USA & Canada
Published: 13 November 2017
Author: Jinjoo Lee
NEWS ANALYSIS: UNLOCKING COMMERCIAL AND INDUSTRIAL SOLAR OPPORTUNITIES
The solar sector has experienced rapid growth in the past five years, but project size, coupled with a lack of credit metrics and ineficient fnancing have stymied the development of commercial and industrial (C&I) solar facilities. In this news analysis, Associate Editor Jinjoo Lee explores the different ways in which executives are now addressing issues specific to the sector
Utility and residential-scale solar has grown steadily over the past five years, due in part to declining costs. Commercial & industrial (C&I) solar has lagged behind as the industry has struggled to standardize contracts and make the financing process more efficient.
The C&I market remains fragmented, but some private investment vehicles focused on this sector have begun to reach scale by trimming costs and becoming more efficient through different methods.
True Green Capital in August closed its third C&I solar-focused fund with USD 350m in commitments and expects to raise the next one by mid-2018. Moreover, developer Cypress Creek Renewables recently announced that it has so far raised and invested USD 2bn in the sector, while credit investment-focused Foss & Company in September announced the creation tax equity fund specific to C&I solar as well as its plan to deploy USD 300m by the end of 2018.
One sign of this sector’s maturity has been the entrance of institutional investors in the space.
True Green Capital’s Managing Partner Panos Ninios said the make-up of limited partners in his funds have shifted from family offices to larger institutional investors. Open Energy Group, which identifies investors and matches them up with C&I solar projects requiring capital, has placed deals for commercial banks and institutional investors, CEO and Founder Graham Smith said.
C&I solar is expected to grow 9% this year compared to the previous year, after three consecutive years of flat demand before 2016, according to GTM Research’s 3Q17 US Solar Market Insight report.
Investors and companies in this market segment say the sector has huge growth potential and better risk-adjusted returns.
“[The] potential of C&I solar is substantial if the market can overcome some of the hurdles related to project financing and a lack of standardization,” said Michelle Davis, senior solar analyst at GTM Research.
Solving the cost efficiency puzzle
Size is one of the C&I solar sector’s greatest impediments. Each unit can range anywhere from 200 kW to 20 MW though all the fixed costs, such as due diligence and financing fees, are almost identical to the larger utility-scale projects.
Industry participants have been chipping away at the costs associated with C&I solar from different angles.
Some are focusing on minimizing legal costs by standardizing and decreasing the length of documents on power purchase agreements. Dirk Michels, partner at Ballard Spahr and one of the co-authors of the Solar Energy Industry Association’s (SEIA) standard C&I solar PPA contract, said the legal cost of negotiation could drop below USD 5,000 from USD 20,000 with the simplified standard contract.
The SEIA in September released a standard C&I solar PPA contract, which Michels said was vetted by different investors, developers, banks and offtakers. Without a simplified, standard PPA document, a lot of time and cost is expended when the document goes back and forth between the developer and the offtaker, Michels noted.
True Green Capital’s Ninios, however, said that PPA costs were just the “tip of the iceberg.” He added that his company has focused more on creating the right organizational structure to decrease costs.
“We’ve made an organization that is highly functionalized,” Ninios said. “That allows people to be very specialized and for them to do a good job in their area.”
The credit conundrum
Another speed bump on C&I solar’s growth trajectory is the difficulty of finding consistent credit measurements for counterparties, which tend to range from small family offices to corporate giants like Google or Walmart. Residential solar tends to use FICO scores as measurements, while utility-scale solar projects almost always have investment grade utilities as offtake counterparties. Most businesses and municipalities, on the other hand, often do not have reliable or consistent measures of credit ratings in place.
Shadow ratings have come to fill some of that need. Open Energy Group’s Smith said his firm has been using Moody’s Risk Analytics to run three years of a given offtaker’s financials.
“Depending on the investors, they may or may not accept that [rating],” he said. “But at least it’s a third party accredited credit rating.”
For others, ratings are not a key concern.
“We like ratings, but ratings are for the most part irrelevant in the solar business,” Ninios said. “The worst case scenario is, you can always take the power and sell it somewhere else on the network.” For this reason, Ninios said his company tries to identify projects in load constrained areas instead of spending a lot of time on credit ratings.
He noted that historically when companies have gone bankrupt, electricity tends to be the last bill they still pay. “If you’re bankrupt and not paying your solar provider, then the next alternative is to pay higher electricity bills.”
Executives noted that firms could either aggregate projects to reach scale, or make the financing process so efficient that each project could be financed on a stand-alone basis.
For True Green Capital, the plan is to balance sheet finance as many projects as possible before reaching enough scale to reach out to find debt for it.
“We like to finance large pools of collateralized assets, so we tend to bring in bank debt after we have operating assets,” Ninios said.
Meanwhile, Foss Renewable Energy Partners and Open Energy Group aim to standardize and streamline the financing process to such an extent that it becomes possible for small projects and portfolios to get funded efficiently.
Foss Renewable Energy Partners’ Managing Director Alex Tiller said the firm will work with lenders to standardize financing documents for C&I projects, and that the firm’s goal is to optimize processes to reduce its minimum tax equity investment to less than USD 1m in 2018.
Smith from Open Energy Group said the firm has been decreasing costs by capping the underwriting fee, using consistent loan documents and by continuing to remediate project documentation – such as PPAs, EPC, site lease and O&M contracts. The company typically charges a fixed fee of 2% of the total loan amount, according to its website.
Tiller said he believes there is 1GW of small-scale C&I solar projects that are “out there, inefficiently seeking capital.” He noted they will eventually be built, but noted that they are not being constructed yet because the process of finding financing – including tax equity – is cumbersome and problematic.
“If we find a way to standardize and speed up that process and lower the due diligence cost per project, it pulls forward the timeline for that gigawatt of renewables,” he said.
The sector will likely benefit from pressures for corporations to go green, as well as well priced capital, Smith said. Ninios noted that nuclear and coal power plant shutdowns will create new opportunities for C&I-scale solar in certain states.
“Frankly the only form of power generation you can build quickly and cheaply is distributed generation solar,” he said, adding that rooftop solar projects typically take a few weeks to install.