A Zero-Day Payback Time for Solar Projects

A Zero-Day Payback Time for Solar Projects

Author: Matt Cheney

New models in third-party financing for solar-power projects can make the high upfront cost of installation -- the major obstacle to companies going solar -- a thing of the past.

The greening of corporate America is all the rage. But ask any CFO their thoughts on going solar and you'll find that upfront cost is the single greatest obstacle to adoption today. New financial tools coupled with a change of perspective on the way we present pricing can translate intimidating system costs into predictable power bills -- and ultimately help speed the solar sale.

For the renewable energy market at large, third-party finance directs large amounts of capital into what is currently a relatively fragmented, inefficient marketplace. Like the car loan did for the auto industry and the calling plan did for cellular technologies, the rise of the PPA and other new finance models streamline the market and enable the speedy adoption of solar energy.

Delivering a solar energy system that makes good business sense to a corporate customer is a difficult undertaking. Solar energy remains one of the most expensive sources of electricity.

A new 1-megawatt system can require an investment of several million with break-even time frame of a decade, a prospect that almost always garners a lower ROI than dollars spent toward the company's core business. A widget supplier would undoubtedly rather increase its capability to sell more widgets than become an electricity producer, however valuable the green marketing cachet.

The switch to solar also impacts operations. Energy consumers are generally not pre-loaded with expertise in the ins and outs of energy generation and system management. Owning a new large-scale solar system essentially requires that the organization function as a utility, again a redirection of time and resources that few corporations savor.

So why require a financial and operational leap into the unknown? Companies know all to well how to pay an electricity bill. Turn on a light, pay for the kilowatt-hours: this is a familiar concept. Rather than fighting convention, the solar energy industry should make the most of a pricing model that already resonates with those larger energy consumers.

The days of expecting large-scale energy customers to self-finance are on their last leg. New models in third-party finance, ownership and operation are quickly advancing the renewable energy market beyond early adopters by offering customers exactly what they want -- clean, predictably priced electricity -- without the cost or hassle of ownership. Designed to meet that need, a Power Purchase Agreement (PPA), functions via a third-party that serves as the owner and operator of the system and sells the power to the site host under a long-term contract.

Making the most of solar's inherently long lifetime, the model essentially translates the daunting upfront cost into electricity pricing paid out over the life of the system.

As far as the customer is concerned, the PPA delivers a power bill just like they'd get from their local utilities, minus the nasty surprises of volatile energy pricing. When financial factors are optimized and the economics of the system line up, the right project can deliver electricity priced below the commercial customer's local utility rates from day one. For corporate interests with a green directive, the economically viable system delivers additional value in the form of green marketing kudos. In short, it's a value proposition that few corporate forces can resist.

Despite the opportunity involved in taking the system cost off the customer's plate, navigating the waters of project finance and third-party ownership to make economic ends meet is not a simple undertaking.

More than 20 factors need to be assessed and optimized: Federal and regional incentives and tax credits, which should offset 40-50 percent of a new system cost, need to be understood and applied. Additional revenue from the management and sale of renewable energy credits (RECs) needs to be captured without compromising the customer's green directive. Credit histories and insurance rates need to be explored given the long-term nature of the PPAs. Technology options and system engineering lend another caveat to the finance puzzle.

As a finance partner to a spectrum of solar product and service providers, we at MMA Renewable Ventures are finding that the model resonates with equipment suppliers, integrators and developers all looking to speed their sale and avoid project management roadblocks. In addition to the obvious benefits of speedy cash for new projects, an experienced third-party financier can fill the role of a project problem solver. Rather than spending the time handing permitting, credit risks, tax code, system insurance and the other variables mentioned above, renewable energy service and equipment providers can pass that responsibility along to a third party and get back to doing what they do best.

For the renewable energy market at large, third-party finance directs large amounts of capital into what is currently a relatively fragmented, inefficient marketplace. Like the car loan did for the auto industry and the calling plan did for cellular technologies, the rise of the PPA and other new finance models streamline the market and enable the speedy adoption of solar energy.

In the simplest terms, innovative approaches to third-party finance help commercial energy consumers, service providers and investors alike focus on their core competencies to leapfrog the solar industry forward.

With all that benefit waiting to be unleashed, why aren't we already selling solar in a world where third-party finance is the norm? In our visits to prospective commercial customers, one barrier consistently rises to the top -- a simple lack of education. We find that the CFOs, energy managers and decision makers are generally unaware of the PPA model, leases and other third-party finance options available to them.

However, once the concepts of zero upfront capital cost and set long-term electricity pricing are made clear, solar energy starts to make real economic sense to those corporate stakeholders. Action is needed on all the part of all of us in the solar industry -- the directive is simple enough: review the options, collaborate with project finance teams, and help your customers understand that financial resources exist to help make solar as good for business as it is for the environment.

Matt Cheney is the Chief Executive Officer of San Francisco, California-based MMA Renewable Ventures.