Solar is booming. Although it used to be an unwieldy source of energy that was both expensive and confusing, recent technological advances and creative ownership structures have made photovoltaic power more attractive.
It is also becoming more widely accessible; the Obama administration and many states have proposed initiatives to increase access to solar for those who cannot afford or feasibly install solar on their home.
At the same time, the residential sector is only one segment of the distributed generation solar market. The commercial and industrial (C&I) space is ripe for development and opportunity; however, it remains untapped in some areas due to the lack of sound risk assessment for investment.
Not all C&I properties have public credit ratings; in fact, most of them don't. Moody's, Fitch, and Standard & Poor's generally only supply public credit ratings for large commercial entities. If there is no public credit rating, it is difficult – if not impossible – to secure the required capital for a small or midsize commercial solar installation.
So, how do you fund them and do so with confidence?
You know how the saying goes: Where there's a will, there's a way. The same applies for funding the C&I solar market. When a C&I project without a credit rating requires a third-party financial solution, there's a significantly greater underwriting issue and a higher degree of risk that must be considered. Some of these considerations are as follows:
- The system's ability to perform and deliver projected output;
- Credibility behind equipment manufacturers' warranties and the workmanship warranty of the contractor installing the system;
- Public policy issues that could amend net-metering agreements or other incentives;
- Whether there will be long-term operation and maintenance of the system; and
- Guarantee of the host's financial capacity to make full power purchase agreement (PPA) payments.
Perhaps the most important of these risk factors is whether or not the host facility will have the financial capacity to make payments through the full term of the PPA. If there are no payments, then the financial investors aren't getting their principal and return. A high-risk prospect will likely dampen any hope of getting a project off of the drawing board.
However, solutions do exist for these unrated facilities. When a public credit rating is lacking, a facility may demonstrate the level of risk it represents to potential investors through supporting documentation. Usually, this comes in the form of audited financial statements and tax returns. If the prospect is a 501(c)(3) or some other nonprofit organization, supporting documentation, such as endowments and a history of its membership numbers, may also be required. As a last resort, a member of the business or nonprofit can offer a personal guarantee.
Financing a project, however, is not entirely tied to economics. Consideration must be given to the type of the facility. Commercial buildings, such as multi-tenant offices, retail spaces or any location where a high turnover rate is likely, may lack the type of long-term commitments needed to make a project attractive to investors and third-party-owned PPAs. Investors find properties that are unlikely to change use or ownership to be much more attractive. Good candidates in this category include distribution centers, agricultural operations and owner-occupied manufacturing facilities. These types of facilities generally provide a great deal of assurance to investors because occupancy, ownership and power consumption tend to be stable.
Until recently, the process of underwriting facilities that lack public credit ratings has been done ad hoc to each project's specialized needs. This is a time-consuming process that raises the cost of capital. There are, however, new types of businesses and organizations entering the C&I market. Such specialists bring more transparency to risk assessment and help standardize the investment process, which lowers the cost of capital. This improves the chance that all parties will be satisfied with a deal.
With such systems in place to provide detailed risk assessments, investors will be able to enter the C&I market confidently – enabling the solar momentum to build across all sectors.
Nathan Homan is an executive director at Wiser Capital, a Santa Barbara, Calif.-based financial services firm that facilitates financing and risk assessment for mid-range commercial solar projects through its online platform.