While residential solar installers battle for market share and YieldCos gobble up utility scale projects, the commercial and industrial (C&I) solar space has been relatively quiet. Broadly defined as behind-the-meter projects between 50kW and 5MW, the middle market remains untapped due to market fragmentation and complexity associated with relatively smaller deal sizes. In fact, the number of middle market solar projects interconnected in Q1, 2014 was down 12% from the same quarter in 2013, according to Greentech Media (GTM) and SEIA’s Solar Market Insight Report. Additionally, Q1, 2014 marked the first quarter that residential solar MW installed exceeded those installed in the C&I niche since 2002.
Despite the roadblocks facing those active in the C&I space, its tremendous potential can be seen on vacant rooftops throughout the U.S. The next great leap in solar will occur when financiers and developers combine to unlock the C&I solar market, creating massive value for the solar industry.
Why Is C&I Solar So Challenging?
At present, the C&I solar market is by far the most difficult market to crack. Most deals are one-off’s, host origination is difficult, and PPA negotiations are seemingly never-ending. Adding insult to injury, most solar investors will pass on a seemingly good deal because it is too small or doesn’t fit their “credit box.” Occasionally a deal may reach financial close, but a statistical analysis of projects reviewed by Sol Systems indicates that more than 85% of C&I deals never reach the finish line. It is no wonder that many developers find a niche in other sectors of the market.
Partnerships: The Key that Will Unlock C&I Solar’s Potential
In the face of all of these challenges, the middle market still holds more promise for both developers and financiers than any other solar market in the US. Per Bloomberg New Energy Finance, the solar middle market comprises roughly 30% of U.S. installed capacity, and no one firm has installed more than 10% of that. GTM’s Q2 2014 U.S. Solar Market Insight Report remarks that the C&I space as a percentage of the overall industry has declined significantly in the last few years. However, they “see some opportunity on the horizon as companies develop mechanisms to build out and finance small commercial portfolios.” This indicates a relatively nascent market, containing the potential for a firm with the right business plan to take advantage of market conditions.
The key to cashing in on the hidden value of this space now lies in solving the challenges it presents. Much of this can be accomplished through scale and creativity. Combine those two ingredients with a solar financing partnership and you have the beginnings of a recipe for cracking open the C&I market. Through a partnership, financiers can provide certainty around which projects to pursue and which to leave behind. A mutually agreed form set of legal documents can also cut back on the complexity of the space, and significantly reduce transaction costs and legal costs spent negotiating these documents. Both financiers and developers can benefit from a well-constructed partnership as they drive volume, reduce costs, and finance deals.
At Sol Systems we have partnered with a number of our developers to help bring C&I projects to completion. Leveraging our financing experience, we assisted our development partners by helping them to execute payment in lieu of taxes (PILOTs) in Massachusetts, renegotiate unfinanceable PPAs, or underwrite credit that most financiers wouldn’t touch or take the time to understand . The initial time investment pays off as we pursue repeat deals with our partners, utilizing the same documentation and structures.
It’s time for the solar industry to collectively wake the sleeping giant that is the solar middle market. Some will try and conquer the market alone, but like most things in life, it’s better with friends. Find a good partner, strap on your boots, and take down the last untapped market in the US solar industry.
About Sol Systems
Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 171MW and over $600 million of distributed generation solar projects on behalf of Fortune 100 corporations, insurance companies, utilities, banks, family offices, and individuals. It has over $300 million in assets under management as of September 2014. 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.solsystemscompany.com.