A Less-Than-Totally-Addressable Market
Commercial solar can be an extremely difficult, uphill sell. Not only must a salesperson overcome traditional customer barriers of ignorance, indifference, or fear, with a product that can seem formidably technical, but they have to do so in what is to date an inordinately small addressable market. Consider a Venn diagram, but one where you must intersect a highly creditworthy client, with a large-enough-to-bother roof, such roof being fairly new (but not covered with mechanical equipment), with some spare structural capacity; generally, commercial instead of industrial electricity rates, low shading, a PPA-friendly state, and one of the markets that makes sense for solar this quarter. In considering all of this, you’ve no longer got a Venn diagram; you’ve got something else entirely.
It’s part of the reason solar developers like to press their nose against the glass as their plane comes in over the big flat roofs on the warehouses next to the airport and dream of what might be.
Of course we should pursue such low hanging fruit where we can find it – and keep in mind that some finance providers are more innovative on host credit than others.
However, there are only so many big retailers and Fortune 500 distribution centers out there. Great credit often comes with truly challenging host sites and vice versa. Further, we’ve seen other issues with over-concentration. In certain substations serving Southern New Jersey office parks, we’ve seen interconnection study results that look like all Three Stooges trying to fit through a door at the same time.
Breaking Out of The Intersection
So what if we could break the site-customer nexus? What if we could bring together the apocalyptic but South-facing brownfield of a solar engineer’s dream with the towering, near-roofless office blocks of an AAA-credit off-taker?
Commercial customers love the long-term price certainty they can get from solar, and they should be more or less indifferent to where the system itself is located. We’ve seen forays into this in the form of Massachusetts’ and Maryland’s Virtual Net Metering (VNM) policies, which have driven a significant proportion of all installations in those states. But in a well-functioning wholesale market, all infrastructure is in place to do remote solar delivery without a VNM policy. Instead you could carry out a pure financial offset.
Shipping Dollars Instead of Electrons
The key concept here is to move the benefits of solar, without seeking to move the electrons themselves. Think of any customer big enough to have a separate account at the wholesale market operator. That account works much like a checking account – the customer “writes checks” monthly to pay other wholesale generators. But if they were able to “get a payday” every few weeks from a system injecting wholesale power, they would have a hedge against future volatility in electricity prices just as sure as if the system were on their roof. They, in turn, could contract with their developer using a fairly typical – looking solar PPA that existed as a “side agreement” outside the wholesale market.
To be sure, this is not a “perfect hedge”. The value the customer received for the power from “their” system would be different than what they paid at retail. But this can be managed – in large part by putting the system as geographically close to load as possible. Further – and this is the truly tough part – you do lose the value of the distribution credits you can receive from true onsite or virtual net metering.
Trading Margin for Market
In some markets, this is an acceptable trade – losing $.05 per kWh in distribution benefits can be successfully offset by the benefits of potentially building on ideal sites, and being able to address a far larger set of potential customers. To be sure, many of the same considerations apply. The site must still achieve interconnection, and it must be backed by a PPA with a creditworthy off-taker. Some administrative work may be necessary for off-takers not large enough to carry an ISO sub-account.
There’s some chatter about similar projects – we’ve seen some that have only a PJM “Wholesale Market Participation Agreement” (Endearingly pronounced “Wampa”, like the creature from Star Wars,) that gives them the right to local market wholesale price. We have not seen as much in the way of investors interested in taking that kind of merchant risk. Others have sought commodity hedges, only to find the minimum transaction sizes too large and the horizon too short to adequately enhance finance. But we’ve also seen some pioneering projects – like the D.C. government contracting for remote wind, or the state of Maryland’s accepting delivery at wholesale for the Mount Saint Mary’s project – which show that it is possible. The infrastructure and the finances are there for this next generation of solar PPA’s in deregulated markets. If you have something similar under development – give us a call.
About Sol Systems
Sol Systems is a renewable energy finance firm that provides secure, sustainable investment opportunities to investor clients, and sophisticated project financing solutions to developers. Founded in 2008, Sol Systems focuses on meeting the industry’s most critical solar financing needs, including tax structured investments, capital placement, debt financing, and SREC portfolio management. To date, the company has facilitated financing for thousands of distributed generation solar projects and hundreds of millions in investment on behalf of Fortune 100 corporations, utilities, banks, family offices, and individuals. For more information, please visit www.solsystemscompany.com.
View this blog on Renewable Energy World.