Solar Potential in Small Commercial Sector Finally Recognised

SolarCity snaps up the neglected solar potential in the small commercial market.
Published: Mon 10 Aug 2015

The solar market has quite literally exploded over the past few years thanks to subsidies and a cost reduction in solar equipment and installation.

According to clean energy communications firm and consultancy Mercom Capital, residential and commercial solar installation contributed to a record quarter in the US this year. The firm also reports a major escalation in debt financing which saw a total investment in solar nearly double in the first three months of the year compared to the previous quarter.

Installed capacity in the US has also grown considerably. In 2004, just 15,500 homes had installed PV systems. By 2014, this figure had increased to 600,000. And just two states had an installed solar capacity over 10MW in 2004. This figure has grown to 35 in 2014, with 20 boasting an installed capacity of over 100MW.

Solar energy is also fast-becoming a 'least-cost' option for US utilities. By the end of 2016, The US Solar Energy Industries Association (SEIA) estimates that 40GW of solar will be installed across the states, with 16 installing more than 100MW.

Small commercial’s slow solar growth

While solar in the residential and large commercial sectors is experiencing major growth, the small commercial segment of the market, made up of locations like apartment buildings, office buildings, small businesses, factories, warehouses and hospitals, has been slow to react for a number of reasons.

Residential solar installations, built on standardized transactions and easy access to financing because projects, can be pooled based on homeowner credit scores, is highly attractive as large investors with cheap capital are attracted to homogenous amassed projects and the perception of well-understood credit risk, according to the Energy Finance Report. The utility scale solar market also continues to grow (despite fewer available long-term power purchase agreements) on the strength of decreasing costs and abundant liquidity in the form of very low cost capital driven significantly by yieldcos.

The small commercial market has been faced with challenging transactions that are often just as complex and costly to undertake as large projects. But, the small individual projects fail to carry the economic scale to absorb the cost of complex transaction structure and execution. This has left small and medium-size businesses with an appetite for solar with very limited options.

The standardization that has brought down costs for residential pools has also yet to emerge in parallel form to support the small commercial market. Add to this unrated or high credit risk spread across a diverse set of power buyers, which has kept traditional (and inexpensive) capital sources away from this market sector which results in a small and very fractured market segment that has been underserved while the rest of the industry has grown exponentially.

But, this may be about to change.

Tailor-made solar product for small commercial

US solar installer and financier SolarCity has come up with a new solar product made especially for small and medium-sized businesses. The 20-year solar lease product will initially be available only in California, where the Property Assessed Clean Energy (PACE) programme will enable small and medium-sized businesses to pay for solar panels as part of their property taxes. PACE financing has been used for energy efficiency upgrades and is now available for solar systems in California. SolarCity CEO Lyndon Rive says he expects other states to adopt PACE programmes which help make the product viable for SolarCity.

PACE solves the creditworthiness issue by tying the repayment of the solar to property tax, making it much more likely to be repaid than if structured as a separate financing for just the solar property.

With this new product, SolarCity is going after what Mr Rive calls a "neglected" part of the rooftop solar market. While it will only be available in California to start with, SolarCity wants to make this service available countrywide.

SolarCity will be cutting installation costs by 30% for these small businesses and the new mounting system will enable SolarCity to install 20-50% more panels on small commercial customers' rooftops.

The advances in technology, cost-cutting installation, financing and of course good business acumen is expected to make SolarCity's product the first major success story in the small commercial solar market which is crying out for development.

The small commercial solar market is largely untapped and is anyone’s game. The successful development of this market will echo throughout energy industry as the lessons of how to successfully design and standardize small commercial projects are shared with parallel markets.

We can’t help but wonder whether utilities are sharpening their pencils to take advantage of this market potential or are they simply watching another opportunity sail by.

Further reading

Mercom Capital Group- Q1 2015 Solar Funding and M&A Report

SEIA-Solar Energy in the United States: A Decade of Record Growth