Contents. Businesses Can Benefit From On-Site Solar. Shortfalls with Common Methods of Financing. C-PACE: A New Financing Option for Solar Buyers

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2 Contents Businesses Can Benefit From On-Site Solar Shortfalls with Common Methods of Financing C-PACE: A New Financing Option for Solar Buyers Access to C-PACE Across the U.S. Comparison: C-PACE vs. Conventional Debt Financing Challenges to Financing with C-PACE

3 Businesses Can Benefit from On-Site Solar Businesses have become increasingly interested in on-site solar energy in recent years, and for good reason. On-site solar power systems generate electricity at the point of consumption, reducing or eliminating the amount of electricity a business must purchase from an electric utility or third-party provider. Typically installed on a rooftop, parking lot canopy, or on the ground if land is available, these systems can provide a range of economic and other benefits to businesses, including: Attractive Returns Investing in a solar power system can yield very attractive returns, with ROI well into the double digits in markets where electricity prices are high and incentives are available. Fixed Electricity Pricing Energy expenses are among the top five expenditures for many businesses, and electricity price volatility can make it hard to plan. On-site solar can fix the price of electricity for 25 years or more. Tax Benefits Businesses can claim a federal income tax credit equal to 30% of the purchase price of an onsite solar power system, and then depreciate the asset in the first year, providing a substantial benefit to companies that pay income tax. Sustainability On-site solar can provide tangible (and highly visible) progress towards corporate clean energy and sustainability goals and offset Scope 2 greenhouse gas emissions. Any of these benefits may motivate a business to explore on-site solar power. Once that exploration begins, there are a myriad of options to evaluate, including choices on technology, ownership structure, contractual terms, and vendors. One of the first major decisions any business will face, one that can affect the other choices they make, is how to pay for the system. There are a range of financing options available, each with attributes that make them more or less feasible and attractive to any particular buyer. This paper describes one method of financing that addresses some of the limitations inherent in other popular forms of solar project financing: Commercial Property Assessed Clean Energy (C-PACE) financing. 1 EnerNOC, PwC & Winston Eco-Strategies, "Energy Strategy for the C-Suite: From Cost Center to Competitive Advantage An Introduction to the Unified Approach to Energy Transformation" C-PACE: A New Option for Financing On-Site Solar 1

4 Shortfalls of Common Solar Financing Methods Most commercial and industrial (C&I) on-site solar power systems are financed in one of three ways: 1. Direct purchase and system ownership, paid for with cash or bank debt. 2. Leasing structures, typically with an option for system buy-out after a certain period of time. 3. Third-party ownership via Power Purchase Agreement (PPA), where the energy consumer doesn t own the system but purchases the generated solar energy for a contracted price. Each of these approaches has unique advantages, and can be a great fit for the right project. However, each of these common approaches to financing is subject to constraints which might preclude its use for a solar project that could be attractive to a business. There are a variety of factors that can prevent a business from using cash, debt, a lease, or a PPA to finance an on-site project: o Availability of Funds: Many businesses do not have the cash (or borrowing capacity) available to pay up front for a solar power system, or have fiscal management rules that don t allow them to spend the cash they do have (or can borrow) on long-term energy investments. o Financing Term: Leases and debt often have terms of seven to ten years. In low-cost energy markets, this may not be a long enough for a solar power system to achieve full payback. o Credit and Credit Backstops: PPAs can typically only service investment-grade credit. As of late 2016, 55% of US businesses rated by S&P did not meet this requirement. o Policy Issues: PPAs are prohibited or difficult to contract because of utility or state law in 24 states, making PPA financing practically impossible. o Transferring the Asset: If a business owner decides to sell a property, PPAs and leases may make it difficult to pass the asset on to the next owner. o Split Incentive : In tenant-occupied buildings where the owner does not pay energy bills, there is additional complexity and in some instances legal restrictions in allocating benefits and costs in a way that meets the needs of both owners and tenants. These and other complications have hindered a significant portion of businesses interested in on-site solar from implementing solar projects. Fortunately, C-PACE has emerged as a financing option that addresses many of these limitations and can help more businesses achieve their on-site solar development goals. C-PACE: A New Option for Financing On-Site Solar 2

