Solar Leasing

Utilities have yet to turn their fire on solar feed-in

San Diego-based OneRoof Energy is making a bid for a piece of the booming market for rooftop-solar leases on homes.

Backed by $50 million in recent financing, the solar startup is approaching homeowners as they build or replace a roof, offering thin solar panels that double as roofing tiles — an aesthetic that blends in with non-solar houses.

By forging a partnership with an established roofing company, OneRoof intends to compete for market share with pioneers like SolarCity and SunRun that lease photovoltaic systems back to the customer or sell rooftop-generated power under a purchase agreement.

So-called “third-party” solar companies, which own thousands upon thousands of rooftop arrays, are thriving based on a curious anomaly of government incentives for rooftop solar.

Corporations are much better positioned than most individuals to collect and repackage government incentives, including federal investment tax credits and deductions for accelerated depreciation.  Utilities haven’t yet complained about solar in the way they once did with industrial cogeneration. Yet its still early. In time, third-party leasing and financing could remake the landscape just as off-balance-sheet project financing paved the way for independent power producers.

On the plus side, customer solar could help utilities fulfill their obligations under renewable portfolio standards (RPS) without having to fund the capital costs themselves or buy a power purchase agreement. A customer leased, third-party-installed, and net-metered solar panel comes without any obligation on the utility’s part, other than to interconnect and meter it. For a retail utility, this might well look attractive. At the same time, however, the meter is running backwards.

How it works

“It has been structured through the tax code that it’s more efficient for a third party to monetize those tax credits than a homeowner,” explained David Field, CEO of OneRoof.

In California, third-party leases are expected to account for almost three out of four new rooftop solar installations this year, after surpassing the 50 percent mark last year, according to the California Center for Sustainable Energy.

Operating out of a business park in the University City area outside La Jolla, OneRoof’s call center quickly provides lease estimates to customers based on their street address, using three-dimensional mapping technology to study roof angles and surface areas.

Field said OneRoof’s initial goal is to provide more than 3,000 leases by the end of the year, but he and his colleagues are planning ahead for much more rapid growth as solar leases gain acceptance.

“It’s becoming more mainstream,” Field said of rooftop solar leases. “And as it becomes mainstream, you have to say, ‘How do I do this thoughtfully and expand this business into more than a current opportunity?’ ”

OneRoof’s answer has been to partner with exterior building materials company CertainTeed and its network of contractors, helping train roofers as solar installers and sales agents.

Finding an installer

That partnership, which also involves electrical services company IES, is intended to provide economies of scale on materials, labor, warranties and more.

“Now I can point to a $5 billion company and say this is my partner,” said Field, referring to revenues at the Saint-Gobain subsidiary.

Field compared launching OneRoof to the building of a utility company, where returns are compiled over decades.

At the same time, he believes the rooftop lease market is moving toward securitization — the bundling of leases for sale to institutional investors — possibly by the end of the year.

OneRoof leases include a performance guarantee designed to ensure savings on utility costs.

Companies like OneRoof are capable of turning a profit while still matching the long-term cost efficiencies of a purchased rooftop system because of the structure of the federal tax code and additional state incentives in California, said Ben Airth, residential solar program manager for the California Solar Initiative. The state initiative is gradually lowering and phasing out its per-watt solar rebates that extend to third-party owned systems.

“They are passing along the tax credit benefits and the depreciation and the incentive from us to that homeowner, giving them an upfront cost that is significantly less,” he said.

Individuals cannot deduct for accelerated depreciation on solar equipment as businesses can, and the 30 percent tax credit does not always fit neatly into household finances.

“My big question is what’s going to happen when the tax credit goes back down to 10 percent” in 2016, Airth said.

Field said rising energy prices and declining solar equipment costs act as insurance against the investment tax credit deadline and expirations of other government incentives.

A recent study of Southern California by the National Renewable Energy Laboratory found the solar-lease model picking up a new customer demographic in neighborhoods that previously had few customer-owned rooftop systems, where average family income ran from $100,000 to $150,000.

