Catalyst Sees a Bright Future for Commercial & Industrial Solar
Renewable energy is in the midst of a pivotal period of development – driven by the desire to combat climate change, a favorable policy and regulatory environment, advances in technology, and limited domestic penetration to date.
The US market remains nascent: currently only 10% of total domestic energy consumption comes from renewable sources, including only 0.4% solar. While this rate lags EU nations averaging 15-30% renewables and 5-10% solar, the US appears to be catching up, installing a record 3GW of solar capacity in the fourth quarter of 2015. Solar accounted for nearly a third of new capacity additions in the past year – up from just 5% only two years prior. Coupled with the recent extension of the investment tax credit (ITC) for renewable energy late last year, these factors set the stage for a long runway for growth in solar power.
Through our research efforts (including a recent whitepaper), we identified commercial and industrial (C&I) distributed solar as a growth market that shares similar characteristics to our previous investments in wireless towers and other internet infrastructure developers and consolidators. Wireless towers benefit from organic lease-up (and solar generally does not), but we were greatly attracted to the similar business characteristics of C&I solar developers: recurring revenue, contracted cash flow, and long customer life.
While C&I solar requires investment in development and installation, these costs are partially defrayed by the up-front tax equity subsidy and operating costs are limited thereafter. Due to the lower capital outlay of smaller-sized projects, the ability to diversify across multiple installations reduces the impact of dry hole (or construction) risk relative to other renewable sectors such as wind or hydro. As compared to residential solar, C&I and utility-scale solar benefit from lower customer acquisition costs (on a per watt basis), economies of scale in both generating efficiency and operations and maintenance, and stronger power “off-taker” credit quality.
C&I developers leverage deep regional networks that enable them to source and execute opportunities to install solar panels on the rooftops of stores, offices, and other commercial real estate or on parcels of undeveloped land. Large institutions provide projects with tax equity (funding tied to the up-front tax subsidy), while the ongoing energy produced from these installations is typically pre-sold sold to an off-taker (usually the tenant or local utility) at contracted rates in a 20-year power purchase agreement (PPA).
Baseline project-level returns for solar in most states may be utility-like, but we believe that upside could be achieved by partnering with an industry-leading development platform, utilizing primary capital for geographic expansion and operational enhancements in sales and marketing, and ultimately selling portfolios of operating assets to large aggregators such as yieldcos. Through our outreach efforts, Catalyst has participated in a number of industry conferences and continues to actively evaluate investable opportunities. Catalyst is interested in partnering with growing C&I solar developers looking to scale their development efforts.
Catalyst Investors employs a proactive, research-based approach to investing. We target sectors that are experiencing above-average growth. If you are a growth-stage C&I solar developer seeking investment, our team would love to start a dialogue. Please send inquiries and business plans to [email protected].