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Is a Market Developing for Solar PV in Small Commercial Facilities?

October 28, 2014 By Martin Flusberg

Martin Flusberg

Small commercial facilities, those under 10,000 sq. ft., represent almost 70% of the approximately 5 million commercial buildings in the US; buildings under 25,000 sq. ft. represent a full 90%. And yet, according to the Solar Energy Industries Association, installation of PV systems smaller than 100kW, which is the size appropriate for smaller commercial facilities, represented less than 30% residential PV installations in the first half of 2014 – and this percentage has been declining.

flusberg chart 1There are several reasons for this. For example, project size in this sector is simply too small for most solar developers and financial backers to consider, given the complexities and costs of getting a system approved and concerns about creditworthiness of some small property owners. In many cases, the roofs on these facilities may be too small for adequate PV installations, particularly given the prevalence of multiple roof top HVAC units. Moreover, unlike residences and many large facilities, smaller facilities are less likely to be owner occupied, creating mixed incentives.

A recent article in Greentech Media, “The Return of Small Commercial Solar?”, suggests that recent developments may set the stage for growth in solar deployment in smaller facilities. The article cites several new developments. The first is new state PV incentives with a special carve out for small commercial, most notably in New York and Massachusetts. For example, the New York-Sun Initiative offers special incentives for non-residential PV systems up to 200kW. The article also suggests that there are a number of companies working to lower the administrative burden associated with small commercial solar financing, and that some commercial developers are funding small commercial projects themselves as a proof of concept in the hopes of attracting third-party capital to the space.

Another development that may presage renewed activity in small commercial solar is the growth in the commercial Property Assessed Clean Energy (PACE) market. PACE allows property owners to fully fund clean energy projects, using bonding authority supported by 3rd are then paid back on the property tax bill over an extended period, in some cases as long as 20 years. The savings in energy costs are expected to exceed the extra payments from day one. There are currently 26 active PACE programs operating in 9 states plus the District of Columbia (18 of which are at the point of having funded projects), with 9 more states considering PACE legislation. California is pursuing a Clean Energy Bill (AB 1883) that would streamline the PACE process and spread administrative fees across a bundle of deals, rather than tie them to each deal individually, which would drive down financing costs. These changes should be of particular help to small commercial projects.

Moreover, the California bill specifically supports the use of solar leases and Power Purchase Agreements (PPAs) within the PACE program. With a PPA and lease, the solar developer owns the system and gains the tax breaks and other credits that may be available, thereby generally creating a greater return. Solar leasing has led to an explosion in residential installations and could potentially do the same in the small commercial market. The New York-Sun Initiative also specifically allows for PACE lease financing, and there are already financing products available for this market, including the PACE Lease offered by Demeter Power Group.

Still another development is the emergence of programs that integrate solar energy and energy efficiency projects. The idea behind this is to reduce the overall length of project payback to attract financing, since energy efficiency projects such as lighting retrofits will have much shorter payback times than solar installations. For example, Noesis Energy recently expanded their energy efficiency financing to include solar projects, specifically aimed at achieving this outcome. One of Noesis’ financing programs is focused on small to mid-sized businesses.

The upshot is that, while the installation of solar in small commercial facilities remains challenging, there are multiple developments that may change that situation. This is particularly true in California, Massachusetts and New York, all of which have special programs available for this market, plus other states where commercial PACE financing is beginning to gain traction. With the appropriate financing available, the installation of solar PV in a small commercial facility – or a portfolio of small facilities – makes good business sense, typically delivering immediate savings while directly contributing to sustainability objectives. Combining solar with energy efficiency measures – including an energy management system that can drive additional energy savings while monitoring the PV system and other equipment to help maximize performance – can yield significant savings. And, with emerging financing options, this can potentially be accomplished without tying up critical capital.

Time to consider your place in the sun?

 Martin Flusberg is CEO of Powerhouse Dynamics.

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