PPA evolution propels commercial rooftop market

A number of engineering, procurement and construction (EPC) companies have recently moved into the commercial space through mergers or acquisitions, at the same time that financiers have made direct investments in installers and developers. And as commercial power purchase agreements (PPAs) mature in the PV industry and more types of financiers get involved in larger commercial solar projects, transaction costs and other savings will drop, sources agree.
One entity that has been studying the commercial rooftop potential is the California Public Utilities Commission (CPUC), which hired Black & Veatch Corp. to conduct aerial imagery studies that would help developers and utilities determine where to strategically locate rooftop deals. “We did the first aerial study in 2009 and found that parking lots offered a larger potential than the commercial rooftops themselves, and if you combine them you get a much larger project. This approach is driving more deals now,” says Ryan Pletka, the Director of Renewable Energy Projects for Black & Veatch Corp., in San Francisco. The cost of the parking structure can add a 15 – 20% premium to the cost of the parking lot installations, he notes.
“We are also finding that you can get dense concentrations of sites, like the area around Ontario (California) Airport, where the local warehouses could support a couple of gigawatts alone,” he says. Apart from the CPUC, one California utility has also utilized Black & Veatch’s aerial analysis for solar planning, he notes.
According to a study by the Center for Environmental Innovation in Roofing, in Washington, D.C., that draws on data from the U.S. Census Bureau, there are 50 billion square feet of commercial flat rooftops in the United States, of which about 25% are loosely estimated to be suitable for solar. Assuming that solar power production might amount to 10 watts per square foot during daylight hours, the potential for U.S. commercial rooftops would then be close to 125 GW.
Since solar installations frequently require new roof installations on flat host roofs, the U.S. market for commercial re-roofing might also indicate the scope of the opportunity for new solar installations. According to analysts at Principia, in Malvern, Pennsylvania, U.S. commercial roofing contracts this year will amount to 6.6 million square feet valued at $5.3 billion.
One particularly promising segment of the commercial rooftop market is academia. “The solar adoption potential is just enormous in the academic world, within which a major driver is the American College & University Presidents’ Climate Commitment (Acupcc), a carbon neutral document now signed by 750 leading academic institutions out of 3,000 in the United States,” says Ted Flanigan, President of EcoMotion, a solar consultancy and management company based in Irvine, California. Launched in 2006, the program has led academic campuses to be a leading solar host group in the United States.

Large arrays close to the meter

Trends in commercial PV are beginning close to the point of consumption. “One of the things we are seeing on the commercial side is a trend toward larger projects of 10 to 20 MW behind the meter, particularly among institutions, large industrial complexes, campuses, and universities,” says Pletka. “In these cases, the single off-taker sets up a request for proposals and gets pretty aggressive pricing, with substantial savings,” he says. “At that scale it is not so much the case that there is a standard PPA, but rather that more innovative PPAs are used, including options like buyout or pre-payment. So for a $50 million project, it can help bring the price down another cent per kilowatt hour,” he says.
Not all hosts have a single rooftop large enough for a 1 MW system, however. “Another thing we are seeing is a clustering of sites [under a single owner], where you might put 10 or 15 buildings together to get an economy of scale and get very attractive PPA pricing,” Pletka says. “Usually the developer aggregates them or the host aggregates them and goes to a developer. After the price is set, they do the project,” he says. “Aggregating can be more of a challenge if you have 10 to 15 different corporate users,” he qualifies.

Vertical integration

More PV players are recognizing the need to integrate a commercial unit in their vertically integrated growth in the industry. SolarWorld Industries America, for example, is a large panel manufacturer that also operates an EPC company to help market the company’s products. “We provide turnkey solutions on a subcontracted basis to PPA providers for a fixed price. Before we do a proposal we contact the PPA provider, say that we can do the job for this price, and they come back to us and say ‘here is the PPA rate for 15 or 20 years,’” says Raju Yenamandra, Vice President of Sales and Business Development for the company, in Camarillo, California. “The PPA company is the one owning the asset, so they need to feel as comfortable with us as us we do with them. It’s like being strategic partners,” he says. Yenamandra estimates that commercial projects represent a third of the company’s project portfolio overall.
One EPC to recently forge a joint venture to target larger commercial rooftop PV is Black & Veatch, headquartered in Overland Park, Kansas. Black & Veatch tied up with Brightergy, a St. Louis-based solar developer to develop a $100 million portfolio of commercial projects in Missouri. “We are bracketing commercial applications from 25 kW up to 2 MW, within which a preferred roof would range from 200 kW to 1 MW, a medium-to-large size,” says Jon Erickson, the Director of New Initiatives for Black & Veatch’s energy division, in Overland Park.
Initially, the venture will install a dozen or so test projects, including one
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on Black & Veatch’s headquarters, to assess differing technologies and product suppliers. Then the venture will execute up to 70 projects in Missouri to get to the $100 million level, Erickson says. “We have not finalized what to do with the portfolio on completion, but securitization is an interesting mechanism and very promising, so I’m sure we’ll be looking at it in the future,” he adds.
Once the first $100 million portfolio has been developed, the venture’s strategic plan is to move more regionally within the Midwest, as well as into the Northeast and the Southwest, Erickson says. “We expect to do projects with similar commercial terms, under similar technical engineering specifications, and have some kind of a standardized PPA,” he adds.
Ab major utility that has recently added commercial solar to its tool chest is NextEra Energy Resources, of Juno Beach, Florida, which in May 2013 acquired Smart Energy Capital, of White Plains, New York, a commercial solar developer that has done over 70 MW of PV deals in several states.

