New Solar Financing Model for Nonprofits Blows a Hole in Tariff Barrier

When President* Trump first proposed new tariffs on imported solar panels, industry stakeholders predicted that solar installations in the U.S. would grind to a halt. The worst has yet to materialize. The rate of solar growth slowed last year but it is picking up again, and the U.S. solar industry could emerge stronger than ever.

In one sign of things to come, new financing instruments are beginning to crack open the market for solar installations at nonprofits and other tax exempt organizations.

A new rooftop solar discount for the tax-free

The untaxed sector has been relatively slow to adopt rooftop solar, partly because conventional tax benefits don't apply to organizations that don't pay taxes in the first place.

One new workaround is a commercial financing model for rooftop and ground mounted PV installations called Collective PACE™, launched this week  by the green financing leader Greenworks Lending and nonprofit solar specialist Collective Sun.

The new model leverages two instruments that were once fairly exotic, but are now familiar fixtures in the energy efficiency and renewable energy fields.

One is C-PACE ( Commercial Property Assessed Clean Energy), which provides commercial property owners with access to low cost financing for energy related upgrades. The up-front costs are financed through a voluntary assessment on the property. If all goes according to plan, the assessment is offset by lower energy costs.

No money down is also the operating principle for PPAs (Power Purchase Agreements). With typical PPAs, property owners have rooftop solar installed by a third party that owns the equipment. The cost is paid off through the property owner's utility bill. Ideally, the property owner's bill goes down and the end result is a "free" rooftop solar installation.

Combine the two, and the result is a third-party lease agreement:

Collective PACE™ delivers a discount to nonprofits through the upfront monetization of tax incentives by the third party, while simultaneously allowing nonprofits to take advantage of the longer-term, lower-cost financing available through C-PACE.

Collective Sun and Greenworks also cite benefits over and above the direct advantages of rooftop solar:

...Charitable rating organizations such as GuideStar can look more favorably upon an organization's financials when less contributed revenue is allotted to operations vs. core services provided. Further, the burden on development departments and donors to fund new construction or other needed capital improvements is reduced when financing can cover 100 percent of a solar investment.

PACE and the race against coal

C-PACE financing is not available in every state. As with rooftop solar policies, the situation can vary considerably depending on state-level legislation.

That could change, because U.S. Department of Energy is very much in favor of C-PACE as a matter of national policy. That's interesting because the President has been vociferous in his support for coal-sourced electricity, while C-PACE aims in exactly the opposite direction.

Nevertheless, earlier this year the Energy Department issued a report optimistically titled, Lessons in Commercial Leadership: The Path from Legislation to Launch. The goal is clear:

Lessons in C-PACE Leadership aims to fast track the set-up of commercial property assessed clean energy (C-PACE) programs for state and local governments by capturing the lessons learned from leaders.

The Energy Department singles out Texas, Connecticut and California among the nation's C-PACE leaders.

The agency is also interested in promoting R-PACE for residential properties. The challenges for rooftop solar financing are different in the residential sector, but there is also a major new opportunity in R-PACE:

A PACE assessment is a debt of property, meaning the debt is tied to the property as opposed to the property owner(s)...This can address a key disincentive to investing in energy improvements because many property owners are hesitant to make property improvements if they think they may not stay in the property long enough for the resulting savings to cover the upfront costs.

Consider that the average U.S. resident moves more that ten times in their lifespan, and you can see where the limitations of PPAs come in. If the rooftop solar financing is attached to a person's utility bills, they would likely move before they realize any significant benefit. PACE closes that gap and incentivizes energy upgrades regardless of how long (or short) a person owns the property.

Community benefits of energy upgrades

The Rocky Mountain Institute is one energy advocacy organization that makes a strong case for PACE, including R-PACE. They argue that the benefits of R-PACE ripple out beyond the individual homeowner:

...It also serves the community-wide interest in improving the housing stock while correcting for the failure of the market to fully recognize the impact of energy profiles on housing valuations.

To make the case for community benefit, Rocky Mountain Institute took a dive into the numbers and found the potential for preventing housing stock from falling into disrepair:

...37 percent of PACE financing is used to respond to emergency repair or replacement needs, while an additional 23 percent is used to repair something that “was likely to fail in the near future” according to a 2017 study by Research Into Action. These are situations where homeowners may not have been planning to make an upgrade, but in the face of a broken furnace, air conditioner, or roof had to protect their health, safety, and home investment.

As an additional community benefit, the availability of R-PACE financing means that homeowners can afford the upgrades without dipping into savings or amassing credit card debt and other high-cost loans.

Rocky Mountain Institute foresees a game-changing effect if R-PACE is implemented nationwide:

R-PACE has been used successfully to finance more than 158,000 retrofits in three states since 2008, which demonstrates its market acceptability, scalability, and potential as a transformational market-financing tool.

Who's steering the renewable energy ship?

Unfortunately, just last December the Trump Administration announced that FHA would stop insuring mortgages for housing with PACE loans.

That's a setback, but it could be offset by the Energy Department's advocacy for PACE and other clean energy programs.

Last April the agency issued a new report on the impact of R-PACE on rooftop solar installations. The report underscores the significant impact that R-PACE financing can have on the rate of rooftop solar installations:

A new study by Berkeley Lab found that residential Property Assessed Clean Energy (R-PACE) programs increased deployment of residential solar photovoltaic (PV) systems in California, raising it by about 7-12% in cities that adopt these programs.

Trump or not, the Energy Department has been avidly pursuing its renewable energy mission with a sharp focus on lowering costs -- and killing coal.

Photo: Collective Sun via Facebook.

*Developing story.