Growing Market

OneRoof is currently expanding operations to Hawaii and later plans to do the same in Arizona, Colorado and beyond. The business has 35 employees and plans to grow to 100 by the end of the year.

OneRoof received $50 million in financing late last year through agreements with Hanwha International, of the South Korean conglomerate Hanwha Group; a subsidiary of US Bancorp; and with alternative-energy and clean-tech investment fund Black Coral Capital. Hanwha became a minority partner, while Black Coral and Bancorp invested in solar leases.

Field, a veteran of several energy and clean-tech ventures, sees OneRoof as more than a business opportunity. His environmental credentials include a three-year stint as president of San Diego Coastkeeper, a nonprofit devoted to safeguarding inland and coastal waters and wildlife.

“I can have a bigger impact doing this than anywhere else, as long as it’s done in a thoughtful, responsible, long-term way,” Field said.

Solar project financing has long proven difficult – for homeowners especially, but also for governments and commercial and industrial (C&I) customers. Now, with third-party financing winning converts, utilities are seen as supportive, yet watchful.

Price is key on the residential side. If costs fall far enough for small-scale installations, and if financing becomes a no-brainer, homeowners could flood utility distribution systems with customer-owned solar, posing operational problems and threatening stranded costs, both for generation and T&D assets.

Ditto for government and corporate installations. And the bigger the installation, the bigger the threat.

Third-Party Financing

Smart Energy Capital represents the new breed of solar lease financier. The company designs, develops, constructs, and operates solar projects for commercial and government power users, real estate investors, and utilities. It also develops and executes financing.

By the end of 201 1, Smart Energy Capital had 40 MW of projects operational – 8 MW on the net-metered side ( 1 2 schools and eight other government facilities), and 32 MW on the utility side (four projects with Sacramento Municipal Utility District).

“Solar has reached a level of complexity that is difficult to find anywhere else,” says Mike Grenier, managing partner. “Especially with the interaction between the technical side, the commercial requirements, tax issues, and the financing.

“We meet a need for institutional investors.”

The challenge for such investors, Grenier says, is that solar projects tend to be relatively small. “From an institutional investor’s standpoint, even a 20MW project is a small deal,” he states. “They can’t afford to do small deals one at a time on their own. They aren’t set up to do it, they don’t have the expertise to do it, and they wouldn’t be efficient at it. This is where we come in.” Smart Energy Capital aggregates and underwrites these projects for institutional investors and serves as an ongoing asset manager. The company takes deal sizes that range anywhere between $2 million and $50 million, and aggregates them efficiendy, so that investors can deploy capital into an attractive asset class.

“When we talk with institutional investors,” Grenier says, “we emphasize that we have a proven technology with a proven operating history and relatively predictable performance over time.” The company offers a 20-year stream of contractual cash flow backed by investment-grade entities, making it a lowrisk investment, according to Grenier.

However, he admits that challenges and risks remain. One relates to predictability, which, he points out, everyone in the business must address. “There is fundamental policy uncertainty on a federal level, state level, and utility level,” he says.

For customer-owned projects, Smart Energy Capital has created a $180 million financing vehicle for distributed generation projects, partnering with Duke Energy Generation Services (DEGS) and Integrys Energy Services. The companies have created the project finance program to joindy own and operate rooftop and smaller groundmounted photovoltaic (PV) solar projects that deliver electricity to investment-grade C&I and government customers under long-term power purchase agreements. The program can provide 100 percent of the capital required, including long-term debt and equity, tax equity, and construction financing. Smart Energy Capital develops the projects, arranges financing, and provides construction management. That enables DEGS and Integrys to create a streamlined, end-to-end approach to bringing solar projects to market. “Duke and Integrys ended up investing in our fund, because they felt it was the most efficient way to deploy capital into what they expect to be a significant segment of the renewable energy business,” Grenier says.

