Financing Trends in the Solar Sector

1 of 7

http://ecmweb.com/print/green-building/financing-trends-solar-sector

print | close

Electrical Construction and Maintenance

Tom Zind

By Tom Zind, Freelance Writer

Fri, 2012-11-09 11:26

For an energy source thats so consistent and measured in its 93-million-mile trek to Earths atmosphere, solar
power rides a roller coaster of heady promise and stark reality as its factored into the market for electrical
energy.
From a technical standpoint, snatching energy from the sun has never been easier. Technologies for accessing,
converting, and distributing solar energy chiefly via photovoltaic (PV) panels are proven and established.
Meanwhile, progress on the next game-changing technical front to refine methods of capturing and storing it in
batteries is picking up steam.
Its in the
mechanics of
integrating
itself into the
existing
electrical
energy
framework
where solar
is still
searching for
its footing.
Competing
against wind
and other
renewables,
as well as
established
fossil fuels,
on a playing
field thats
buckling under forces that swing between tilting and levelizing it, solar seems to be running in place. On one
level, its raring to go; on another, its stymied by seemingly intractable market realities.
After a flurry of activity, some publicly funded financial incentives that helped solar take off around 2005 are
ebbing. Thats left it more exposed to the mercy of fundamental energy market forces that are proving
stubbornly resistant to renewables. But at the same time, prices and supplies of fossil fuels notably natural gas
are gyrating. The result amounts to more questions than answers about long-term prospects for traditional

07-03-15 2:00 PM

Financing Trends in the Solar Sector

2 of 7

http://ecmweb.com/print/green-building/financing-trends-solar-sector

energy sources and, by extension, renewables like solar.

Big picture entices investors
The bigger financial picture for solar is anything but bleak, however, especially in light of the emergence of
creative funding concepts. Taking a long view of the energy market through an environmental prism, solar
industry players cant help but see a bright future. But for as far as the eye can see, solars economic viability will
be a central concern one that financiers, developers, installers, and power producers are working hard to
address.
Convinced that its core attributes as a clean and abundant source of power make it a cant-miss technical
proposition, the solar delivery industry is shifting more of its attention to rationalizing solar as a sound
investment. Exploring everything from new twists on leases, third-party ownership, and power purchase
agreements on the consumer side to vehicles such as project bonds, asset securitization, and master limited
partnership arrangements on the developer side, solar proponents are turning over every stone for answers (see
SIDEBAR: Funding Options).
While it is indeed more challenging to make solar projects work financially, investor interest in projects remains
fundamentally strong, contends Mark Crowdis, president of Reznick Think Energy, LLC, a renewable energy
consultancy with headquarters in Bethesda, Md. Yes, expirations and retrenchments of incentives put solar on
shakier investment ground. It was easier to develop investor-grade projects before expiration of the Treasury
Departments 1603 grant program, which doled out 30% of a projects cost in direct cash, and the Energy
Departments 1705 loan guarantee program for riskier utility-scale projects. Many investors were more
enthusiastic about solar projects and willing to take more risks before the near-collapse of the New Jersey solar
renewable energy credit (SREC) market. Add in plummeting natural gas prices and entrenched fossil fuel
subsidies, and the picture worsens.
But this situation is being partially offset, he notes, by falling prices on PV components. Plus, requirements that
utilities boost the renewables component of their energy mix in some cases with specific solar carve outs
and efforts to broaden their corporate investment portfolios to include funding of distributed solar project
investments act as counterweights to the incentive reductions and decreased electricity prices.
Theres capital in this market, says Crowdis. Investors used to lack an understanding of how solar
technologies and systems worked. Now investors are much savvier. Theres more understanding of solar
enough so that more investors are now willing to provide capital for projects. Banks, pension funds, and even
individuals want to invest in renewable energy in North America. Its seen as an attractive, stable, and potentially
high-return investment.

Topping out or taking a break?