Investing in solar developers

Financiers also are seeing the light in terms of PV integration investments. San Francisco-based Sunrun in January acquired the residential business of REC Solar, of San Luis Obispo, as well as its AAE Solar distributorship. Joe Miller, the Executive Vice President of Sunrun’s strategic developer partner SolarUniverse, of Livermore, California, says, “We are approached on commercial projects all the time and while we do some now, we will do more in the future.” Perhaps ironically, in February, REC Solar announced plans to narrow its focus to commercial projects only.
Similarly, Minneapolis-based tenKsolar, a producer of commercial rooftop solar solutions, received an initial investment in January from funds managed by Oaktree Capital Management’s GFI Energy Group, of Los Angeles. Oaktree has some $80 billion in assets under management. At the time of the investment, Ian Schapiro, the Managing Director of Oaktree’s GFI Energy Group, said, “We targeted the commercial rooftop solar segment for our investment capital given its strong growth potential.” And needless to say, utilities are not immune to vertical integration either.
In August 2013, Edison International, based in Rosemead, California, acquired SoCore Energy LLC, based in Chicago, a distributed solar developer focused on commercial rooftop installations. SoCore Energy targets multi-site retailers, real estate investment trusts (REITs) and large commercial and industrial clients, with 80 commercial-scale solar installations now developed and operating in 11 states. The company is performing a solar energy rollout for drugstore chain Walgreens. Other national clients include the Ikea knock-down furniture chain.

Pooling projects

Since transaction costs at financial institutions are so high, projects need to be worth a minimum value to cover these costs and still yield a profit. “Big investors are focusing on the $200 million utility PV deals. Banks are the only ones playing in the $10 million to $20 million cost range,” says Mark Frederick, the President of Auburn, California-based Citigreen, a solar developer-financier that has executed several megawatts of commercial projects.
“Nowadays, banks really need to have a project or portfolio of projects worth about $20 million,” reckons Frederick. “It’s typical for us to first go through a broker to package several of these smaller projects together, then go to the banks and have them set up their tax equity investors,” he says. “As a result, the developer and the financial broker are much more important in the commercial solar segment.” Others agree: “The more you aggregate commercial projects the better the interest rate you can achieve, among other terms,” says Flanigan.
One factor that enables such a pooling of smaller commercial projects is PPA standardization, Frederick notes. “Banks don’t want to have to do a lot of background on every single project, so for a pool, it is common to work withone installer or one equipment provider, and have a standard PPA for each of the pooled projects,” he explains.
Even if there is a high minimum project value for bank financing, the appetite for larger commercial solar projects seems to have improved, Frederick suggests. “Companies needed three good years of recovery after the crash in 2008, and now their credit ratings have come back up; lately I’ve been able to refinance projects that had been rejected then,” he says. Indeed, growth is on the horizon for commercial solar deals, with Citigreen’s business projected to double this year. “California is poised to make a commercial solar comeback, and a plain PPA format is one of the indicators pointing in the right direction,” Frederick adds.

NREL hammers out a PPA

One standout industry effort to standardize the PPA for commercial rooftop applications has come from the U.S. National Renewable Energy Laboratory in Golden, Colorado. “We started the Solar Access to Public Capital (SAPC) project in October 2012 with an industry working group of about 20, including the Department of Energy, which is sponsoring the effort,” says Paul Schwabe, a member of the Market and Policy Impact Analysis Group in NREL’s Strategic Energy Analysis Center.
“The big effort was to convene industry representatives and develop a standardized template for a commercial rooftop PPA, as well as one that might work for residential,” says Schwabe. “We worked six months with major banks, developers, legal counselors, financiers, consumer protection agencies, analytic and advisory firms, and we released Version 1.0 in September,” he says. “We are working on an update to that contract, and expect V1.1 in the next couple of months; thereafter we will update a couple of times per year based on user feedback,” he notes.
“The idea was to point out the most important clauses where businesses don’t compete with one another. If we can get those standardized, we will see three benefits: speed from a reduction in time to review; scaling to help multiple projects aggregate into a tradable investment vehicle; and savings from reduced time at the negotiating table, lower transactional costs and less due diligence,” he says. “We’ve now heard from quite a few people – 165 firms now. And we are hearing that some financiers already want to know how a PPA presented to them differs from the SAPC [the template of NREL’s Solar Access to Public Capital working group],” Schwabe says.
“The NREL document has made financial institutions more comfortable with financing solar,” confirms EcoMotion’s Flanigan. Such standardizations may help alleviate host concerns that their PPAs are plagued with unexpectedly costly fine print. “There is a fear among at least academia that many PPAs are upside down, and that prices which early signers are paying are more than if they had stayed on the grid,” Flanigan suggests.
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