Raising the roof

For many customers, high up-front costs rule out installing solar PV systems. But, as Jess McCabe reports, innovative financing packages are changing the economics of solar energy

From factories and warehouses to office buildings and schools, the glint of the photovoltaic solar cell is becoming an increasingly common sight across rooftops worldwide.

But installing solar arrays of any scale costs millions of dollars, and both big business and public-sector organisations are turning to a novel kind of financing as an affordable alternative.

Rather than consumers buying their own solar cells, a third-party financier steps in to pay the upfront costs and continues to own – and sometimes maintain – the rooftop generator. The customer, meanwhile, pays a regular, monthly bill for its electricity – but to the financier, instead of its electric utility.The consumer benefits from a predictable, fixed-cost supply of electricity and the public relations benefits of using solar power, while the financier benefits from a steady income stream and, in the US at least, a number of attractive tax credits.

Set up in 2003, SunEdison pioneered this approach to financing, striking high-profile deals with giant stationery retailer Staples and later with organic supermarket Wholefoods. The solar company installs its own technology, married with financing from Goldman Sachs. In its wake, companies have been springing up across the US to offer variations on this type of third-party financing, drawing in clients of all sizes.

Matt Cheney, MMA: no shortage of capital

San Francisco-based MMA Renewable Ventures is one of the biggest new players. Originally an offshoot of Dutch utility Nuon, MMA has been working on its third-party financing model for five years.

But the idea came into its own when the firm was bought out last year by MuniMae, an investment management company which puts millions of investor dollars into low-income housing, to take advantage of tax breaks intended to increase the stock of affordable housing. MMA chief executive Matt Cheney says this buyout gave MMA access to investors with a tax appetite, used to putting their money into third-party financing projects.

Although the firm also raises money for its funds from a variety of sources, he says: “We have a really good ability to raise capital, really from many of the same investors that invest in low-income housing.”

Last year it closed two funds,worth a total of $39 million, or 5.3MW of capacity. But Cheney says:“This year we are looking at doing 10 times that.”

The firm’s first big project using this model – announced in June 2006 – involved installing 901kW of solar capacity on the roof of Fetzer Vineyards’ bottling plant in Hopland, California. To potential host-companies, MMA offers a range of options within this model. MMA acts like an energy services company. Apart from paying the bills, the host takes on no responsibilities – MMA organises installation and maintenance of the rooftop generator, and charges only for the electricity the panels produce.

But there are other variations on the model, including a ‘lease/buyback’ arrangement. In this case, the host company will take on responsibility for maintaining and servicing the panels, while MMA and its partners have little involvement except for financing and installing the equipment.

Cheney explains that MMA co-ordinates this effort, shopping around for financiers, solar cell suppliers and maintenance firms: “We are a solutions provider. We are a financial services company.” And, in this capacity,MMA’s role is to manage the complexities of incentive systems in all the markets in which it operates, taking this burden away from both generator and investor.

In the US, this means taking advantage of a 30% federal tax credit on installation costs for solar, as well as a myriad of state-level incentives, from additional tax breaks to tradable Renewable Energy Certificates for renewable electricity generated by the installed arrays.

MMA, in common with some other firms involved in third-party financing, is branching out overseas – usually where existing customers want it to go – but the US tax incentives make the model particularly appealing in its home market. “The tax incentives are different, if not non-existent. For those deals,we are just talking about straight up debt/equity,” Cheney says, noting that MMA is exploring possible investments in Asia – particularly South Korea – and the EU.

Bottled sunshine: the solar array at Fetzer Vineyardsl

Developing Energy Efficient Rooftop Systems (DEERs) is behind a number of other high-profile projects using this financing model, including the installation of just over 1MW of solar panels on the General Motors factory in Rancho Cucamonga, California.

The company, which expects to roll out 50MW of solar roofing a year, has no website and is surprisingly difficult to track down. Jack DeLiddo, president of DEERs, is also cagey about revealing any but the most basic details of how his model operates because of confidentiality agreements with investors. But speaking of his plans for expansion both in the US and overseas, he says: “We don’t need to advertise it.We have plenty of business, more than we’ll ever be able to do.”

Another recent entrant is UPC Group, a Houston, Texas-based pipe and steel manufacturer, which launched a new arm to offer third-party solar financing early in 2007. UPC Solar aims to take on big deals, looking to finance not just one solar system on one warehouse roof, but bundles worth at least $50 million across a number of properties.

None of the firms say they have any trouble finding investors. Randall MacEwen, chief executive of Los Angeles-based Solar Integrated, another firm offering this financing model, says: “The number of organisations trying to become investors has gone up exponentially.”

The question remains, however, why massive corporations such as General Motors, Staples or Wholefoods do not simply pay for the solar panels out of their own pockets.