Between 2004 and 2011, it seems, investors increasingly bought that argument. During that time, according to a
May 2012 white paper published by Bloomberg New Energy Finance, Re-Imagining U.S. Solar Financing,
asset financing of U.S. solar PV projects grew 58%. Such funding peaked in 2011, Bloomberg says, spurred
partly by looming year-end incentives expirations, when $21.1 billion was secured to help build out some 1.8 GW
of new solar PV capacity.
Looking ahead, the white paper projects that U.S. PV deployment will demand an average of $6.9 billion per
year through 2020. Between 2012 and 2020, residential and commercial capacity alone not counting
utility-scale installations will grow at a compounded annual rate of 22%, resulting in almost 16 GW of
cumulative capacity at the close of that period.

07-03-15 2:00 PM

Financing Trends in the Solar Sector

3 of 7

http://ecmweb.com/print/green-building/financing-trends-solar-sector

Meanwhile,
utilityinstalled PV
continued to
grow at a
faster clip
into 2012. In
the years
second
quarter
alone, utility
PV installs
numbered
more than
20 for a
combined
447MW,
according to a report from GTM Research and the Solar Energy Industries Association. According to this report,
it was the busiest quarter ever for utility-scale PV.
Overall, PV installs of 742MW were up 116% in the quarter over the same period in 2011, the report said. The
residential market experienced little growth in the quarter, while the commercial market contracted 33%
quarter-over-quarter. Still, the residential and commercial markets could be the near-term growth engines for
PV. If utilities are reluctant to disrupt the profitable status quo with big capital outlays on solar, more electric
customers are increasingly eager to get out ahead of the steepening energy cost curve. PV systems either
purchased outright or leased while still generally requiring a substantial investment thats lashed to an
extended payback period offer an opportunity to lay a foundation for lower net energy costs down the road.
Thats leading more companies, among them specialized electrical contractors, to get into the business of
formulating, designing, and installing PV solutions for this market a market thats likely to grow as solar
capital equipment and installation costs come down amidst a growing supply glut and a consolidating industry.

Shift to utility projects

Eying solar and other alternative energy sources from a short-term hedging and long-term positioning
perspective, utilities and independent power producers certainly have begun to integrate more solar into their
generation mix. However, theres little evidence theyre in any particular hurry to allocate large slugs of capital
and capacity to new technologies. With systems built for abundant coal and now, more recently, cheap natural
gas power producers still have little incentive to embark on wholesale replacements of fully depreciated
generation and transmission assets that can deliver power efficiently, if not at a price far from certain to remain
stable.
That utility market, however, has been where the action is for some companies that have sought to stake out
positions on the leading edge of the solar installation market. Having plunged into the commercial market in the
busy early-adopter phase, some solar systems contractors have been shifting their attention to utility market
niches that offer more immediate potential.
In the quest for more opportunities to keep its hand in the evolving solar space, Rosendin Electric has delved
deeper into markets where solars economic advantage is stark. Having installed large renewable distributed
energy generation (RDEG) PV projects in municipalities and school districts in California, as well as

07-03-15 2:00 PM

Financing Trends in the Solar Sector

4 of 7

http://ecmweb.com/print/green-building/financing-trends-solar-sector

utility-grade solar farm projects, the San Jose, Calif., electrical contractor turned its attention to utility projects
in markets where sunlight factors and exceedingly high incumbent energy costs make a near slam-dunk case for
PV.
Rosendin Electric is in the midst of building a 75MW PV solar farm project for the state-owned utility in Puerto
Rico. Because end-user energy costs are 25 to 32 cents per kWh and rising, this arrangement is an ideal
candidate for an alternative energy approach. Seeing a window of opportunity to address high energy costs and
an aging fuel oil-based electric supply, the islands governor pushed through renewable portfolio standards for
the utility, paving the way for this and many other PV projects, says Duncan Frederick, the companys director of
solar operations.
Beyond these utility-scale opportunities, theres a high concentration of industrial and commercial users in
Puerto Rico, especially in the pharmaceutical sector there, who are paying a lot for power, creating a demand for
local RDEG renewable power solutions, he says. Were [solar contractors] all chasing markets like this that
have a fundamental higher cost of power, because without that its tough to make these projects work. Larger
EPC players like us saw a great ride with local incentivized RDEG projects, but we needed to switch gears to
focus on new markets as state and local incentives have dried up.

