6 Trends Changing Solar Financing

Buoyed by new cost-reducing technologies and government incentives, the solar energy industry is enjoying it's time in the spotlight.

In the U.S. alone, a new solar project has been added every 100 seconds this year, and there are now over 1.8 million installations across the country. Last year, the sector generated a whopping $17 billion for the American economy and globally solar capacity has quadrupled over the last five years.

In the wake of this success, the solar industry finds itself at a crossroads: As states edge ever closer to meeting Renewable Portfolio Standards (RPS) requirements and installation costs continue to shrink, the sector now turns to new markets and unique models to sustain growth and drive demand.

A surge in sun sharing

Community solar is making clean, renewable energy more accessible and affordable to businesses and residents alike.

Under a shared solar plan multiple consumers—including homeowners, renters and businesses—can purchase a portion of their electricity from a local sun-power plant, enabling them to enjoy the benefits of solar without having to install and maintain their own panels.

As much as 1,226 megawatts of community solar has been installed in the U.S. through July this year. Another 3-gigawatts are expected to be added in the coming years. Underpinning this growth is sliding costs, attractive state incentives, the rising sustainability agenda and savings on energy bills.

Support is mostly showing up on the state level. At least 19 states including Colorado, Minnesota and Massachusetts have implemented policies to support shared solar and some 42 states have at least one project operating. Each state offers different ways for consumers to get involved, but most offer credits on electricity bills, creating savings that range roughly between 5 and 20%.

Dabbling in new territories

As the costs of solar declines and electricity suppliers become less concerned with meeting RPS targets, new states are beginning to dip toes into the market even as legacy states roll out fresh, innovative programs to support continued growth.

Massachusetts, for example, approved new incentives under its Solar Massachusetts Renewable Target (SMART) program in September designed to bolster the development of 1.6 gigawatts of solar. Illinois recently implemented legislation to help farmers and rural areas install solar plants and New Jersey updated its RPS to 50% by 2030.

California is making some of the boldest moves yet: The state recently became the first to mandate solar panels on all new homes, aiming to derive all its electricity from carbon-free sources—such as solar and wind—by 2045.

Such strong signals boost demand by making solar the new normal for consumers.

Going merchant

Solar power plants are typically supported by long-term Power Purchase Agreements (PPAs) issued by utilities. As states edge closer to reaching their RPS targets and solar costs decline, however, the price of PPAs also slides, nudging the sector towards other financial models.

Merchant solar allows additional debt capacity for projects, potentially making returns on shorter PPAs more attractive and further piquing the interest of lenders. While financing merchant plants can be tough, some projects combine a merchant component with a contracted PPA. Others mitigate risk through shorter-term agreements, guarantees and covenants.

Merchant models are already gaining a foothold in Latin American countries such as Chile and Mexico, which have a strong solar resource. Some North American states are now tentatively following that lead. (Texas, for example, installed the country's first merchant solar plant in 2015.) The challenge for lenders is volatile energy prices and adjusting to alternative financing that doesn't involve a strictly contracted cash-flow.

Storing sun energy

Alongside the emerging merchant solar trend is battery storage. While the technology remains in its infancy, the ability to store power from intermittent sources such as the sun is being touted as a way to improve the economics of risky merchant plants. Storage can help balance peaks in electricity demand, provide back-up power and lower costs by enabling energy to be harnessed and released as needed.

California is a pioneer in battery storage: The state already has 717 megawatts of energy storage in operation. New Jersey is targeting 600 megawatts of storage by 2021. New York 1.5 gigawatts by 2025. And Massachusetts—to support its solar development—has implemented incentives for battery storage, aiming for 200 megawatt-hours by 2020.

The battery storage market is forecast to 'double six times' by 2030 to more than 125 gigawatts of capacity driven largely by falling costs and increased demand as more intermittent sources of power such as wind and solar, are added to the grid. This represents a huge $103 billion of investment.

Changing agreement structure

The decline in solar energy costs means PPAs can be signed at lower rates and for shorter durations, drawing more corporate buyers into the sector—especially for those companies that want to improve their sustainability credentials and explore new market opportunities.

States such as California are pursuing a model known as Community Choice Aggregators (CCAs), allowing local governments to sign agreements with energy providers on behalf of their residents and businesses. This gives them greater control over their electricity and its origins. By pooling buying power, CCA prices can be 15 percent to 20 percent lower than the residential retail electricity price.

Larger projects

There's a swing towards larger solar facilities with many more 100-megawatt plus projects coming online, particularly on the east coast and in Texas. This is whetting the appetite of banks that are seeking to deploy capital amidst fiercer competition. And where there's competition, there's often innovation—which is likely to further spur banks towards novel finance solutions such as longer terms, higher loan amounts, or lower rates.

The solar energy industry is maturing. No longer a small fish in a large pond, the sector is weaning itself off government support and finding innovative ways to grow organically.

The views expressed by the author are not necessarily those of Fifth Third Bank and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank, National Association or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank.