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New Financing Models: Potential to Revolutionize Commercial Solar Water Heating Market

SEPA released a new study titled, “Heating Up: The Impact of Third Party Business Models on the US Market for Solar Water and Space Heating.” The report profiled the emergence of a number of new and existing third-party options for financing solar water heating. While third party financing has potential to revolutionize the commercial SWH market, there are still a number of challenges holding back such financing mechanisms. However, existing industry players and new market entrants are actively devising ways to overcome these challenges.

As I’ve discussed in previous posts, commercial solar water heating (SWH) is less expensive and captures more energy per square foot than solar PV—making it a compelling proposition for many businesses in hot water intensive sectors. Although solar water heating systems are less expensive to own and operate than solar electric systems, their upfront cost is still a challenge for many buyers.

Third party financing and turnkey services allow customers to purchase SWH with no upfront costs. The paper identified six different financing models, each with its own set of benefits and challenges:

Loan-centered models 

Commercial customers can receive a low interest loan from the local government or utility as part of loan program, such as Local Property-Assessed Clean Energy (PACE) or on-bill finance (OBF) programs. These programs allow customers to pay for a system over a ten to twenty year period, on their property taxes for PACE programs, or utility bills for OBF programs. Despite widespread interest in PACE and OBF programs, the availability of these programs is limited.

Currently, there are only four operational commercial PACE programs, with nine programs in the design phase and four more in the preliminary planning phase. According to ACEEE’s “On-Bill Financing for Energy Efficiency Improvements” report, there are currently 31 existing OBF programs spread across twenty different states. However, the number of PACE and OBF programs is likely to increase as more utilities and local governments become interested in starting their own programs.

Solar thermal energy service companies (ESCO) 

Customers can contract with ESCOs to develop, install, and finance a wide-range of energy improvements, such as lighting retrofits or SWH. ESCOs operate on a shared-savings model and keep a certain percentage of energy savings. When ESCOs contract with a customer, they develop a prioritized list of projects based on potential savings and payback period. Oftentimes, ESCOs choose to implement only energy efficiency projects with short payback periods, rather than installing SWH with a typical payback period between seven to ten years depending on available incentives and local energy costs. Additionally, ESCOs work best for larger institutional and commercial customers, meaning that medium and small sized businesses are underserved.

Third-party Leasing 

Customers can also choose to lease SWH equipment. However, the use of third party commercial leasing is limited at the moment, and has not gained much traction with SWH. With a lease, customers are typically responsible for the operational risk of their system.

Third-party Shared Revenue Projects with Utilities 

Utilities can work with a turnkey third party developer to offer SWH to its customers. The utility and the developer earn a share of the project’s savings, while customers pay a flat fee for the service. However, shared revenue financing has not been widely used. Lakeland Electric and Regensis Solar Power pioneered the model for the residential marketplace but no one has yet attempted to replicate it for the commercial marketplace.

Third-party Energy Purchase Agreements (akin to PPAs) 

In recent years, third-party energy purchase agreements (EPAs) have emerged as financing tool for SWH. EPAs are similar to power purchase agreements (PPAs). Customers purchase the energy to heat water at a contracted rate for ten to twenty years from the EPA provider who installs, owns, and operates the system. An EPA removes both the upfront cost and the operational risk from the customers.

Many people see EPAs as the “Holy Grail” of energy improvement financing, but there are still a number of challenges to their widespread use. To pencil out, EPAs rely on strong SWH incentives and good solar resources. Commercial SWH systems also require more engineering and design work than residential projects, adding another element of complexity. Finally, EPAs oftentimes compete against natural gas prices, which are historically low. These factors have lead EPA providers to selectively offer the EPA only to customers when the economics are compelling.

Model Innovations

The paper also mentioned a novel financing mechanism being pioneered by Skyline Innovations. This new financing mechanism is similar to an EPA, but uses price-indexed energy cost instead of a standard three or four percent annual escalator. Skyline offers customers a fixed discount off their utility bill for water heating over a ten to fifteen year term. No upfront capital is required from the customer, but customers give up the RECs and other incentives to finance the system. The true benefit of this model is that it guarantees customers energy savings even if the price of energy decreases. In an EPA, customers could be hurt if the price of energy drops below the contracted rate.

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