The Path to Investment Grade for the Unrated Distributed Generation Market

The Path to Investment Grade for the Unrated Distributed Generation Market

For the vast majority of commercial facility owners and managers the investment benefits of solar have not been as readily accessible as witnessed by the residential market – but all that is changing.

Making an asset, such as a commercial facility you own or manage, more valuable is a no-brainer if the cost and return on the improvements can be reliably forecasted and suits your risk appetite. In that vein, the renewable energy space has never been hotter, particularly as investors look to get in before the solar Investment Tax Credit (ITC) is reduced significantly at the end of 2016. For the vast majority of commercial facility owners and managers the investment benefits of solar have not been as readily accessible as witnessed by the residential market – but all that is changing.

 

What’s been holding this back?

We need to understand the market conditions. The vast majority of commercial facilities that could exploit renewable energy are unrated organizations such as nonprofits, private businesses or small municipalities. While the country has seen large, multi-national corporations such as Apple and Google and the residential solar market steam ahead, the rest of the commercial and industrial distributed generation (DG) market has been left behind. This space didn’t fit residential models: utility tariff analysis is complex, there are no readily available FICO scores, and sales cycles are typically long. It also didn’t fit existing large scale and utility models: there is an inability to absorb the costs for negotiations and underwriting, a lack of public debt rating, as well as standardized documentation.

The lack of standardization, transparency and public debt rating has prevented the unrated DG market from being taken seriously for far too long. The transaction cost of evaluating and negotiating each individual project has been prohibitively high for most investors. But that is changing as technology is enabling greater standardization in the same way it has allowed the residential market to flourish over the past decade, and the race is on to maximize returns before the end of the current ITC at the end of 2016.

 

How technology is unlocking this new opportunity through standardization

Leading the solar standardization charge has been the Solar Access to Public Capital (SAPC) working group. Standardized project documents such as the SAPC site leases and commercial power purchase agreements (PPAs) are critical to minimizing transaction costs and legal fees. New technology is enabling unrated commercial real estate facilities to obtain the financing needed to achieve immediate electricity cost savings with solar. Innovations – such as the Wiser Solar Asset Rating (WSAR™) score and Property Assessed Clean Energy (PACE) financing – are driving down the cost of capital needed for nonrated commercial projects, creating a path to investment that did not exist before. They are doing this by standardizing the risk evaluation process for these commercial facilities in the same way standardization of mortgage documentation and evaluations unlocked the residential homeowner market in the 70s and 80s.

These efforts underscore how the industry is working to become more data driven and streamlined, enabling it to obtain insurance and revenue shortfall policies to further mitigate risk. We expect over the next 2-5 years, as the industry becomes increasingly transparent and grows its history of operating project performance, fewer of these insurance products will be needed, and the cost of capital will respond accordingly.

All these steps are paving the way for institutional investors to become increasingly involved, taking the unrated space closer to securitization. Solar is an incredibly reliable investment: there are no moving parts and the technology has been proven over the last 60+ years. Panels have 25-year warranties as an industry standard, and production forecasts include in-depth analysis of site specific historical weather patterns and standard equipment degradation over time.

While the solar industry is still relatively new at this scale, there is a surge in investment interest and appetite, resulting from the technology innovation and investment process standardization. That demand was shown most clearly in the 2015 Solar Investment Index which found that 83 percent of investors will make an investment in solar one of their top priorities within the next five years, while 32 percent plan to invest in solar for the first time this year.

 

Nathan Homan is Executive Director of Wiser Capital

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