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Financing Commercial Solar: Part 3 - PACE, Crowd Funding and Limitations

06/14/13

  07:08:00 am, by Jim Jenal - Founder & CEO   , 851 words  
Categories: Solar Economics, AB 811/PACE/LACEP Funding, Commercial Solar, Non-profit solar

Financing Commercial Solar: Part 3 - PACE, Crowd Funding and Limitations

In Part 1 of this series on financing commercial solar power systems we explored the basics - cash purchases and commercial loans. Part 2 examined the pros and cons of solar leasing arrangements and Power Purchase Agreements (PPA’s). Today we conclude the series by looking at a couple of more novel approaches: Commercial PACE and Crowd Funding, as well as some overall financing limitations.


Commercial PACE

Commercial PACE in LA CountyAnother option that is starting to appear is PACE financing.  PACE – which stands for Property Assessed Clean Energy – operates in cooperation with a local government, typically a city or county, that agrees to finance solar power systems through the sale of municipal bonds.  Investors purchase the bonds and the proceeds are used to pay for the installation of the solar power system.  The government entity imposes a lien on the property to be paid back over time as an assessment on the annual property tax bills.  If the client chooses to sell the property, the obligation “runs with the land” and is assumed by the new owner (who, of course, also derives the benefit from the solar power system).

Under PACE, there is no personal obligation on behalf of the solar client so neither corporate nor personal credit is at issue.  In theory, PACE has the potential to greatly increase the number of entities that could qualify for solar financing.

Unfortunately, to date PACE has yet to live up to its potential.  Jurisdictions have been slow to adopt PACE programs and even in cities and counties where it has been adopted – such as in Los Angeles County - the pace of PACE-funded projects has been depressingly slow.  Part of that is due to the reluctance of some investors to get up to speed on the benefits of PACE as an investment vehicle, and the (perceived, if not real) inability to resell PACE investments in the secondary market.

Crowd Funding

The latest trend to hit solar financing is that offered by companies like Solar Mosaic which provide an online platform intended to bring together individual investors with selected solar projects.  At the Solar Mosaic website, potential investors can review projects and invest however much they choose, in $25 increments.  However, investors must be “qualified” per SEC rules based on income and/or net worth (without counting autos or residence). Investors who do not satisfy the qualification criteria have their total investment in any twelve months capped at $2,500.

Solar MosaicBy the end of May, 2013, Solar Mosaic had reported funding fourteen projects worth a combined investment of $2.1 million. The loans being provided by Solar Mosaic, however, are not covering the full cost of the systems being built.  Rather, they appear to be limited to something on the order of 25% of the total project cost.

Solar Mosaic offers an innovative, if limited, model for solar project financing.  It will be interesting to see if the crowd funding model succeeds with solar and expands over time as well as whether competitors, like UVest Solar, can build on what Solar Mosaic started.

Financing Limitations

Regardless of the financing vehicle – other than cash purchases – there are some common limitations as to the applicability of any of these methods.  The most common impediment is the size of the project.  Because all of these financing methods involve some amount of overhead, typically small projects are harder to fund, with project thresholds of $150,000 or even $250,000 being common.  While these limits aren’t a problem for mid-sized commercial projects, they can effectively leave small commercial projects in the 30-60kW range unfunded.

The credit worthiness of the solar client is also a consideration for each of these methods except PACE.  Non-profit organizations might find themselves shut-out of all of these funding methods because of concerns for longevity in some cases or simply because they do not pay property tax bills (a deal breaker for PACE programs).

Since non-profits do not qualify for tax benefits, their cash flow improvement is not as great as it is with their for-profit neighbors.  Moreover, whereas a small commercial customer might be able to secure a loan by making a personal guarantee (indeed, that may well be required), with a non-profit organization there is likely no one in a position to make such a guarantee.

More creative approaches may therefore be needed for non-profits.  For example, some non-profits are fortunate enough to have endowment funds that are restricted in how they can be used, but which might exceed many times over the cost of the proposed system.  Diverting some of those funds into a separate, interest-earning account against which the lending institution can attach a lien provides adequate collateral for the lender, with possibly acceptable risk to the endowed funds.

Non-profits that are not so well endowed, but which have a well-established donor base could consider the possibility of creating a free-standing, for-profit corporation to own the solar power system and to provide a PPA back to the system-hosting non-profit.  Since the for-profit owning entity can secure tax benefits, it can make the venture financially viable even if conventional funding cannot be found.


The preceding is an excerpt from Jim Jenal’s upcoming book, “Commercial Solar: Step-by-Step,” due out in July.

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Jim Jenal is the Founder & CEO of Run on Sun, Pasadena's premier installer and integrator of top-of-the-line solar power installations.
Run on Sun also offers solar consulting services, working with consumers, utilities, and municipalities to help them make solar power affordable and reliable.

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