Solar for Rent

Oct 1, 2008 12:00 PM, By Beck Ireland, Staff Writer

Michaels agrees. “Most PPA providers typically focus on larger systems,” he says. “Everybody has a different threshold of what they need but, for the most part, you're not seeing PPAs on systems under 200kW.”

In fact, Michaels is seeing system sizes increase by 20% every six months. On projects funded by his firm in California, the average system size is about 400kW, but getting closer to a megawatt in size. “Investors are looking for anything greater than 250kW,” Raeke agrees. “Hopefully, in time, as the model becomes more refined, they can offer PPAs on smaller and smaller systems.”

Most commercial solar power installations are grid-connected. “They don't have to be connected to the grid, and involved in net metering but it helps with the ROI,” says Green. “The whole trick to a solar energy system is to come to as close to zero as humanly possible without overproducing. If you do overproduce, net metering helps you out with the averaging. You can always draw it out and spin your meter the other way and recapture your electricity.”

Prior to net metering, designers of the solar power systems had to carefully size the systems. “We also had to account for losing Sunday's production because most companies aren't open on Sunday,” Green continues. “Anything they produced on that day, they lost.”

Because of their differing policies regarding solar power systems, some states are more hospitable to the conditions of meaningful ROI on commercial solar power systems than others. For instance, Washington State's low electricity rates exclude it from prime commercial solar financing arrangements, as does the cap on systems larger than 50kW in New York City, despite its high power prices and available subsidy. “With state laws changing almost on a monthly basis, we have to move fast to get through these loopholes to make enough money to stay afloat,” says Christopher Quinn, president and CEO, Electron Solar Energy, Miami.

With a 35% tax credit and the highest energy prices in the nation, Hawaii seems like prime real estate for solar energy systems, but there are restrictions on how much PV-generated energy can be put back on the grid. “There's always something,” says Michaels. “All you need is one variable to not be there for something not to happen.”

So far, California seems by far the friendliest to these types of financial arrangements. “It's made a 10-year commitment to see this happen,” Michaels says. “Other states that have renewable energy laws have small solar incentive programs, and they don't have some of the other mechanics there for the market to mature from a commercial perspective.”

A new lease

More than any technological advances in photovoltaic (PV) engineering, financial techniques — such as PPAs — are being reported as the driving force behind the growth of the solar power industry. In 2007, 148MW of solar capacity came online, up 46.5% from the previous year, according to the Solar Energy Industries Association, Washington, D.C. Of the national commercial and institutional solar market in 2007, an estimated 50% was developed under PPAs, up from 10% in 2006, according to the GreenTech Media report, which predicts that in 2009, PPAs will be established as the standard way American businesses pay for onsite green power, with yearly additional growth of 30% to 50%. Thus, in 2008 and 2009, PPAs will account for three-quarters of U.S. commercial and industrial solar sales. “The bulk of the major commercial installations are now done with PPAs,” says Raeke of Borrego Solar Systems.

Because of the required conditions for a substantial ROI, commercial solar sales' upward mobility depends on the continuation of government incentives. The big question for the future is the status of the federal ITC, wrote the GreenTech Media report's authors Jon Guice and John D.H. King. The current ITC is set to expire at the end of the calendar year.

Fortunately, the Emergency Economic Stabilization Act of 2008 — the package that allotted $700 billion to the banking industry — includes an eight-year extension of the 30% ITC for solar installations. This was a great relief to many in the solar industry who worried about having to put projects on hiatus until the credits were put back into place. Previously, Michaels believed the federal tax credit wouldn't be renewed to the current level until spring of next year. “I don't think anybody could have predicted the events that would create a climate for this to pass,” he says.

Therefore, SPP planned on timing out its remaining 40 projects for the end of the year. “Our contracts were developed in a way that they all stipulated the projects must be done before the end of the year,” he continues. “We set our benchmark at the end of November to allow for a month of interconnection and testing — the things that must be done to take something live officially.”

Now, because of the renewed tax credits, the solar industry will be able to continue with business as usual. “The industry is going to be able to move forward,” Michaels says. “A lot of customers who were waiting to see if they should proceed will be able to determine how they want to move forward. It's going to create a significant amount of the market coming to the table to move things along for next year. It's prevented a potential six-month lag.”

Because of higher overhead costs, those that would have felt the pinch of that six-month lag the most would have been the installation and construction side: the solar contractors. “Nobody was going to start building the project until they knew the tax credit would be there,” Michaels says. “For us, as a developer, we don't have the trucks and the large overhead that installers do, and so it's largely those types of organizations that were going to be the most burdened and troubled by this delay.”

However, even with the renewed federal ITC, embarking on new projects in such a newly popular industry is not without risk. One unfortunate aspect of the solar industry is that sometimes its customers aren't always serious about going through with the installation or experience sticker shock and end up pulling what they consider a non-essential project. “If you get three month's work into a project, and then the customer declines to pull the trigger, you're out a lot of money,” Quinn says. “I have a number of projects that we have $3,000 to $5,000 invested in each, with engineering, that the customer has yet to close.”

Therefore, says Quinn, down payments are a necessary proof of the customer's commitment. “It's a fledgling industry, and it's all happening right now,” Quinn says. “There are four different ways to go with technology, and there are three different ways to go with financing. It's important to get a down payment up-front before even engineering or financing options. You need to get a commitment from the customer.”

Sidebar: Financing for the Residential Market

Unlike the commercial solar industry, residential solar is driven less by a return on investment (ROI) and more on concern for the environment. “Half the sales that are happening in the residential space are an emotional sale,” says Todd Michaels, VP of project development and marketing, Solar Power Partners, Mill Valley, Calif. “It's not necessarily for cost benefit.”

Although residential solar systems can pay for themselves in as little as five to seven years, up-front costs have been a major barrier to installation on the majority of America's rooftops. Formerly, residential tax credits were capped at $2,000, resulting in a stunted residential market. For instance, in solar-friendly California, fewer than 1% of homeowners have solar power. However, in addition to renewing the 30% investment tax credit (ITC) for commercial and industrial applications, the Emergency Economic Stabilization Act of 2008 also removes the residential cap. “Finally, the federal government has implemented a set of policies that will spur the long-term growth of the solar industry,” says Barry Cinnamon, CEO of Akeena Solar, Los Gatos, Calif. “Our customers can now achieve a payback on their solar investment in five years instead of 10, with a 20% ROI. In today's uncertain economy, rooftop solar power may be the very best investment a homeowner can make.”

Even so, several companies have set up financing options to combat the large up-front costs to ease homeowners into solar investment. For instance, Electron Solar Energy, Miami, manufacturer of wire, cable, and solar panel mounting hardware, as well as a commercial and residential service installer, recently partnered with Clean Power Finance, San Francisco, to provide estimates and financing options to the company's home and commercial solar energy clients. Prior to this arrangement, Electron Solar's residential customers had to provide a down payment between $40,000 and $50,000. Under the terms of the new financial arrangement, the up-front payment can be reduced to as little as $10,000.

“The customer can come in with a down payment, similar to buying a vehicle, and then just give us a several hundred dollar monthly payment,” says Christopher Quinn, president and CEO of Electron Solar Energy in Miami. “The loan can be stretched out over different time periods: 10 to 30 years. Also, it can be rolled back into a complete refinance of the house, so the up-front cost is greatly reduced.”