5 C-PACE: A New Financing Option for Business C-PACE financing is a specialized type of long-term loan that can be used by businesses to pay for on-site renewable energy, energy efficiency, and other specific qualified facilities upgrades. C-PACE loans are based upon a voluntary assessment which becomes part of a building owner s property tax bill. Funds are provided by private investors or government-issued bonds, and are secured via a lien on the property. The loan payments are collected by the local government as part of the property tax bill, annually or semiannually. C-PACE loans can be transferred from owner to owner with a property sale, and financing approval is tied to the value of the building, not the owner s or tenant s credit. In many jurisdictions, a C-PACE loan term can be as long as 30 years. C-PACE can often allow the bundling of renewable energy, energy efficiency, roofing, and other facilities upgrades under a single loan. C-PACE can be a compelling option for financing on-site solar projects in the following situations: o Non-Investment Grade Owner Credit: C-PACE is secured via a first lien on the property, providing collateral for investors. So rather than analyzing the credit of the business purchasing the solar power system, C-PACE financiers look to factors including building value, loan-to-value, and the ability for the property to be repurposed by future owners when determining whether or not to provide capital. While C-PACE may not be appropriate for companies with bankruptcy records, it can be more forgiving than traditional financing in providing capital to businesses with less than investment-grade credit. o Projects in States with Limits on Third- Party Ownership: C-PACE is currently available in 7 states where PPAs are prohibited or difficult to contract (Arkansas, Florida, Kentucky, Minnesota, Missouri, Nebraska, and Wisconsin). In these cases, C- PACE may provide the only long-term option to finance a solar investment. Figure 1: States where PPAs are constrained and where C-PACE programs are currently working o Buildings That May Change Ownership: A C-PACE loan is tied to the building, not the tenant or property owner, avoiding potential transfer complications when the property changes hands. Once a new owner takes control of a property, they can continue paying the assessment as part of the property taxes, or the voluntary assessment can be paid off prior to sale. C-PACE: A New Option for Financing On-Site Solar 3

6 o Buildings Where Owner Does Not Consume Energy: C-PACE is tied to a property s tax assessment, enabling the property owner to pass the cost of a solar power system on to the energy-consuming tenant. This works especially well in triple net lease structures: the tenant pays the assessment fees and receives the benefits of energy savings. o Low-Cost Electricity: In markets with lower-cost electricity, a solar power system may not achieve full payback throughout the duration of a traditional seven to ten-year capital lease or loan, as payments under a shorter amortization period can exceed savings. C-PACE financing can result in positive project cashflows by spreading payments over a longer term. o Combining with Energy Efficiency or Other Facilities Upgrades: C-PACE allows property owners to combine energy efficiency measures, building upgrades, energy storage, and renewables under one single loan. This bundling means that different technologies can be paired to create a more favorable cash flow profile for the combined project as a whole. Figure 2: Project cash flow profiles for an on-site solar power system financed with a capital lease and C-PACE financing. Modeled project is a 500 kw system with solar production typical of Denver, CO. C-PACE: A New Option for Financing On-Site Solar 4

7 Access to C-PACE Across the U.S. While not yet available everywhere in the country, access to C-PACE financing is steadily increasing throughout the United States. As of late 2017, 34 states have C-PACE-enabling legislation, and of those, 21 have working districts where projects are being financed. States that currently offer C-PACE include both historically strong solar markets (such as California and Connecticut) and states where solar adoption has lagged in the past. Figure 2 below shows areas where active C- PACE programs exist, areas that are PACE-enabled but where no district has yet been established, and areas where further legislative action is required. As C-PACE financing continues to grow, it will be important to monitor the development of assessment districts across the country to track new opportunities to use C-PACE in additional states and local markets. There are two prerequisites to enabling C-PACE financing in a given geography: o The state must pass legislation to allow jurisdictions to add assessments onto properties Figure 3: States With C-PACE Districts o A district must be created to administer the C-PACE loan C-PACE: A New Option for Financing On-Site Solar 5

