Open Energy’s Graham Smith on how to get more capital into commercial solar
Solar has entered the mainstream: there are now over 20 gigawatts of cumulative solar capacity operating in the U.S., and that figure is expected to double over the next two years. Growth in 2014 was led by the utility-scale sector, which grew 38 percent over 2013 to reach nearly 4 gigawatts, and the residential sector, which crossed the 1-gigawatt barrier for the first time, growing 51 percent over 2013. Commercial solar was the only sector that did not see growth in this time period, instead decreasing by 6 percent.
One of the main obstacles to growth in the commercial industry is limited access to capital. Commercial solar financing faces a lack of standardization (disjointed applications for finance, no clear communication on financing terms, different legal contracts) and high transaction costs relative to deal sizes. These factors translate into challenging due-diligence processes and complex finance negotiations, which wind up costing a great deal of time and money. Furthermore, this is all done offline, against the backdrop of a world where borrowers can apply for almost any loan/finance online (think credit cards, SME business loans, mortgages). Commercial solar financing is further affected when monetizing the ITC through a tax equity partner, which increases legal fees because of an added layer of due diligence and finance negotiations.
These hurdles are specific to the commercial and industrial market. By contrast, the residential market is highly standardized, and residential borrowers are more homogeneous because they can be differentiated and segmented by FICO score; the risk value is the same across the nation, whether the homeowner is located in New York or California. Residential solar borrowers also have online borrowing sources available. At the large scale end of the spectrum, the utility-scale projects also lack standardization but project sizes are large enough to support high transaction costs, which are small relative to the capital involved.