This blog was originally published at CivicSolar.com by Charlie Seltzer.
The property-assessed clean energy (PACE) model is an innovative mechanism for financing energy efficiency and renewable energy improvements on private property. PACE programs allow local governments, state governments, or other inter-jurisdictional authorities, when authorized by state law, to fund the up-front cost of energy improvements on commercial and residential properties, which are paid back over time by the property owners.
For a primer on PACE financing see HERE.
While Utility and Residential solar grew more than 50% annually (from 2012-2015, no exact 2016 numbers yet), the Commercial sector’s growth has been relatively flat since 2012. Fortune 100 companies such as Apple, Walmart, Target, and Prologis, along with Community Solar programs are dominating the Commercial sector which means that the private, small and medium-sized businesses (SMB), which make up a significant portion of America’s GDP and employment are not taking advantage of solar. It’s not for a lack of opportunity.
NREL estimates that there is more than 500 GW of potential solar capacity for SMB. The main challenges facing this sector are a lack of competitive financing, non-owner occupied properties, long sales cycles, high customer acquisition costs, solar’s economics, and interconnection and utility rate design. Leading solar research institutions such as the Rocky Mountain Institute and Greentech Media have vigorously studied increasing Commercial solar deployment and have determined there’s not one simple solution for this sector. However, contractors interested in commercial solar should have PACE (if available in their area) in their toolbox because it is as much a customer acquisition tool as it is a financing solution by effectively addressing commercial solar’s key barriers.
Here are four more ways you can benefit from using PACE:
Reduces sales cycle time
Though a silver bullet does not exist, Commercial PACE (C-PACE) significantly improves customer acquisition. Solar contractors can instantly know if a property or business qualifies for a PACE loan by using PACE providers’ property search tools. These tools can also identify a loan’s respective terms and the loan’s size. This helps reduce the sales cycle for C&I projects since obtaining competitive financing can be an arduous process when private businesses have unrated credit. PPAs and debt financing can have high due diligence costs so projects less than 250 kW do not pencil economically for the financing institution. PACE programs, such as Ygrene, can go as low as $5,000. Generally, PPAs and third-party financing are not available for companies that have below investment grade credit, but C-PACE will work for “B” grade companies since the loan depends on the mortgage and staying current on taxes. By using C-PACE, contractors can pre-determine the business’ financing terms before engaging with them.
Solves nonowner occupied properties and split-incentive challenges
Most businesses do not own their property and this complicates solar projects because lessors are reluctant to invest in a solar project. Additionally, since real estate tends to change ownership every 5 to 7 years and if there’s not a high level of certainty they will recover their investment on a capital expenditure such as solar, it is unlikely they will do a project with a payback period longer than 5 years. Having a long term loan or a PPA on the property could complicate the property’s sale and the owner may have to pay off the loan’s or PPA’s balance before selling the property. C-PACE helps customer acquisition by solving non-owner occupied property and “split incentive” challenges.
Many leases are Triple Net Leases (the lessee pays taxes, insurances, and maintenance) and require the lessee to also pay utilities. This creates the “split-incentive” problem because the lessor does not have the incentive to invest in a solar project because they do not pay energy costs or are responsible for building upgrades; the lessee would benefit from a solar project but since they do not own the property, they cannot make a capital expenditure. With a PACE loan the lessee will always pay 100% for the solar project and also take advantage of tax incentives and depreciate the asset. Traditionally solar contractors have avoided non-owner occupied business but PACE makes more of them prospective customers.
Makes solar more attractive from capital budgeting perspective
PACE also improves solar’s economics, from a capital budgeting perspective, because it allows businesses to evaluate solar projects independently from other projects. This greatly helps customer acquisition. Many businesses have limited capital for cost savings projects, especially ones outside of their core functions such as solar. Businesses will also have defined metrics (e.g. payback years or IRR) for capital investments and if project doesn’t meet them they will not consider it. Although solar is a safe and profitable investment, it may not meet a business’ internal metric or not be as attractive as other investments.
Another advantage is PACE provides 100% financing for solar projects so businesses can conserve their cash without affecting debt ratios, covenants, or future borrowing. This is because the PACE loan acts off-Balance Sheet. The PACE loans’ interest rate will also be comparable, if not lower, than a private company’s cost of capital which will make it a more attractive investment. By using C PACE, solar contractors simply have to ensure that the project will reduce energy costs without competing with other business objectives.
Competitive, long-term financing
Besides customer acquisition, C-PACE also offers competitive financing. As mentioned earlier, obtaining financing is challenging in the Commercial sector because businesses do not have FICO scores and private companies’ debt is unrated. Commercial solar projects are a new, and very small, asset class for traditional banks so financing options as attractive as C-PACE are few and far between. C-PACE offers businesses fixed long term financing (20-year loans with rates from 7-8%), which makes bi-annual payments low with no collateral or personal guarantees required (they are non-recourse loans secured by the property). There are few banks or lending institutions that would offer this type of financing for a solar project. Again, non investment-grade businesses can qualify for C-PACE so the solar contractor doesn’t have to worry about whether a business will qualify for financing or not during the sales process.
Despite greatly improving customer acquisition and offering competitive financing, C-PACE is not a panacea for the Commercial sector. If the business is more concerned about having fixed energy payments or wants highest ROI for their solar project, better financing products exist than C-PACE. In order for C-PACE to pencil economically, the business must be able to take advantage of the 30% ITC. Furthermore, the C-PACE lien must be senior to the mortgage and requires the lender to give consent to the PACE loan. However, C-PACE has unique advantages and it makes it easier for more businesses to go solar so contractors interested in this sector need to become familiar with their regional PACE programs.