Corporate customers are procuring more solar than ever. Companies are raising capital for commercial solar. And community solar is booming. It’s a heady time for investment in distributed commercial solar.

Now more than ever, it’s important to understand what commercial customers want, and how these solar projects are financed. According to GTM’s new report, Commercial Solar Consumer Finance Trends, third-party ownership in commercial solar has been increasing since 2015, driven primarily by the intense growth in community solar. Community solara accounted for almost 20 percent of commercial installations in 2017, 99 percent of which were third-party owned.

But this doesn’t tell the whole story — trends in consumer finance and customer preferences are nuanced across customer types and project sizes.

Non-Residential Installed Capacity by Ownership Type



Source: Commercial Solar Consumer Finance Trends

Third-party ownership is expected to increase, but at different rates across segments

GTM Research expects the recent increase in third-party ownership to continue. Community solar, solar-plus-storage installations, and large (1+ megawatt) projects are forecast to account for most of the commercial solar market. On average, over the next five years, community solar is anticipated to be 30 percent of the market, with solar-plus-storage and large projects accounting for an additional 19 percent and 23 percent, respectively. With community solar and solar-plus-storage systems almost entirely third-party owned, and large projects over 70 percent third-party owned, third-party ownership will rise quickly in the near term — from 53 percent today to a peak of 78 percent by 2021.

But outside of these specific commercial solar segments, the increase in third-party ownership is expected to be more moderate. Since small- and medium-scale projects (<1 megawatt) are more difficult to finance, this segment will remain mostly customer-owned for the next five years.

Small- and medium-scale projects present two main obstacles for developers and financiers:

  • First, since they represent small transactions, the fixed transaction costs often make these projects unviable.
  • Second, these projects are more likely to have customers without investment grade-credit — a requirement for many major financiers.  

Third-Party Ownership Shares for Various Market Segments: Historic and Forecasted



Source: Commercial Solar Consumer Finance Trends

Consumer finance in commercial solar is customer-driven

In contrast to residential solar — where third-party ownership trends are highly influenced by the product offerings of major national installers — commercial solar customers dictate their financing options. Most customers want to compare power-purchase agreements, leases and direct ownership before choosing their preferred solution.

There are multiple factors for each commercial customer that influence this decision. For example, many commercial solar customers don’t own their property — about 45 percent of occupied commercial buildings in the U.S. are leased. For these customers, third-party ownership avoids leaving the customer on the hook for any complications with the lease agreement. And even for a third-party owned system, access to the customer’s facilities must be arranged differently for each customer, making each commercial solar deal highly customized.

Most commercial solar developers have adapted to this environment by offering multiple financing options to customers. Developers have found that third-party ownership is more alluring to most customers. Many customers don’t want to invest large amounts of capital in anything outside their immediate business interests. Plus, the increasing complexity of certain solar markets (California’s new time-of-use rates, Massachusetts’ new SMART program, New York’s DER compensation schemes) means customers would rather entrust third-party owners with managing and navigating the details of such markets. 

PPAs are highly customized to individual customers

Despite most customers’ preference for third-party-owned deals, power-purchase agreement negotiations still require substantial time and attention. There are some “usual suspects” that most customers focus on during this process.

Beyond the final PPA price, term length can be contentious. Most businesses are sensitive to long-term contractual agreements and therefore prefer shorter contracts. As a result, some developers have reported that 10- and 15-year PPAs have increased in popularity. But of course, shorter term lengths typically increase the final PPA price. At the end of the day, developers must weigh the importance of certain contracting terms and the PPA price depending on customer preferences.

To address future growth, developers and financiers should strive for flexibility

The commercial solar space has a lot of potential — only 0.95 percent of all business facilities in the U.S. have gone solar to date. To truly address this potential market, there are a few market gaps that developers and financiers must address.

  • First, developers must create product offerings to serve less creditworthy customers. Most strategic investors and national banks still require investment-grade credit for offtakers, yet potential projects with these offtakers will become tougher to find. Developers have reported that this has already started to happen in saturated markets like Massachusetts and New Jersey.
  • Second, customers need more flexibility, not less. While there are several advocates for standardization in commercial solar, the customized nature of commercial solar deals isn’t going away anytime soon. Every commercial customer is different — having the flexibility to tailor product offerings for this diverse set of customers will help expand the commercial solar market even further.

Commercial solar is a challenging sector in which every deal is a bit different. But as third-party ownership becomes increasingly appealing to customers, developers and financiers will be well positioned with more flexible and appealing financing options.

Join us in San Diego for Solar Summit on May 1-2. Relevant sessions include: Financing Solar Plus Storage, Structuring a Corporate PPA Deal, The Corporates Roundtable: Selling Solar to the Business Community, and more!

Learn more and register here.