Creative ways to finance solar and storage systems

Creative ways to finance solar and storage systems

Illustration of solar PV in the shape of a battery
As more customers are sold on solar technology, batteries remain the riskier bet.

Solar energy storage systems are not yet widely used. And this lack of popularity can make storage systems difficult to finance.

Creative and tactical approaches to financing these systems were the topic of a crowded, overbooked panel discussion with a diverse audience.

Speakers offered strategic advice on energy storage financing at the Solar Power Northeast conference, held by the Solar Energy Industries Association (SEIA) in Boston in early February.

The panel was moderated by Joel Meister, an associate at Foley & Lardner, LLP, a large international law firm with an extensive energy practice. Panel members represented Altus Power America, Foley Hoag, SunPower and GoldenSet Capital Partners.

Solar energy storage is critical to the widespread expansion of solar energy generation. Because the solar resource is intermittent, storage is key to both ensuring sufficient energy to meet demand, most notably after sundown each evening and also for improved grid functionality.

However, this is still a relatively new technology. Thus, both the investors and the IRS are still learning exactly how to structure the deals to ensure a given project meets the necessary criteria and risk is minimized.

In particular, tax equity investors considering possible solar and storage combination projects look for size, certainty and simplicity, all markers of a safe investment.

Start with the Investment Tax Credit

A key factor in financing a successful combination solar and storage project involves taking full advantage of state and federal tax credits. The most important benefit is the investment tax credit (ITC).

The ITC, sometimes termed the federal solar tax credit, allows for the deduction of up to 30 percent of the cost of solar energy technology for either residential or commercial customers. The ITC was established in the 2005 Energy Policy Act and has been a key component in making distributed solar energy systems financially achievable.

In order to assure that the ITC is a reliable incentive, the solar and storage system must be designed to ensure that the battery is exclusively charged from the solar system and not the grid, the panelists said.

As the panel discussed, even small charges from the grid can reduce or void the applicability of the ITC. That can render the entire development financially undesirable and excessively risky.

However, it is also very difficult to bring a project to life without taking advantage of state-level incentives.

"The ITC is a good place to start, but that doesn’t typically don’t get you all the way there," said Tom Athan, president and co-founder of Altus Power America. Market prices alone usually don’t work.

Massachusetts, California, New York, and Arizona all have good state-level incentive plans. The Solar Massachusetts Renewable Target (SMART) program, for example, has a "storage adder," the compensation rate adder, designed to provide financial payback to customers who produce a net surplus of energy. Producing a surplus is typically only possible with storage.

Add value with storage

Both customers and investors are more hesitant about investing in storage systems because they are unfamiliar with the technology. The project-finance-payback structure is also new to them.

One of the biggest challenges is finding clients, according to the panelists.

"Storage unambiguously adds value," said Christopher Elias, senior manager at SunPower. But convincing customers of this can be difficult.

"Eight years ago, it was hard to find solar customers," Athan said. "But it is easier now because we don’t have to explain everything. But batteries are harder sells. They are riskier."

The panel recommended often starting with previous clients that already have operating solar systems. These customers are familiar with the paybacks and benefits of solar and thus require less persuasion about the added value provided by a storage system.

Using demand charges

Another important aspect of solar and storage systems is demand charge management (DCM), also called "front of the meter" management. Demand charges are assessed to commercial customers to help ensure that their demand will be met at all times.

A solar system can help offset demand charges, as it can provide energy and thus reduce demand during the day.

Storage can aid in DCM by further reducing the off-taker's demand for energy. In high-demand-charge utility markets, the addition of a storage system can, over time, significantly reduce utility bills.

Planning for performance maintenance

The panel also discussed concerns over battery and storage performance and the need for robust, accountable maintenance programs. Reliable warranties are also needed to protect an investment.

Both of these concerns need to be addressed before investors are comfortable with financing a storage project. Warranties add an extra layer of protection, but investors don’t want to take technology risk if they don’t have to.

"If the battery relies on a warranty, it won’t make it," Athan said.

Most solar systems in use today still don’t have storage components, but the industry is continuing to explore creative ways of making the challenge of financing storage systems an achievable next step.

Meister concluded the panel by summing up the trend toward solar storage systems — lots of people are talking about it, but not many are doing it yet. It remains to be seen how extensively adoption will occur as developers and investors see proof in the paybacks.

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