The growth of solar on the U.S. power system is slowing, but new solar industry initiatives are seeking to break through barriers for commercial-industrial customers.
One initiative expanded and streamlined the basic contract between a commercial-industrial (C&I) customer, the solar project developer, and the provider of financing. It is expected to make opaque and complicated deals much easier and more appealing.
The other initiative, a new white paper, is intended to help owners of commercial real estate (CRE) understand the advantages of supporting solar development. It is intended to show property owners how offering solar to tenants can lead to new leases that will benefit their bottom lines in the long term, in spite of the short-term costs.
Counterproductive federal policy and changing state policies slowed the utility-scale and residential solar sectors in 2017. Solar has not lost its customer appeal or its importance in the climate fight and analysts say it will continue to grow — just not as fast.
Due largely to the Trump Administration's tariff on imported solar modules and cells, GTM Research (GTMR) expects total solar capacity growth between 2018 and 2022 to fall 13% from what had been forecast. But the industry is still expected to add 15 GW per year and double the current installed capacity over the next five years, GTMR senior solar analyst Colin Smith recently told Utility Dive.
Rooftop solar installations are less affected by tariffs because modules are only 16% of system cost, according to GTMR senior solar analyst Austin Perea. But residential solar growth contracted in 2017 for the first time since 2010, largely due to state policy turmoil that is likely to continue.
The one sector that gained last year was C&I solar, according to the 2017 U.S. Solar Market Insight (USSMI) report from the Solar Energy Industries Association (SEIA) and GTMR. Atypical policy factors and a boom in the relatively small community solar sub-sector were the drivers, leaving the question of continued growth open.
The C&I spike
Non-residential solar, which includes the C&I sector for GTMR and other industry analysts, added 2,147 MWdc in 2017, a 28% spike over 2016 additions. One key growth driver — atypical policy factors — was transitional.Those atypical factors ran from east to west as California, Massachusetts and New York saw new C&I customers rushing to qualify for terminating or changing incentives.
Community solar is the other key growth driver and is only tangentially related to traditional C&I customers. A policy-delayed community solar pipeline in Minnesota exploded into installations in 2017, making the state the year's third biggest non-residential solar market. Its 246 MW almost doubled the rest of the country’s 249 MW of private sector installations and led to a record-setting 112% year-on-year growth for the community solar sector.
The overall non-residential solar sector is, however, expected to see "two consecutive down years" in 2018 and 2019, the USSMI forecasts. No new burst of community solar activity is expected until 2020 and the C&I projects eligible for expiring incentives will be slowly completed.
Two factors will likely stimulate non-residential growth after 2020, the USSMI reports. One is new community solar capacity in New York, Maryland and Illinois. The other is solar-plus-storage, which is expected to add significantly to the solar value proposition when prices fall further. But neither will overcome barriers for traditional C&I solar customers, including contract complexities and a failure to understand the opportunity.
Drivers, barriers, documents and doubts
"Solar Means Business (SMB)," SEIA’s annual survey of large companies leading solar adoption, shows "corporations want solar," SEIA VP Dan Whitten told Utility Dive.
Tracked companies added 325 MW in 2017, driven "primarily by falling costs and changes to incentive programs in key states," SMB added. That was a 2% increase over 2016 and a 43% increase over 2015.
Costs will continue to come down and more companies will add sustainability and renewables goals, opening growth opportunities, SMB reported. But a key challenge is that many "early adopters" have already bought in, leaving growth to "mainstream commercial consumers" and introducing "customer acquisition issues."
A 2015 survey of potential C&I solar customers by E Source identified lists of "common drivers" and "frequently cited barriers" to adoption, according to E Source senior director for strategy Alanya Schofield. Current but still unreleased work shows the findings of the 2015 survey remain accurate, she emailed Utility Dive.
The main drivers are to obtain ongoing operational savings, meet corporate sustainability goals, lock in price certainty and bolster corporate images, Schofield said. Barriers include "concerns about up-front costs, competing management priorities, lack of information to make a smart decision, and physical or locational constraints," she added.
Initiatives expand and define the opportunity
SMB identified similar drivers and barriers. Two new SEIA initiatives are intended to address the barriers by expanding, streamlining, and defining new opportunities for C&I solar highlighted as solutions in SMB.
One is a new kind of power purchase agreement (PPA) that includes commercial property-assessed clean energy (PACE) financing. The other is a new white paper that better defines the opportunity. They are "resources for people engaged in day-to-day energy purchasing that will help make it easier to invest in solar," Whitten said.
Solar Finance Council Executive Director Michael Mendelsohn oversaw the design of the PACE PPA as a SEIA senior director. "PACE allows using the property as collateral so that financing is tied to the credit quality of the property instead of the credit quality of the off-taker," he told Utility Dive.
The white paper, “Solar Energy & Commercial Real Estate; Insights for Your Investment Property,” explains nine benefits of on-site solar to commercial property owners and managers. It is “intended to make solar more familiar to the people who are making the buying decisions,” Whitten said.
