared to the residential PACE market. Despite this slow development, commercial properties represent an enormous potential opportunity for the solar industry. A conservative estimate of just the nation’s nonprofit building stock, prepared by the U.S. Department of Energy-supported CivicPACE team, found almost 20 GW of potential rooftop solar capacity.
Unsurprisingly, a prominent focus of the PACE Strategy Summit, as well as conversations throughout the broader convention, was identifying and addressing the largest barriers prohibiting widespread adoption and use of PACE financing in the commercial sector. Presenters, including members of the CivicPACE team, lead engaging discussions on a broad range of PACE topics that included strategies for, and benefits of, aligning the solar industry with energy efficiency contractors, the difficulties and importance of obtaining lender consent, and viable pathways and deal structures for nonprofits to access PACE financing. Event participants noted a variety of other challenges, including fragmentation of PACE programs and procedures, politicization of PACE legislation, and limited geographic coverage of PACE, among others.
One topic that came up repeatedly in myriad contexts — and was the most frequently cited factor limiting the use of C-PACE — was education. A lack of PACE understanding can stymie legislation, hamper deal closings, limit the PACE customer pool, and increase the timeline and cost for project development. One Summit participant from Arizona recounted the state’s three failed attempts to pass PACE-enabling legislation and pointed to limited PACE understanding as the primary stumbling block.
Despite strong PACE outreach and education to national mortgage holders in recent years, lack of communication with and among their local branches and other regional lenders was seen as another ongoing obstacle. Looking toward solutions, Summit participants identified priority groups that require more robust PACE outreach to enable rapid expansion, including local government associations, capital providers, legislators, property owners, and even energy contractors.
Another widely discussed barrier was the cost of C-PACE transactions, which can sometimes make C-PACE projects appear less advantageous when compared to more traditional sources of solar financing. For example, one participant cited a lack of standard title insurance in C-PACE transactions triggering costly title search due diligence. Chief among the cost barriers that were highlighted was the added complexity that may arise with C-PACE transactions as a result of its otherwise beneficial flexibility.
This flexibility — regarding lien terms, eligible measures, capital structuring, etc. — fosters a unique “snowflake” quality to each C-PACE transaction, lengthening the development phase by adding to document production complexity and often resulting in higher legal fees. Such transaction costs, especially legal fees, increase exponentially if the project needs to bring in a tax equity investor because the property owner does not have sufficient tax appetite to take advantage of the investment tax credit (ITC). Often, small commercial projects are not large enough to absorb the added ITC structuring transaction costs and still yield a positive return. Participants seemed to agree that these project challenges resulted in a limited number of interested C-PACE lenders and tax equity providers, leading to more expensive capital for PACE deals.
Taken together, these obstacles — limited availability of PACE, limited awareness of PACE among contractors and property owners, transaction complexity, snowflake effect on project design, and scarcity of capital providers — have a particularly sharp impact on nonprofit and tax-exempt property owners. Such organizations are often motivated to pursue solar energy and energy efficiency building improvements because of their organizational values. Despite their strong interest in pursuing energy sustainability and the tremendous value that PACE brings as a credit enhancement to these organizations, project sizes may often be too small to be financeable.
Nevertheless, as the PACE industry matures, many C-PACE transaction costs were predicted to go down by Summit participants. As lenders continue to enter the PACE market and become more comfortable with PACE, competition will drive down the cost of capital. Furthermore, tax-exempt, philanthropic, and other very low-cost sources of capital traditionally used to support community investments were seen as likely new sources of nonprofit PACE capital to be more widely available as the market matures.
Alexander Winn (left) helps direct many of The Solar Foundation’s key programs, including the Department of Energy funded CivicPACE program, which is working to support solar energy deployment by bringing property assessed clean energy (PACE) financing to tax-exempt organizations, such as nonprofits, affordable housing, faith based institutions, and schools. Alex also leads the SunShot Solar Outreach Partnership, the State Solar Jobs Map, and the Solar Faith Initiative.
Tim Olson, J.D., currently serves as Program Manager with The Solar Foundation for the CivicPACE program, as well as the Solar Training Network. In this capacity, Tim is helping local governments reduce regulatory and financial barriers to solar adoption, answers unique legal and financial solar funding questions, and is supporting the development of the future solar workforce. Tim also provides internal legal support to the organization.