Option R will encourage the development of solar projects 20kW - 4MW in size in southern California.

Option R will encourage the development of solar projects 20kW – 4MW in size in southern California.

Rate structure changes in favor of demand charges in both the Pacific Gas and Electric (PG&E) and Southern California Edison (SCE) utility territories have discouraged the development of commercial and industrial (C&I) solar projects in the Golden State. Luckily, we expect this to change in SCE territory as developers begin to take advantage of Option R.

Demonstrating kilowatt hour (kWh) savings is critical to expressing solar’s value proposition to potential to hosts. However, under SCE’s Option B Time of Use (TOU) rate, California developers have had a hard time proving how solar could help them save on their electric bills. Electric bills under Option B disproportionately emphasize demand charges – or the measure of a customer’s peak usage in a given billing cycle. In essence, the customer is being charged their worst-case scenario usage instead of their kWh usage throughout the billing cycle. Less emphasis on kWh usage makes it challenging for solar developers and installers to guarantee that they can lower a customer’s electric bills, as it can be hard to guarantee that the a commercial host’s particular peak usage will coincide with the optimal time for solar performance.

In December, SCE agreed to lift its cap on Option R, a more “solar-friendly” rate structure, from 150MW to 400MW. The Option R rate would lower customers’ demand charges in exchange for higher energy rates, particularly during peak and part-peak hours. This will make it easier for California developers and installers to pitch the ROI of solar to hosts, which will also awaken California’s underwhelming commercial solar market. According to Greentech Media and SEIA’s latest Solar Market Insight Report, residential installations outweighed commercial solar in the Golden State in 2014.

Now that the cap has been lifted, we expect to see a gold rush in SCE territory as developers hurry to find opportunities to fill SCE’s 400MW cap. Project sizes may range from 20kW to 4MW in size and will not need incentives to be bankable with competitive build prices; the rate is enough. Developers will be most successful if they structure PPAs that undercut the average kWh rate in a customer’s electricity bill; our analysis says that low double digit PPAs should suffice.

Option R, however, is not without its challenges. For one, developers are not awarded the Option R rate until after the project is operational. This should not pose problems to developers who qualify when only 200MW of projects, for example, have received the rate. But, if a developer starts discussions with hosts when 380MW have already qualified for the rate, they may be out of luck by the time that they are eligible to apply. For reference, 246.62MW are still available, so if you’re a developer reading this, you have some time…but not too much. Learn more about Option R on the SCE website.

Sol Systems will move quickly to finance California projects to ensure they qualify for Option R tariff. Contact our team at finance@solsystems.com for more information.

ABOUT SOL SYSTEMS

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 180MW of distributed generation solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. Sol Systems provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. The company’s tailored financial services range from tax structured investments and project acquisition, to debt financing and SREC portfolio management. For more information, please visit www.solsystems.com.