By transferring a portion of a commercial building’s electricity expenses to its property tax bill, Demeter Power is paving the way for an expansion of distributed solar generation in small- to medium-sized commercial buildings.
Demeter Power, a provider of financing solutions for commercial distributed generation, has been awarded $500,000 through the Department of Energy’s SunShot initiative for its efforts to help commercial buildings overcome a primary obstacle to securing financing for solar power investments: access to credit. SunShot’s aim is to make solar power cost-competitive with other electricity sources by 2020.
“The number-one obstacle that the marketplace is seeing for solar power investments by commercial building owners is credit,” said Demeter co-founder and executive vice president of development Yann Brandt. “For solar financing, credit security is the biggest driver of whether a project can move forward.”
Investing in solar electricity generation capacity is a long-term proposition. Financing models for these kinds of investments, such as leases and power purchasing agreements, tend to have time horizons in the 20-year range. “Like any two-way purchase in solar financing, it’s a guaranteed purchase of electricity for a period of time,” Brandt said.
These long-term agreements require appropriate counterparties, often established through a corporate guarantee provided by a building owner (such as a holding company) with a sufficiently strong balance sheet. But when it comes to smaller commercial spaces, the proprietor could be an individual.
“With smaller companies, sometimes you need a personal guarantee from company owners, which makes the project even more difficult: you’re putting your own personal balance sheet on the line for the transaction,” Brandt said.
Demeter’s solar financing product helps to avoid the corporate guarantee requirement by enabling building owners and tenants to shift a share of the building’s utility bill to its property tax bill. Demeter’s solar financing product builds on the Property Assessed Clean Energy (PACE) program, under which solar projects can be eligible for loans which are then paid back through property tax bills over a fifteen- to twenty-year period. When a building changes hands, so does the PACE assessment.
“The insides of the buildings may often change in terms of who’s operating it and what its business needs are, but the building will be there for decades,” Brandt said. “By shifting some of the electric bill to the building, we allow building owners and tenants to hedge future price increases, take advantage of immediate savings, at the same time adding solar, which we know from data points that many businesses want.”
In addition to shifting liabilities associated with solar financing agreements, PACE offers a means of standardizing -- and potentially pooling -- smaller solar projects with similar credit profiles.
“We leverage the power of solar financing products -- PPAs, leases, solar services agreements -- and merge them with the power of PACE, which is a credit-enhancement and uniformity tool,” Brandt said. “By securing the revenues as a PACE assessment, we bring uniformity to solar transactions, which lowers transaction costs for smaller projects.”
And uniformity and scale are key to achieving securitization, an outcome the solar industry has been pursuing in a variety of ways.
Near-term target markets for Demeter’s solar financing products include areas where PACE is an enabled regulation and utility rates provide for the viability of scaled, commercial solar, such as northern and southern California. Other markets offering opportunities for growth include Washington, D.C. and Connecticut, and looking farther out, Midwestern states such as Ohio, Minnesota and Michigan.
And the SunShot award will allow the company to accelerate expansion of its reach. “It enables us to help the solar market by bringing the financing product to more contractors and solar developers and impacting how fast we go to market,” Brandt said.
“At the end of the day, the goal of the award is to lower the cost of solar, and we do this in a very specific way,” Brandt said. “Securitization is one avenue, and access to long-term capital on a repeated basis through PACE loans is another. We can do more with less sponsor equity capital.”
“What the solar industry is missing is a uniform credit profile. More efficiency, access to capital -- those things fall in the hands of establishing a strong credit profile. We want the industry to look at PACE as a credit enhancement product,” Brandt said.