On the utility side, Grenier reports that IOUs are becoming interested in having the company finance their utility-scale solar projects, especially if they want to meet their RPS requirements. “This option is especially attractive to small municipal utilities that don’t have access to public financing and may only have a small number of people on staff,” he says. For municipal utilities in particular, the company can design a portfolio of peaking plants in their service territories and deliver it in a programmatic way. In addition, public entities can use the tax credits, further lowering the cost of capital. “We will also be announcing a large project with a co-op in the near future,” he adds. If the utilities eventually want to own their own systems, they can buy the project from Smart Energy Capital at some point in the future.

On the net-metered side, Smart Energy Capital’s goal is to focus on Fortune 500 companies, as well as schools and other government facilities. How do utilities feel about such projects, with the risk of losing parts of their customer base?

“Utilities may struggle with the fact that, on the net metered side, these kinds of projects can reduce their revenue base,” Grenier says. “When customers decide to self-generate, this can add up for the utilities. These days, the IOUs are struggling to adapt to a new world where customers have a real choice.”

Part of the problem that utilities see in this area might be solved in the future, when solar grant and tax credit programs expire. “It’s no secret that solar does need a subsidy in order to be cost-competitive,” Grenier says. “If the subsidies go away, the price of power from solar projects will increase.”

For investors, a 25-Year Hedge

Two of Smart Energy Capitals projects recendy were launched in the Town of Prescott Valley, Ariz. In November 201 1 , construction began for two new solar projects designed to save the town more than $1.5 million in electric costs during the next 25 years. Smart Energy Capital and Wilson Electric will build and maintain the units, which will be located at the town’s water pump stations and wastewater treatment plant. Under the arrangement, Smart Energy Capital will fund all of the development costs and sell 100 percent of the electricity from the four units at a fixed rate per kilowatthour for 25 years.

“The reason we got interested was because we determined that solar would cost less than what we are currendy paying for electric utility service, and we also expected regular electric invoice pricing to continue to rise,” says Kim Moon, capital projects coordinator for the Town of Prescott Valley. “We would like to do even more of these projects in the future. Of course, this would depend on what happens with the tax credits and other financial incentives.”

According to Moon, Arizona Public Service approved the town’s applications, providing renewable energy credits in return, thus being able to retain “bragging rights,” according to Moon. “Since this fulfills some of their obligations, they are a close partner with us on the project,” she says. “They haven’t indicated any concern to us at all about the loss of revenue.”

Solar panel manufacturers also are getting involved in leasing. One of the most comprehensive and active packages of programs is offered by SunPower Corp.

On the residential side, SunPower began offering the SunPower Lease and SunPower Loan programs to residential customers in 2009. “Earlier this year, we announced a partnership with Citi to expand the leasing program to eight states,” says JuUe Blunden, executive vice president of public policy for SunPower. The leasing program provides low monthly payments with no upfront payment, plus a performance guarantee direct from the manufacturer and an early buy-out option that allows homeowners to capitalize on solar home resale values. “We have seen a significant increase in the demand for the SunPower Lease product,” she says.

On the commercial and utility side, one of SunPower’s acquired companies, PowerLigJit, began offering a power purchase agreement in 1999 with a rerail electric company, Green Mountain Energy. Since that time, SunPower has worked with many major finance firms, such as Wells Fargo Bank, Bank of America, and MetLife, to finance commercial and utility projects. “Our large commercial customers continue to have a steady interest in financing, particularly PPAs,” Blunden says. “For example, we’ve had a $100 million finance facility with Wells Fargo in place that has streamlined the financing of projects for customers such as Western Riverside County Regional Wastewater Authority and the City of Tucson.”

According to Blunden, the role that utilities play in supporting net metering policies is critical to the continued growth of the residential and commercial market sectors, as well as the economic and environmental benefits that solar delivers.

“Net metering in states like California empowers residents to install solar power systems, save on their utility bills, and reduce harmful emissions,” she says. “It’s one of the most important tools we have to allow energy consumers to generate their own reliable electricity from the sun.”

Going Beyond the Meter

How do utilities themselves feel about third-party solar financing? It depends on what side of the meter it’s being considered.

