Monday, January 08, 2007

Accelerating Solar Adoption Through Third Party Financing

Unlike other most other forms of alternative energy, solar energy is distributive and decentralized; the maturity of solar markets will be marked by the mounting of photovoltaic (PV) cells on the roofs of residents--everyday people taking it upon themselves to convert their homes to micro-power stations. One of the barriers to the adoption of photovoltaics in residential communities is the high upfront costs. Because fuel costs of solar are zero, and given the long life cycle of PV cells (about 30 years or more), a consumer installing PV essentially pays for 30 years of electricity upfront, rather than on a monthly incremental basis as one pays for plug-in electricity today. It a huge price tag for a consumer to stomach.

Enter the third party financier. Rather than the consumer making the upfront capital investment, and sustaining the installation costs and ongoing maintenance costs, all those costs can be borne by a third party financier in return for regular periodic fee payments. The third party PV financier in essence becomes an energy service company (ESCO), like a utility providing energy services in return for fees. In this way, the risks of PV installation and maintenance are more efficiently allocated to the party with greater PV expertise and which has greater financial resources.

One cryptic website explains:


The Third Party Financing (TPF) method...can be described as an optimum combination of the two elements necessary for the implementation of a modernisation project: on the one hand, a guarantee of the necessary finance and, on the other hand, professional technical assistance. As already mentioned, thanks to TPF an energy user lacking finance to implement a modernisation project does not have to bear any initial costs of the energy efficiency investment. Instead, a TPF company charges the user with a fee equivalent to a part of the energy saving achieved as a result of the modernisation. During the "payback period" the user incurs costs not exceeding those from before the modernisation. After the fee provided by the TPF company has been repaid, the user gets the full amount saved and gains the modernised installation. The TPF method can be attractive also to energy users who have free financial resources as it allows for getting profits from energy savings, without the necessity to freeze the capital. Thus the resources can be used for other purposes.

Wal-mart Goes Solar

The headline news is Wal-marts' request-for-proposal (RFP) for solar installations for 300 of its stores across 5 states. Joel Makower, who has read the hiterhto confidential RFP, estimates that the scale of the installations may be some 60 times the size of the largest exisitng solar installation (at Googles headquarters). As Joel explains in his blog, among the financing options being considered for the Walmart RFP are are:

  • a direct purchase by Wal-Mart of turnkey solar energy systems, along with a plan to maintain the systems;
  • solar systems that are installed, owned, and operated by the supplier, which would then sell all of the system's electricity output to Wal-Mart; and
  • an arrangement in which Wal-Mart would lease solar installations, own all of their electricity output, and have an option to purchase the systems if it desired.

Sunny Grapes Shows the Way

As if to show Walmart how the second option should be done, last week, it was reported that MMA Renewable Ventures, a subsidiary of Municipal Mortgage & Equity, LLC (MuniMae; NYSE: MMA), coordinated the financial backing to own, operate and maintain a 901 kw PV system at Fetzer Vineyard (sustainable wine!), and sell the clean energy to Fetzer under a long-term Solar Services Agreement contract that sets the electricity costs at a fixed rate.

"We get clean power from new solar at a cost that is 10% less than conventional power from the utility. It will stay below the cost of grid power for the length of the contract. It also reduces our peak demand power charges by 70%. All this at no capital expense and no increasing in the asset base," said Susanne Zechiel, Fetzer's manager of facility resources for its California wine group.

..and Some Sweet News from the Honey Pot

And today, it was announced that Honeywell will provide solar power for a Californian school district by installing solar panels on seven school buildings and selling the solar-generated electricity at a discount under a 20 year contract.

Bundle it with Home Mortgages!

Yet another variation of solar third party financing is proposed by Travis Braford, founder of the Prometheus Insitute for Sustainable Development, in his new book Solar Revolution. Bradford observes that the mortgage industry should embrace solar panel installation in houses as a feature that enhances real property values, and bundle the financing of solar panels with the rest of the house--mortgage financing is after all the cheapest form of financing in the U.S.

As more innovative forms of financing emerges to alleviate the upfront capital costs to end-users, the adoption of solar technologies will accelerate. Solar ESCOs will be an important piece in the solar value chain puzzle, making affordable the scaling up of PV adoption for the mass markets. Indeed, variation of third party financing has been considered for clean coal technologies (see this report on 3P financing for IGCC plants). The business opportunity for clean energy financing as a support industry to the clean tech sector looks promising.

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