By combining aspects of property assessed clean energy (PACE) financing and third-party ownership (TPO) businesses are finding a new way to go solar. Vote Solar recently presented a webinar discussing how PACE-TPO hybrids are helping small commercial property owners are using the tools to make it easier for them and their tenants to go solar.
Third-party ownership is among the quickest growing segments in terms of installing solar—on homes, and even for utilities, but thus far it’s not been as successful for the small commercial solar market. For instance, while the majority of recent California Solar Initiative (CSI) applicants—72 percent—were for systems under 100 kilowatts, 68 percent of residential applicants were financed through TPOs, while only 36 percent of commercial projects in that size range were financed through TPOs, said Mary Kathryn Lynch, a consultant who has worked with Vote Solar.
Among the challenges facing the small commercial solar market are non-investment grade counterparts, high-transaction costs and low returns. But together PACE and TPO, also known as PACE3P, it’s lowering the risk and ensuring returns. “Both of these financing tools are powerful, both are incredibly complex,” said Michael Wallander, president and founder of Demeter Power Group.
Wallander explained that PACE programs traditionally provide a lien placement, which prevents the repayment obligation from being extinguished in the event that ownership changes or the event of foreclosure. Normally that’s thought of a means to pay a debt. But, ”That lien placement can secure a promise to pay a fee in another form such as a lease or a PPA,” he said.
By using PACE as the medium through which repayment is assured, it allows the project sponsors a low-risk means to investing in a project, since the investment will be repaid through the property tax PACE lien. Hence it makes it more attractive for tax equity investors like those that back TPO options for homeowners. It brings certainty for providers offering fixed rates for power over 20 years, Wallander said. Basically, it gives a solar hedge for electric costs and it’s scalable for different-sized projects.
“The reason why you can do long-term financing at attractive rates, is of course, the seniority of the PACE lien and the fact that’s its secured by the property value,” Lynch said. The hybrid model offers split incentives between the property owners and the tenants. It allows the property owner to choose to go solar offers them a lower utility rate, which is passed on to the tenant, as well as increases property taxes for the period of the lien, both of which are passed on to the tenant and any subsequent tenants.