Financing Commercial and Industrial (C&I) solar projects can be challenging, and for a myriad of reasons. We share our tried-and-true methods for pushing through each challenge and successfully financing C&I solar projects below.
Project financing tends to be limited in the C&I space as most banks and investment companies do not make investments at this level; they either don’t provide project financing, or they want to invest larger amounts of money. Financing for solar projects of utility scale and at the residential level has typically come from banks and investment companies, however C&I projects aren't quite large enough to warrant the large investment most investment companies want and need to make and aren't small enough to tackle with a project construction loan through a bank. Financing C&I projects then requires us to think outside of the box to execute these worthy projects.
Complexities to financing these projects arise because the financing available largely depends on the owner of the project and the credit of the company purchasing the electricity. On a C&I project we have the potential to work with several companies: the owner of the project site, the lessor of the site (this can be the same as the owner), and the company purchasing the electricity the solar system generates (this can be the same as the owner and/or the lessor). Smaller companies tend to be higher risk for investments simply because they don't have the credit risk rating that a large and well-established company may have.
Further complexities arise when trying to include tax equity with each investment as the tax equity regulations are very different than other tax incentives and expensive to implement. The expense to implement a tax equity investment is a much smaller percentage when working with a larger project, and therefore yields smaller returns on smaller projects. Read more about the good, bad, and ugly of tax equity here.
So how do we overcome all these challenges and successfully finance a C&I solar project?
C&I solar projects are typically financed with a combination of financial instruments: equity, debt, lease, tax equity or some combination of these. The optimal solution for financing ultimately varies to meet the specific objectives of the project owner.
For example, a building owner and business operator may choose to purchase the solar energy system and own it outright instead of financing it. See the four main paths to solar project development here. This kind of project would entail using a lease or equity and tax equity.
An economic investor, or someone who is investing on behalf of a large corporation to meet corporate sustainability quotas, will likely invest in projects that entail the use of equity and tax equity or equity, debt, and tax equity. In this scenario, we would also likely recommend that their individual solar projects be bundled into a portfolio that focuses on megawatts built to appeal to investors who have a larger capital fund they want to put to work.
With so many ways to finance a project, so many investment vehicles to choose from, and the increased complexity of some of the structures, we continue to find ways to move the solar industry forward in the commercial and industrial space by finding the best fit for each investor and project owner and pairing them together.
Customization and industry knowledge, both in finance and solar, are the keys to successfully financing solar commercial and industrial projects in a space that isn't yet geared towards this niche market.