Net energy metering (NEM), a policy under which utility companies are obligated to pay solar customers a state-determined rate for excess energy produced, has become central to the solar business model in many parts of the U.S.
Although NEM clearly helps drive the growth of solar, several states have undertaken reform measures in an attempt to counteract grid strain by targeting NEM. Such measures, which include the implementation of capacity limits and specific compensation terms, threaten solar growth. To date, commercial solar has largely been omitted from these discussions. In order to effectively organize in defense of NEM, the U.S. solar industry must first ensure that all sectors are represented in the NEM discussion.
Graham Smith
The U.S. commercial and industrial (C&I) solar market has historically been an overlooked and underfunded segment within the industry. Consisting of customers ranging from small local businesses to large corporations like Walmart, the highly heterogeneous market is often underserved by financiers and developers alike. Because each project is unique, the due diligence required for a project to be funded often results in prohibitively high transaction costs. As such, the C&I market is oftentimes omitted from broader solar conversations entirely. In fact, solar industry veteran Jigar Shah recently called the U.S. small commercial solar sector the “disrespected asset class.”
The irony is that the C&I sector consumes more energy than the residential sector and has immense growth potential. Last year, the National Renewable Energy Laboratory reported that over half of rooftop solar potential consists of “small buildings” that are not residential households. Wiser Capital estimates that the midsize commercial solar market potential in the U.S. Northeast alone represents a $67.5 billion opportunity. With U.S. residential solar slated for minimal growth in 2017, according to Bloomberg New Energy Finance, the conditions are just right for the solar industry to direct attention and resources toward growing C&I.
A good place to start is considering C&I in NEM reform discussions. We can begin by increasing the understanding of the sector’s unique energy use profile. Unlike residential solar, the peak energy use of C&I buildings more closely aligns with peak energy generation – many businesses use a majority of their energy during the day, when solar panels also generate the most electricity. The common misconception? Because energy is used at the time it is produced, there is no need for NEM in C&I. However, solar panels on C&I buildings continue to generate energy during weekends and holidays, when consumption can be significantly lower.
The difference between the energy use profiles of the residential and C&I sectors cannot be used as an excuse to exclude the C&I market from NEM discussions. The importance of NEM to the C&I sector may not be as obvious as in the residential sector, but there is still a need to be met. Commercial businesses do not operate 24 hours a day, seven days a week, so there will always be excess energy produced that needs to be managed and fed back to the grid.
Furthermore, NEM matters for C&I because it affects the financial feasibility of projects. Reliable and predictable policies are critical for reducing the risk inherent in lending. NEM provides lenders with the assurance that they will get returns for many years to come. The more comfortable investors and lenders are with commercial solar, the more readily they will deliver the much-needed capital to fuel growth in the industry. Maintaining a steady capital flow is essential for C&I because a lack of access to financing is the primary cause for the sector’s stagnation.
As states consider revising NEM legislation or establishing legislation where it does not yet exist, they should consider what has worked effectively in other states, as well as what is best for each sector in the industry. Although occasionally there is reason to adopt separate, sector-specific policies, finding solutions that work for all market segments is ideal.
For example, New York has done an excellent job involving stakeholders in policy decisions. Through the state’s Reforming the Energy Vision initiative, any organization involved in energy has the opportunity to participate in crafting the region’s energy policies. This provides a replicable example for legislators to consider all perspectives when determining policies such as NEM and find all-encompassing solutions that meet the varying needs of stakeholders.
In the solar realm, New York has adopted virtual NEM, which allows for credits from energy generated in one area to be used in another. Virtual NEM is an effective policy tool for all segments of the solar market, including C&I, because it allows for a high degree of flexibility in project development. Today’s typical solar system can function for more than 25 years, but the entity purchasing the power may not stay around for that same duration. Virtual NEM provides assurance that if a power purchaser goes out of business, the power produced can be transferred to another business or organization in the vicinity that has the need for it.
This type of flexibility is especially effective in C&I because the life span of small commercial businesses is riskier than other segments. In the residential market, homes are typically owned for several decades, so the stability of ownership is baked into the process. On the utility-scale front, there is no need for NEM, so it doesn’t make a difference. By ensuring that there will always be an off-taker for the solar power produced, virtual NEM encourages commercial solar developers and financiers to grow the market and deploy solar projects, thereby strengthening the C&I market.
In states with volatile NEM policies like Arizona and Nevada, the solar industry is negatively impacted by reductions in developer and investor confidence. When the Arizona Public Service Co. first proposed a demand charge for most residential and small commercial customers last year, the discussions about the effects to the commercial sector were slim to none.
2017 promises to hold many more discussions across the nation about NEM reform, from northwestern states like Utah, to the tip of the Northeast in New Hampshire and Maine. As policymakers and industry executives come together to decide on the future of solar, there must also be discussions about the effects of NEM reforms on C&I.
There are enormous collective benefits when an industry melds the fragmented sectors to unite behind a common cause. Under the guise of NEM policy, the solar industry has an incredible opportunity to join forces and advance the most important cause of all – deploying more solar. Building a solid policy foundation and laying out a road map to continue the growth of solar is essential and the only way to move forward. After all, everyone stands to benefit from comprehensive solar policies.
Graham Smith is CEO of Open Energy, a provider of debt financing solutions for U.S. commercial solar projects.
