Last month, 20 nonprofit developers joined a California Housing Partnership Corporation (CHPC) Green Rental Home Energy Efficiency Network (GREEN) “Talk” to learn the basics of solar financing, and hear from other developers who are actually using these financing tools. Panelists for the talk included solar experts from GRID Alternatives, and three developers—Mercy Housing, Eden Housing, and National Housing Trust—who provided their practical expertise. Below, you will find the highlights from this conversation.
System Purchase
A common way that nonprofit developers cover the cost of a PV system is to include the cost in the development sources for a new construction project or a recapitalization, thereby owning the entire system. GRID Alternatives said that this model is usually the most straightforward to navigate. The cost of the PV is included in the overall project development sources and installed as part of other capital improvements.
Pros
- No need to take on new debt, simplifies the lender approval process for the property
- Ownership of system allows for greater savings by reducing or eliminating financing costs—do not have to share benefits with third party
- Can have the simplest contract structure
Cons
- Need upfront funds to cover full cost of system, or find incentives
- Opportunity costs associated with finding the right solar vendor
- Operations and maintenance is the responsibility of the owner
- No performance guarantee
- Can me more difficult to take advantage of 30% Federal Investment Tax Credit (ITC)
Lesson from Mercy Housing: Lauren Maddock, Project Developer
- Costs can very widely, depending on the system size, which is driven by available roof space and the amount of energy load you want to offset
- Get involved early—stay informed about available incentive programs that can help offset project costs.
- Use a portfolio-wide evaluation to look at which properties have sufficient reserves and good operating income
- Keep in mind any extra layers of review or approval you will need. Depending on the funding source, you may need to get investor approval, or from agencies like HUD. Your local utility may also need to review or approve your plans.
Power Purchase Agreement (PPAs)
According to GRID Alternatives, Power Purchase Agreements (PPAs) are the most popular way to finance PV systems in the US. Under this model, a third party solar provider owns the system and the customer pays for the power produced by the system at an agreed upon rate. Savings are typically expressed as a discount off the current electric rate. PPAs also make it easy for the non-profit project sponsor to take advantage of the Federal ITC. Note: Solar leases function similar to PPAs, but instead of purchasing power production, the customer is making payments to rent the system.
Pros
- Typically no upfront costs
- Well-established structure with relatively standard contracts available
- Operations and maintenance typically included for the term of the contract (usually 15-20 years)
- Allows a non-profit project sponsor to take advantage of the ITC
Cons
- Project sponsor does not achieve as high savings as with a system purchase
- Compatible with incentive programs, but care is needed to ensure the benefits of the incentive goes to increase savings for the project sponsor (instead the third party)
- Due to relatively high transaction costs, investors often have higher system size thresholds (i.e. need larger projects or portfolios to increase financing efficiency)
- Challenging to provide tenant solar unless there is also a common area load to offset
Lessons from Eden Housing: Tom White, Energy and Sustainability Manager
- Keep in touch with the solar provider to hold them accountable if the system is not working.
- Negotiate in the O&M agreement that the solar provider must maintain good monitoring and communication, or otherwise enforce with a fee. Maintenance of the system is key—Eden saw a 10-30% improvement in solar production from having clean PV systems.
- If you are allocating production to tenants, you need to develop a clear standard for how energy is being allocated among the units. Owners may have to manage production and allocation.
Self-Financed Model
Some nonprofit housing organizations, like BRIDGE Housing and LINC Housing, are using a new hybrid ownership structure by creating their own solar company that owns the PV systems and sells the power back to their properties at a discounted rate. This model uses a tax equity partner to allow the project to take advantage of the ITC and other tax benefits.
Pros
- Allows the nonprofit housing organization to be in the driver’s seat of their solar project financing and ownership
- Nonprofit can more easily use the ITC
- Generate a developer fee, return on investment, and option to work with lending partners
Cons
- Significant work needed to set up the deal, long-term management obligations
- Due to high transaction costs scale is need for financial efficiency, typically over 500kw
- Need to evaluate staff time and savings opportunities against other solar financing options
Lessons from National Housing Trust: Jared Lang, Sustainable Development Manager
- Overcomes the challenge of needing lender approvals to add solar on existing properties because the housing corporation owns the solar asset—investors seem to like this model.
- New approach that requires the most upfront work and staff time, but can be the most rewarding.
- Does require thinking about solar on a portfolio-wide scale, as opposed to a project-by-project basis.
In 2018, CHPC will host more GREEN Talks to provide nonprofit developers with a forum to learn from each other about various sustainability practices. To get involved in GREEN, please contact Stephanie Wang, Policy Director, at swang@chpc.net
If you are a nonprofit owner interested receiving no-cost solar technical assistance and low-cost design and installation services from GRID Alternatives, check out their website or fill out this form.
About GREEN
The California Housing Partnership convene the Green Rental home Energy Efficiency Network (GREEN), a network of over 80 mission-driven affordable rental housing, environmental and sustainable energy organizations working to increase access to energy efficiency, clean energy and water conservation resources for affordable rental properties in California.