Signs of life in commercial

In a clear demonstration of the PV markets protractedly unsettled nature, Frederick is now looking for new
signs of life in the commercial RDEG space. With the utility sector generally looking tougher to crack because of
low natural gas prices, that market may present new opportunities for the company to partner with developers
and independent power producers on commercial PV projects wherein financial returns for equity investment
are becoming competitive, he says.
Were in a holding pattern to see how that shakes out the idea being that we want to have a good presence in
both markets, knowing that each one will have its ups and downs, he says.
The
commercial
PV market
could be
poised for
growth if only
because the
prospect of
uncertain and
likely rising
energy costs
is so
menacing.
For especially
large
commercial
users
positioned to
leverage
economies of
scale, PV

07-03-15 2:00 PM

Financing Trends in the Solar Sector

5 of 7

http://ecmweb.com/print/green-building/financing-trends-solar-sector

installations
can represent
an investment
in a key
component of
competitiveness. Combine that with the ability to possibly offset costs with incentives for the use of alternative
energy and the ability to use power purchase agreements (PPAs) to sell power produced on-site back into the
grid, and big commercial energy users may begin to see the advantages.
If youre a large business like a Wal-mart-type operation that has a lot of buildings that allows you to do an
aggregated bid on a system, the numbers can be made to work, Crowdis says. But I think its still going to be
harder to make the financial case without any incentives in place, with the exception of spots where electric rates
are very high.
The bar for financial feasibility in the non-residential market may not be as high, though, if creative funding
schemes and payback scenarios can be brought into play. Third-party finance, for instance, can bring in outside
entities to build, operate, maintain, and attempt to turn a profit from a PV system. The commercial entity, in
turn, gets to tap into some of the power generated, presumably at competitive rates. The owner, meanwhile,
juices its return via tax-equity financing that takes advantage of investment tax credits for funding renewable
energy projects.
Cupertino Electric, Inc., a San Jose electrical contractor, is hopeful that creative financing and other forms of
outside investment will help fuel an uptick over time in commercial PV in California. Saurabh Samdani, who
oversees forecasting and modeling for the company, sees commercial PV prospects still being uncomfortable
with the idea of outright system ownership.
We can tell everyone that solar systems are easy to operate and maintain, but many companies dont have the
processes or people in place to do it, Samdani says. They may not be interested in taking the risk of owning and
operating a system. The common perception is that these activities are best left to the entities who understand
this risk. Therefore, these companies are more comfortable with a third-party owning and maintaining the
system.
Still, from a financial resources standpoint, many companies willing to consider aggressive steps to get a handle
on their own energy costs may be better positioned than ever, says John Curcio, who started Cupertinos
renewables division in 2007 and now serves as its chief commercial officer.
Theres a tremendous amount of cash on company balance sheets today, so the resources might be there to
directly fund a PV system, he says.

Factoring solar into the grid

Growth in the commercial and residential PV market could also come courtesy of evolving regulations governing
how solar energy system owners can offset the costs of power obtained from the grid. Curcio noted recent
progress in California on advantageous changes to net metering that would allow commercial PV users to
consolidate meters from multiple properties for the purpose of calculating net energy cost savings on utilityfurnished power.
Net metering and other techniques that can effectively lower electric consumption and costs will be an important
driver of PVs growth in the residential market. With systems still costly enough to generally preclude outright
ownership, homeowners will need more certainty that their power costs come in low enough to pay for leases,

07-03-15 2:00 PM

Financing Trends in the Solar Sector

6 of 7

http://ecmweb.com/print/green-building/financing-trends-solar-sector

system maintenance, and, when applicable, financing costs.

Now averaging about $4 per watt installed, about 40% of which covers equipment, according to the Solar
Electric Power Association (SEPA), PV systems remain significant investments demanding assurances of
reduced power costs. Those costs have come down from more than $8 just five years ago, says Eran Mahrer,
SEPAs vice president of utility strategy, but they still present a high enough bar to give homeowners pause. The
keys to expanding residential PV will be further declines in costs, especially those tied to installation, mixed with
programs that can help monetize solars inherent efficiencies as an energy source.
Utility incentives through programs like the California Solar Initiative that provide cash rebates are one of the
most important drivers of residential solar, Mahrer says. But most incentives like this were designed to ratchet
down on some predictable path, and thats been happening. Whats left in addition to the Federal Investment
Tax Credit is another mechanism for driving solar, which is net metering, and being able to export energy
produced to the utility and getting a retail credit.