Adding solar offers commercial real estate property owners and managers the opportunity to boost cash flow, the paper reports. Proposing an installation can reduce utility bills and open discussions with tenants about rents, common areas maintenance fees, and new and longer leases.
As the white paper's lead author, Mendelsohn said long-term lease structures translate into higher net operating income and net cash flow.
"Energy accounts for nearly 20% of average office building expenses" and "C&I solar projects produce electricity at roughly $0.06/kWh to $0.15/kWh," the paper reports. "This compares favorably to commercial retail electricity rates, which range from $0.08-0.16/kWh nationally."
Carey Roth, a Miramar Asset Management (West) principal and veteran Los Angeles-region large property manager, reviewed the white paper at Utility Dive’s request.
It provides "good documentation on the benefits and costs of commercial property solar," Roth emailed. "If the lower energy costs are significant enough, it can be an incentive for a landlord to offer and a tenant to accept a lease extension," he observed. "This locks in projected revenue streams for property owners and can increase the projected cash flow and property value."
Roth found details on state and federal incentives limited and questioned the paper’s assertion that solar is already cost-competitive with traditional generation without subsidies.
Mendelsohn said the new legal documents and the white paper will likely have more of a qualitative than a quantitative impact. "Solar costs are coming down from many different factors, but this is a digestible document that adds some transactional efficiencies," he said.
Two successful utility strategies
The growth of C&I solar offers utilities the same kind of opportunities as other demand-side technologies, like battery storage, energy efficiency and demand response, SEIA’s Whitten said. Portfolios of these technologies offer "a real opportunity for collaboration" and can lead to "creative approaches to give customers what they want."
In addition, utility-led community solar projects can be sited on a commercial rooftop where a tenant or building owner could be the anchor customer that makes the project work, Whitten added.
Duke Energy Renewables, the unregulated arm of the company, moved into the space with its 2015 purchase of C&I developer REC Solar. Currently, it is "seeing energy security and sustainability as some of the leading drivers of growth in the C&I market," Duke spokesperson Tammie McGee emailed Utility Dive. Contrary to analyst reports, "we have not experienced C&I solar doing poorly."
To take advantage of the identified drivers, Duke and REC Solar are partnering with providers to do exactly what Whitten suggested. They are using utility-scale and distributed renewables, energy storage, power electronics, other emerging technologies and innovative financing strategies to respond to "complex customer needs," McGee said.
A 2017 focus was the development of microgrids for public safety and correctional facilities in Maryland, to make them more resilient against extreme weather. Taking on the development of these kinds of complex projects makes their services especially valuable to "customers who don’t know how to navigate the energy landscape," McGee added.
"C&I solar is already a great business opportunity."
Executive director of distributed energy origination, Constellation
Duke is not the only utility company with an unregulated arm offering services to C&I customers.
Constellation, an unregulated subsidiary of Exelon, brought online a 554 kWdc array on the roof of a Home Depot in Washington, D.C. in April. It is expected to supply 35% to 40% of the store’s annual energy use over the 15-year contract term.
Constellation Energy executive director of distributed energy origination Brendon Quinlivan has been working the C&I solar space for over a decade. “For a project to be viable, three factors have to come together,” he told Utility Dive.
First, the market needs costs and incentives that make solar financially beneficial for the customer, he said. Second, there must be a solar-suitable roof. Third, the customer must have "a long-term commitment."
Third-party financing through a PPA is the common approach in C&I solar today and was used for the Home Depot project, Quinlivan said. Constellation Energy is the project owner while GE Renewable Energy was the developer and builder. Constellation will maintain the project and deliver "a predictable amount of power at a predictable, fully contracted price, over the 15-year PPA term," he added.
This long term commitment is also a challenge, however.
Much of the commercial real estate industry "has struggled over the last five years with the length of time they are willing to commit to a building and to serving their electric load at that building," Quinlivan said. "The retail industry trend is downsizing of physical footprints and negotiating shorter lease terms on big box warehouses and distribution centers.That means there is a limited selection of viable projects in the C&I space."
One alternative for customers is an assignable PPA, though there is no guarantee the next tenant will want solar, according to Quinlivan. "Incurring an early termination fee is not appealing, but it can be part of normal winding down expenses," he said. Other alternatives include contracting for an offsite renewables facility or contracting for a share of a community solar project.
Constellation’s fastest growing customer base is municipalities and school systems. "They have long-term commitments to their facilities and they save money from year one," Quinlivan said.
The utility typically avoids projects at multi-tenant buildings because it can get complicated. "It depends on who retains the roof rights," he said.
Constellation has not yet seen enough deployment of solar-plus-storage to prove its commercial viability, but it is coming, Quinlivan said. "Over the next 18 months to 24 months, we're going to see a great deal of deployment."
Solar Finance Council's Mendelsohn said many utilities now reassessing their business models and revenue opportunities can leverage groundwork done by the solar industry.
"C&I solar is already a great business opportunity," he said. "For utilities, it can be a way to extend customer engagement and maintain or even grow their rate base. They just need to look at how the world is moving."