Success in our highly competitive solar market is often defined by “transactional efficiency,” or the ability to simultaneously lower costs and negotiate and implement solar projects quickly, at considerable volume, and with consistent high quality.
To that effect, the Solar Energy Industries Association (SEIA) is working on a platform of elements to help speed the solar development process, mitigate burdensome transaction costs and scale the industry to underserved geographic markets and end-use segments.
Transactional efficiency is particularly relevant to the small-medium commercial and industrial (C&I) sector, and specifically projects serving the behind-the-meter portion of the C&I spectrum.
This difficult-to-serve market comprises the majority of the country’s commercial real estate. Among other things, CRE owners and tenants generally have “unrated credits” and are, therefore, difficult to underwrite long-term solar projects for.
And although the aggregate potential for distributed C&I solar is extraordinary — much higher than the installed capacity to date — these projects are individually small in size, and constrained by available roof space and/or load requirements. Developers in this sector continually battle tight margins and counterparties with limited bandwidth to focus on negotiating a solar contract or evaluating the value proposition of the investment, even if very convincing.
Over the past couple of years, SEIA has been focused on this sector and how to unlock its enormous potential.
To that effect, SEIA’s C&I Working Group recently issued a new model power-purchase agreement (PPA). The document represents an improved version of its predecessor — first issued by National Renewable Energy Lab’s Solar Access to Public Capital (SAPC) working group — and incorporates critical learning from dozens of top law firms, development entities and financing stakeholders.
Overall, the PPA could lead to dramatically lower legal and other due diligence costs of solar.
According to Dirk Michels, partner at Ballard Spahr and one of the leading authors of the new PPA, “if the SEIA C&I PPA and embedded access license were to be used, instead of a fully negotiated PPA and Site Agreement, the legal cost of negotiation could drop from approximately $20,000 and more currently for a small to medium-size behind-the-meter C&I project to considerably less than $5,000.”
Specifically, the new PPA:
- is notably shorter than the NREL SAPC form, reducing the length from 36 to 23 pages
- is more clear and concise and easier to navigate for both development entities and their offtaker counterparties
- modernizes terms used by industry entities — rather than referring to environmental attributes and incentives dozens of times, the revised version concisely refers to renewables energy credits and incentives
- perhaps most significantly, provides better balance of risk and eliminates uncertainty between the seller and offtaker in determining the final price of power due to unforeseen occurrences
Ongoing expansion of SEIA’s model contract suite includes a PACE addendum to combine the benefits of PPAs and property-assessed clean energy, as well as a storage addendum to facilitate solar-plus-storage contracts — two areas that could lead to significant growth in solar deployments.
But consistent offtake contracts are only one key piece of the puzzle.
Other puzzle pieces include consistent installation and risk management protocols. These are areas SEIA continues to work on with its membership to build consensus around best practices.
Perhaps the greatest potential benefit of standardization is in the industry’s continuous need to raise capital. Local and regional bank entities, private investors and corporations represent significant potential supply of tax equity and debt capital, but they remain largely untapped. Without consistent documentation and other infrastructure in place, these potential investors must develop and maintain expensive systems and expertise to conduct due diligence and asset management tasks on their own.
Banks and other potential providers of low-cost debt capital also seek long-term liquidity or “take-out” options, i.e., so that they are not required to hold the investment over the entire contracted life of the asset. More mature asset classes, such as mortgages and auto loans, rely on the bundling and securitization of cash flows for purchase by pension funds, insurance companies and other capital market investors who seek long-dated investments and the safety of portfolio techniques.
And the need for low-cost debt will only expand: As the industry works to maintain its growth objectives, and as the ITC essentially fades from use early in the next decade, the need for access to broad swaths of debt will become increasingly relevant.
SEIA and its members are currently researching innovative mechanisms to pool C&I project cash flows at sufficient volume necessary to attract capital market investment. Solar asset consistency will be critical to solving an array of relevant barriers.
In sum, the faster and further the C&I solar sector can build and adopt the asset consistency infrastructure, the better the industry can create a landscape that facilitates deployment speed and capital formation. Check out the new SEIA C&I PPA and our various other activities to make this a reality here.
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