Look out the window on your next flight into your average city and you will witness first-hand the vast potential for light-commercial solar. A glimpse of just a small segment of any city will show you dozens of commercial flat roofs, ripe for solar generation.
However, this non-residential mid-commercial market – 250 kW to 500 MW – is historically underserved by the solar industry at large. Both residential and large commercial- and utility-scale projects have benefited widely from third-party ownership, yet the financial sector has largely passed by projects in the middle.
In the 2013 year-end Market Insight Report by the Solar Energy Industries Association, non-residential solar grew a nearly insignificant 4% last year. This was mostly due to the growth of the Massachusetts market. Three of the top five state markets in 2012 – Arizona, California and New Jersey – shrank in 2013. That decline in leading markets made for a volatile period for project developers.
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Although it has long been difficult to finance smaller commercial projects, the market potential is enormous. This has led some companies, notably Mosaic and SolarCity, to develop financial products that allow smaller investors to aggregate their investments over a wide range of light-commercial deals.
As the solar sector waits for these two players to further develop their offerings, there's a new option for funding light-commercial projects that is accessible to power purchase agreement (PPA) developers today. The utilization of the passive income and the tax appetites of high net-worth individuals is perhaps the most promising opportunity for PPA funding since the financial product was created.
PPA 2.0
It's well understood that the limited number of tax equity sources in the U.S. prefer very large projects. This has been a barrier to widespread solar adoption in the light-commercial segment. Yet, combining individual investor appetite for investment tax credits alongside debt from specialized financial institutions allows companies to uniquely finance projects that previously were either too small for typical tax equity investors or didn't fit usual tax equity requirements.
Kawa Captial Management, Conergy and THiNKnrg recently used this PPA approach as a way to broaden the definition of a ‘financeable solar project.’ We utilized high net-worth individuals to partially fund the development of a 397.5 kW solar installation for the Oshman Family Jewish Community Center (OFJCC) in Palo Alto, Calif.
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The OFJCC solar array includes 1,840 of Trina Solar's Trinasmart solar panels distributed across the rooftops of the 12 buildings of the Taube Koret Campus for Jewish Life. Conergy will own and operate the solar power system, providing electricity to the OFJCC under a 20-year PPA. The OFJCC solar installation is expected to generate nearly 617 MWh of electricity per year.
The solar roof system will supply approximately 20% of the OFJCC's energy needs. The OFJCC solar PPA takes advantage of the usual 30% investment tax credit, plus a five-year, $0.29/kWh performance-based incentive from Palo Alto. The campus is expected to save $26,000 in the first year and an estimated $1.5 million in energy savings over the 20-year contract.
The system is providing the nonprofit with a 50% discount on its energy rates. With the PPA selling energy back to the OFJCC at $0.04/kWh, we estimate this as the lowest cost of solar on record. Regardless of how long this record stands, the deal is an example of how a PPA can tap an underutilized segment of funding and put it to work for a historically underserved section of the industry, thus opening the door for more financing of light-commercial projects.
There is no reason any building or landlord should be prevented from going solar. Utilizing individual investors to fund a light-commercial PPA joins other innovative financing approaches, such as crowd funding and the pending securitization of solar assets, to revolutionize the industry's approach to funding this potentially lucrative market. Solar projects that were previously considered un-financeable can be financed if investors use this project as a model of inspiration.
Zach Rubin is CEO and co-founder of THiNKnrg, a developer of commercial-scale solar projects, based in Palo Alto, Calif. He can be reached by email at zrubin@thinknrg.net.
