VIDEO: What Will It Take to Get Commercial-scale Solar off the Ground?

10 Feb 2015

The residential solar market is booming, and utility-scale is going strong in the face of a decline in the Investment Tax Credit (ITC). At the same time, much of the commercial-scale solar market has seen relatively flat growth year-over-year. GTM Research expects that 2014 will be the first time in 10 years that residential solar surpasses the non-residential sector. This is despite what we estimate to be a $2-4 billion market opportunity.  So why, with seemingly infinite rooftops and plots of land with unused space, hasn’t the industry gotten this sector off the ground?

Lack of Standardization, and a Whole Lot of Fragmentation

There are a number of factors impacting the growth of the commercial solar market. However, the two greatest obstacles relate to a) a lack of standardization, and b) high transaction costs relative to smaller deal sizes.

The only uniform aspect about the commercial solar market is its lack of uniformity. Standardized legal documents are not widely utilized, there is no set standard of technical specifications for project teams to follow, and there is no standardized process to underwrite credit.  Adding to this, hosts rarely sign on the dotted line without negotiating the PPA, deal timelines may run long, and there are inevitably other project-specific issues that rack up transaction costs. This lack of standardization contrasts sharply with residential solar, which has standardized PPA and lease contracts and easy-to-access FICO scores. In residential markets, funds are closed in large tranches of homogeneous deals, simplifying the process, minimizing transaction costs, and creating potential liquidity, which lowers the cost of capital.

Although utility-scale solar projects are not standardized, the project size is such that even smaller 10MW utility-scale deals can support higher transaction costs associated with working through deal complexities. This raises the second (and related) issue of the commercial solar market: negotiating these documents and running “shadow credit ratings” on all of these hosts is extremely time-intensive and therefore expensive. As a proportion of overall capex, transaction costs compose a disproportionate cost for commercial-scale solar.

These obstacles have kept the commercial-scale sector fragmented with no single company emerging as dominant. For now, YieldCos focus predominately in the utility-scale markets, focused on gobbling up projects (and more recently, companies) with portfolios of investment grade offtakes. This is because YieldCos depend on portfolio growth to secure investors. SunEdison (and its YieldCo TerraForm) often buy projects in the commercial space from other developers, but balance this strategy with one of self-development, a challenging balancing act. SolarCity has dabbled in working with partners, but generally works directly with large-scale big box hosts, like Walmart, which potentially limits scale. SolarCity’s latest shareholder presentations show that the solar giant constructed only 50MW of commercial as of Q3 2014 compared to 276MW of residential. Both larger players are fairly limited by the credit constraints of outside tax equity investors.

Sol Systems’ strategy for the commercial and small utility markets is to scale through repeat transactions with developer partners, somewhat like third-party providers such as Sunrun and others have done for residential. Others, mainly local and regional players, leverage the “buy local” mentality to take advantage of local host relationships, many of which end up being cash deals.

Clearing the Trail to Scale Commercial Solar

“Do not go where the path may lead, go instead where there is no path and leave a trail.” Ralph Waldo Emerson

To scale the commercial sector, and to propel it past its $2 billion potential, market players must push a transformation in both efficiency and standardization. The following is critical:

  • Standardizing processes relentlessly
  • Bundling projects into portfolios to command better pricing and efficiency
  • Keeping overhead low; bring legal and engineering expertise in-house.
  • Focusing on long-term partnerships that drive value for both parties. One-off commercial deals are inefficient and costly. Both partners can quickly scale to attack more deals, and the right deals.

Finally, solar developers and investors must focus their commercial business on markets where deals are more likely to pencil, such as the Northeast, Mid-Atlantic, and California. In California, commercial solar projects can pencil without incentives because of the high electricity prices. In the Northeast and Mid-Atlantic, incentive design, among other factors, is pushing developers away from the larger utility-scale projects and toward the rooftops. Examples of these states include stable SREC markets such as New Jersey, Maryland, and Massachusetts (which also incentives projects under 650kW), as well as Connecticut’s ZREC Program and NYSERDA’s PON2112.

Commercial solar is challenging, but not impossible. By mastering efficiency, scale, repeat transactions, and favorable markets, this underserved sector of the market can produce at its potential and propel the solar industry forward.

This article was written as a collaboration between Sara Rafalson and William Graves, Sol Systems Senior Associates.

About Sol Systems

Sol Systems is a solar energy finance and investment firm. The company has facilitated financing for 180MW 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. Inc. Magazine named Sol Systems on its annual Inc. 500 list of the nation’s fastest-growing private companies for a second consecutive year, ranking it No. 6 in the nation’s top solar companies in 2014. For more information, please visit

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Sara Rafalson

Sara Rafalson