Morten Sissener, president and chief executive of UPC Solar, says: “Even though solar’s roots are in small-scale distributed generation, most commercial and municipal parties have no desire to purchase, own and operate their own power generating system – conventional or renewable – but are very receptive to clean, onsite generation and the security of stable and predictable long-term energy costs.”

Craig Hanson, a senior associate at the World Resources Institute, says that justifying capital expenditure on solar cells can be difficult.

“A solar project has to compete against opening a new store, or opening a new warehouse,” adds Hanson, who is working on a programme at the Washington, DC-based think-tank to encourage the uptake of renewable energy by US corporations.

Tim Derrick, director of onsite renewable energy projects at 3 Phases, another firm with a business in third-party solar finance, adds: “Their paradigm is treating energy as an ongoing expense, not as a capital expense.”

"If they sell the RECs, the system owner is purchasing brown energy. Our customers are interested in investing in solar because they want to be producing green energy."

The proposition is also appealing to government bodies,municipalities and non-profits, which cannot themselves make use of the tax credits offered as incentives by the US government, market observers say. In addition, these institutions are unlikely to be able to spend millions on installing renewable generation systems.

Solar Integrated’s first project using this model was with the San Diego school district, starting in 2005. Now expanded to 24 schools, the financier in this case was the commercial finance arm of General Electric, which invested an initial $17 million in solar roofing systems for 14 schools.

But this model is not without its problems. One issue is that the financing package often works best if the arranger can sell RECs generated by the solar cells to buyers looking to ‘green’ their power supply, or to utilities with renewable energy targets.

However, if a host company goes down this route, it is no longer able to claim to be running off renewable power – as the environmental benefits have been effectively sold to someone else.

But Alex Klein, a Massachusetts-based senior associate at consultancy Emerging Energy Research, says that including RECs in the package of benefits for investors will be crucial to the future success of the third-party finance model.

“At the moment, there isn’t much of a RECs market in the US, but it’s expected that that could evolve somewhat. [Investors] are looking to this as a possible huge benefit for them in the future,” he says. “Without the RECs market, it’s a somewhat interesting model… but with the RECs market [it could take off].”

Derrick is in a position to understand this problem well, as 3 Phases also trades in

RECs. For many customers, he says, being able to point to the solar system on their roof is enough of a green cachet. “It’s really a dollars and cents question for them. Most are willing to part with the REC if it means a couple of cents reduction in their rate,” says Derrick.

For some customers, 3 Phases offers a solution. In some states with mandatory renewable power targets, a certain percentage of the RECs that utilities hand in every year must come from solar.This drives up the price of solar RECs. In these cases, 3 Phases is able to sell off the lucrative solar RECs from projects, ‘swapping’ them for cheaper certificates generated by wind power or geothermal projects.

Derrick says: “The customer preserves the claim to green energy but it’s through the creative use of a different REC. ”Hanson adds that acting as a host is, in itself, a boost to the solar market. “Getting a location isn’t as easy as one might think,” he says. But he does acknowledge that selling off RECs – if not explained properly – could be a public relations disaster waiting to happen for firms looking to solar for green kudos.

“One bad local community press release can destroy the whole stakeholder-relation value,” he points out.

Steve Chadima, executive for external affairs at California-based EI Solutions – which offers third-party financing along with other options to its customers – argues that this is a stumbling block for many potential customers. The fact that third-party financing may only be financially appealing if the host company sells the RECs can be a deal-breaker. He explains:“To sell the RECs, [means] the system owner is purchasing brown energy.”

“In most cases, our customers are interested in investing in solar because they want to be producing green energy.”

On top of the RECs issue, investors must ask themselves what happens if the host-company goes bankrupt, or wants to sell up the property with the solar cells installed. All the firms involved in this type of finance build in protections against bankruptcy, but MMA has developed a particular contingency.

The company has 90 acres of land set aside in Mendocino County, California, where it can install solar panels if it is forced to remove them from a property – if it can’t redeploy them for another client. “The components come off as easy as they go in,” says Cheney.

Solar Integrated, meanwhile, explains that if a host company wants to move out of a property, any potential buyer must be willing to take on regular payments for energy from the solar cells on their roof, and must be vetted for creditworthiness.

Most market participants, however, are confident that the popularity of this model will continue to grow.Derrick from 3 Phases points out that investors are competing against each other to fund projects – driving down costs for companies looking to install panels. “Particularly on the equity side, you are seeing a lot of different banks and other interests who have tax appetite,” he says.

And while investors fight it out to put money into rooftop generation, developers say clients are far from thin on the ground. Says DeLiddo of DEERs: “It’s good business. It’s just very, very smart.”