Gauging residential prospects

Until costs come down further, its likely that homeowners interested in installing PV will look to third-party
ownership arrangements such as PPAs or leases where ownership can be secured after the lease period ends.
Companies specializing in structuring and delivering such deals have been proliferating, but a shakeout may be
underway, given the persistent challenges of stable or declining costs of traditional sources of electricity and not
enough business to go around. But PV module manufacturers, pressured by declining equipment costs, could
begin to move into the system development space in a bid to weather the reduced-return environment.
However the acquisition is structured, homeowners who fit the optimal PV user profile can probably secure a
guarantee of cheaper power over time, Mahrer says. On a households cash flow basis, payments on a PV
system versus present utility power, a customer can benefit from a fixed cost of energy and hedge themselves
against future price changes at least under todays net metering arrangements.
That, of course, may be the biggest wild card in trying to forecast whether PV and other renewables will grow to
become more than fringe sources of power. If traditional sources of power become easier and cheaper to access
and use in a cleaner fashion and they remain heavily subsidized to boot solar and other alternatives will
surely struggle to gain a foothold. Combine that with declining economic incentives, notably the scheduled
reduction in the federal investment tax credit for solar from 30% to 10% in 2016, and the hill becomes even
steeper.
Yet creative and aggressive financing coming from a bigger pool of investors eager to grab a piece of the new
frontier in arguably the worlds most important economic sector energy could well keep solar and other
renewables in the game. Ditto for the companies deploying the technology, including electrical contractors and
engineers engaged in everything from securing financing to designing and installing systems to performing
operations and maintenance.
The prospects for solar energy and for us in that space look good, Rosendin Electrics Frederick says. If
theres a shakeout in the industry, the players remaining are those that have a strong financial foundation and
are diversified enough to be a player in the residential, commercial, and utility-grade sectors.
Zind is a freelance writer based in Lees Summit, Mo. He can be reached at tomzind@att.net.

As much work as went into refining solar PV technology, theres been no shortage of effort into finding ways to

07-03-15 2:00 PM

Financing Trends in the Solar Sector

7 of 7

http://ecmweb.com/print/green-building/financing-trends-solar-sector

make it financially practical to install. Financing solar PV has almost become an industry unto itself, as all
parties look for creative ways to factor up-front costs, payback periods, prevailing electric rates, subsidies, and a
host of other variables into a favorable equation.
While every financing deal can come with its own unique structure and nuances, most come down to a choice
between system ownership of some sort or reaping the cost benefits of solar-produced electricity.
Outright ownership: Residential or commercial power users with deep pockets or willing lenders can buy a
system, reaping both the potential benefits of lower cost power and the intrinsic value of a PV system. Tax
credits, net metering, and depreciation can effectively lower the costs of ownership over the systems life and
potentially raise a propertys value, but system maintenance and financing costs are offsets. Users without the
ability to pay cash for a system can access a variety of lending schemes, including bank and subsidized loans, as
well as those secured by the solar equipment or property, or unsecured commercial or guaranty loans like those
through the Small Business Administration.
Leasing: Significant up-front costs can be eliminated under leases where a third party owns the system. The user
makes lease payments on the hardware, but those costs are offset by cheaper power. Under a typical lease, the
user can extend the lease at terms end or purchase the system for residual value.
Power Purchase Agreements (PPA): Users simply interested in cleaner, cheaper power can purchase the solar
power generated from a hosted system. Installation, ownership, and maintenance is handled by a third party,
which contracts to offer the user power at a set rate for a period of time. Power cost savings are typically reduced
in this scenario, but up-front costs are eliminated.
Source URL: http://ecmweb.com/green-building/financing-trends-solar-sector

07-03-15 2:00 PM