8 Comparison: C-PACE vs. Conventional Debt Financing One commonly-cited objection to C-PACE financing is that interest rates tend to be higher than those for conventional market-based debt. However, comparisons based on interest rate alone do not adequately illustrate the differences between the two types of loans. C-PACE is fundamentally different than conventional debt financing, and there are many features of C-PACE that distinguish it from conventional market-based loans. Table 1 below examines some of the differences between a C-PACE loan and conventional debt. Transferability Term Balance Sheet Recourse Acceleration Conventional Debt It can be difficult, if not impossible, for a new building owner to take over the loan should the property change ownership. Conventional debt is tied to market rates and often, lending institutions don t want to hold a rate for longer than 7-10 years because there is too much risk. Will have an impact on business borrowing ability as debt. Full Recourse: In the case of default (failure to make loan payments), the solar power system may be repossessed and sold, and the borrower is liable for repayment of the full outstanding value of the loan. Accelerating: In the case of default, a conventional loan can accelerate, making the entire balance of the loan due at once. C-PACE Financing Just like other property assessments, a successive building owner can easily take over payments, or the original owner can pay off the balance. The PACE interest rate holds steady for years, making it more forgiving for projects to be cumulatively cash-flow positive for the life of the financing. PACE may be considered off balance sheet because it s tied to the building, not the corporate entity 2. Limited-Recourse: In the case of default (failure to make property tax payments), the property may be foreclosed and sold, but the borrower bears no further liability. Non-Accelerating: In the case of default, the interest rate does not change and the borrower is not responsible for the balance of the loan at once, just the missing payment(s). 2 Treatment of C-PACE financing with respect to balance sheet accounting is a subject of open debate. C-PACE: A New Option for Financing On-Site Solar 6

9 Challenges to Financing with C-PACE C-PACE can address some of the drawbacks associated with cash, debt, lease or PPA financing, but it s not without complexities of its own. Some of the special considerations a business may need to address when considering C-PACE financing include: Navigating Local Discrepancies Although a state may have legislation allowing for C-PACE financing, the local government must establish an assessment district to administer the program and place the assessments. Each county or city has the authority to choose whether to join an assessment district, but there may be 2 or more competing districts in a given geography. The sheer number of districts with unique rules and requirements makes it difficult to assess C- PACE projects without understanding the nuances of each different district. Administrative Fees District administrators may be non-profit or for-profit, but both types must charge fees to cover their operational expenses and legal fees. These fees can range from 1-4% of the total contract and may add cost to a project. Lender Consent A C-PACE lien must take priority over any other liens on the property. A mortgage provider must subordinate their right to hold a property to the C-PACE provider, and securing this consent may be difficult depending on the Analyzing C-PACE Financing can be complicated: o C-PACE may be a strong financing option for certain properties within a portfolio, while others may be better suited for direct purchase, lease, or third-party ownership o It is important to understand each PACE market and accurately model fees, energy savings and other financial components to best assess potential opportunities o A business should consider the range of alternatives available before choosing any one approach to financing an on-site solar project bank. However, since PACE is non-accelerating, only any overdue annual PACE payments would take priority over mortgage obligations, and when a project s annual savings outweigh the assessment payments, lenders in general have proven willing to provide their consent to subordination. C-PACE: A New Option for Financing On-Site Solar 7

10 About Alta Energy Alta Energy empowers businesses to achieve the economic and environmental benefits of renewable energy. Supported by proprietary analytics, the company provides expert guidance, including analysis, strategy formation and execution to clients that face the challenges, complexities and opportunities of renewable energy. Alta Energy delivers tailored, objective recommendations on renewable energy technologies, vendors and financing options (including C-PACE financing) that best meet the needs of each customer and project site. By enabling customers to make smarter energy decisions, Alta Energy is helping to expand renewable energy deployment across the United States. For more information, please visit