Tucson Electric Power is involved in about a dozen of its own solar generation projects of different sizes, mostly 25 MW and under. “Because these are smaller projects, they are considerably easier to finance, and we haven’t had any challenges with finding financing for any of them,” says Carmine Tilghman, director, renewable energy resources. For example, he says the utility is fortunate to be included under the jurisdiction of the North American Development Bank, which has changed its focus from NAFTAtype activities to renewable development within 75 miles on either side of the U.S. border, from California to Texas. “They have been very active and willing to help with financing some of our solar projects,” he says. “They bring what most financial institutions can’t bring to the table, which is a low cost of capital and the ability to bankroll some of these projects. As they told me, since they are government-owned, they don’t have to make money on the projects; they just can’t lose money.” The low cost of capital keeps development costs down, which is a benefit to the utility’s ratepayers.

The retail-metered side is a different story, though, according to Tilghman. “Right now, it is a tough situation for utilities, because utilities are struggling or just broaching the subject with regulatory bodies with regard to lost sales cost recovery,” he says. “This is an issue that needs to be addressed.”

Tilghman believes utilities arem opposed to more solar at the customer premises. “However, they are concerned about issues related to cost recovery, rate freezes, and revenue requirements being predicated on a certain amount of sales,” he says.

“When there’s a mandate to lower their sales, this impacts revenue requirements, which then impacts the business bottom line.” Obviously, according to Tilghman, utilities still need to be responsible for the infrastructure to support the system, in the absence of generation, and there needs to be a fair recovery for the utility to do that.

Overall, though, Tilghman emphasizes that Tucson Electric remains a big supporter of solar, and sees a viable niche for itself even as markets change. “However, right now we believe that the utility itself has the ability to put the most cost-effective solar in place.”

One utility that’s doing just that is Reliant Energy in Houston. “Is it a good thing for customers to be generating their own electricity?” asks GU Horning, manager of product development. “Whether it is or not, it’s going to happen, because consumers want it. So, we want to be the company that provides the solution, and help customers manage and optimize the return on their investments. We want to make it easy for them and also provide flexible options.”

In June 201 1, Reliant Energy launched Reliant Solar Solutions, a program designed to encourage solar power among Texas homeowners. The program is distinguished by features in three main areas: low up-front cost; minimal installation and maintenance hassle; and a strong payback proposition.

Reliants lease structure eliminates the need for homeowners to deal with the high up-front costs of direcdy purchasing solar systems. It allows them to choose how much money they want to put down, and even provides the option to pre-pay their leases. “This allows customers to get into solar for a lot less money,” Horning says. Reliants leasing vehicle is run through NRG SunCap, a fully-owned division of Reliants parent company, NRG.

To manage logistics, Reliant offers a network of professional installers. It also provides a power production guarantee, guaranteeing the output over the 20-year lifespan of the lease. “If it fails to produce at that level, we have a mechanism for reimbursing the difference,” he says. “In addition, since we own the panels, we cover all the maintenance, repairs, and insurance for the life of the lease.”

Finally, the program offers a netmetering plan – which the company calls “sell-back” – in two forms. One is the Reliant e-Sense Sell Back Plan, which offers on-peak and off-peak pricing. The sell-back price is the same as the energy charge for the first 500 kWh returned to the grid. Reliant pays 5 cents per kWh for any additional electricity produced by the customer. The other is the Reliant Sell-Back Plan, which provides price security for 12 months. In addition, Reliant purchases any surplus electricity the customer produces. It provides a bill credit for the first 500 kWh of excess electricity that the customer generates at the full retail energy charge, and pays 5 cents per kWh for any additional electricity that is returned to the grid.

Horning sees Reliants program as gaining in popularity. “Most customers,” he says, “are looking at it from a price security perspective – being able to lock in a large percentage of their usage over the next 20 years at a fixed price, when prices are fairly low.”

“Utilities are just broaching the subject with regard to lost sales cost recovery.”

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