Investors are ready for mid-market C&I solar – is solar ready for them?

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The middle market of solar – that non-residential, non-utility scale, pure commercial solar project that’s about 200 kW to 1 MW in size – is historically the trickiest to pull off, despite the seemingly great opportunity for savings, available roof and parking space, and so on.

“The potential of commercial solar has always been something that people generally will look at on a theoretical basis and think, ‘Oh wow, there is a lot of potential in this space. Why is no one tapping into that potential?’” says Michelle Davis, Principal Analyst, US Distributed Solar at Wood Mackenzie Power & Renewables.

This was true even before the tariff threat and various other supply issues, price hikes, looming solar panel tariff threats, wobbly steel pricing and so on [Update: Although the clean energy provisions in the Inflation Reduction Act, like the 10-year extension of the ITC, will certainly help our case here, if passed] . All that aside, the key challenges for commercial & industrial (C&I) middle-market solar specifically:

  • Projects under 1 MW just don’t quite hit the economies of scale that benefit larger projects built offsite.
  • Projects tend to be very bespoke / not enough standardization.
  • Timelines are long, there are a number of barriers along the project timeline.
  • The C&I market is often tied to state driven policies.

“The small and medium commercial solar market over the last couple of years has been pretty flat,” Davis said pointing to 2021 project data that showed slightly less volume than in 2020, partly due to the supply chain constraints knocking plans out of the pipeline.

However, Davis notes that some of these bullets are starting to fall, setting the foundation for the long-awaited mid-market solar C&I’s boom period. Those are my words, not hers, but her words make a pretty good case for it:

State incentives expanding. “We anticipate a couple years of pretty high growth because there are a number of states that have implemented new incentives or renewable portfolio standards, or they’ve expanded upon previous programs  that they’ve had in place.” Specifically here, we’re talking about Massachusetts, New York, Illinois, Maine and New Jersey, all of which are drawing serious investor interest. Leading to key point No. 2…

The maturation of financiers and asset owners. The financiers and project owners at the top of the heap continue to grab more and more market share, with the top 10’s share going from 26% in 2019 to 34% in 2021.

“The implications of that number continuing to rise means that some commercial asset owners are starting to achieve their goal of creating some amount of standardization in this industry,” Davis says.

The feeling is financiers and asset owners are more comfortable with diversity of this segment, investors are more comfortable with how these projects perform, and developers are more adept at prepping their end of things. the bespoke nature of the projects in this segment is much less of an issue.  and developers/asset owners get more efficient at financing projects, even as they continue to have a variety of traits.

“The projects themselves are still pretty bespoke, but these players are finding ways to deal with it more efficiently and effectively,” Davis says.

Davis points specifically to the financing platform model of CleanCapital, which has made a number of big acquisitions this year, solidifying the company’s spot as one of the Top 10 mid-market solar asset owners. In June, the company announced it had acquired BQ Energy, the largest U.S. brownfield developer with a GW pipeline in development. Following that was CleanCapital’s entrance into Guam with a 36.6 MW solar facility – the company’s single largest acquisition to date.  

“What the general consolidation of asset ownership and commercial solar development is showcasing is that a lot of these asset owners who are financing these projects and want to own them for the long term are finding ways to underwrite diverse assets in a way that is broadly appealing to investors,” she says.

Good news for local contractors

The emergence and steady growth of companies like CleanCapital, as they fund and develop the mid-market C&I solar sector, opens up more opportunity for the small, local contractors to actually do the engineering and installation.  

The key for local EPCs is to plan accordingly.

“If you’re a developer or you’re an EPC of commercial solar projects, you can accomplish a lot if you make sure that your processes are set up and the projects that you develop have the right traits that investors are looking for,” Davis says. “The CleanCapitals of the world have access to funds that they want to deploy and they are experienced enough to seek out projects that meet those investors requirements.”

That’s positive news for smart EPCs. There are plenty of C&I solar projects out there. There’s also a significant number of deep-pocketed investors looking to supply financing. The problem is the overlap of the projects that investors want to fund, and the available projects that meet those criteria, is still too small.

“If you want to grow this industry, the main goal is to make the overlap bigger. I think developers and EPCs have some room for improvement in terms of making sure their projects have ‘XYZ traits’ that investors are looking for. Additionally, they need to make sure that they’ve set up documentation along the way so that when it comes time for due diligence, when it comes time for financing, they can automatically send the materials over, step into the process and accelerate the project development timeline. It’s those processes that make financing in this industry difficult.”

What project traits do investors look for?

First off, investors want commercial solar projects with investment grade credit off-takers. If you don’t have that, which is increasingly the case, you need to have clear, transparent documentation demonstrating how the project off-taker will “be around for a while.” This is why municipalities are often a big target.

“You can probably imagine how different finance shops and investors and developers are all going to have different types of criteria for what that means, and no one has necessarily solved that. How do you quickly set up some standardization across multiple stakeholders with variable requirements? That’s why everyone’s underwriting criteria is their proprietary secret sauce.”

Then you have a host of other traits related not necessarily to the off-taker, but to project performance and quality. Will it have Tier 1 equipment? What’s the track record of the EPC? Do you have solid modeling assumptions for the energy yield  that the system is going to produce?

Does storage make a PV asset more attractive?

The answer could be a resounding yes or no depending on where the project is located. For the most part, in most areas, that answer is no.

“A savvy developer who can demonstrate to an investor that performance around this project has better returns because of the storage, because of time of use rates or simply due to lucrative participation in wholesale markets can be at an advantage,” Davis says.

But energy storage is also still just too complicated, and “anything more complicated in this industry makes it that much less likely that a project is going to move forward or be financed.”

Developers right now are struggling to calculate the value proposition of solar + storage outside of the most compelling markets like California or Massachusetts, where there’s literally a requirement that any distributed solar project you build that’s over 500 kW has to have storage attached.

 “Storage is still expensive and usually lengthens the payback period for commercial solar customers. If the amount of time needed to recoup the investment is too lengthy, there will be substantially less incentive,” Davis says, giving us all one last reminder of why C&I solar is a tough game, despite the potential: “Commercial customers have a variety of projects that they can invest in that may offer quicker ROI. Paying attention to solar and putting solar on their roof is not their main business purpose.”

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