Scaling Equitable Solar Finance - By: Eric Hangen, Rebecca Regan, and Sarah Boege - Federal ...
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Carsey School of Public Policy White Paper
Photos courtesy of Inclusive Prosperity Capital
Scaling Equitable Solar Finance
By: Eric Hangen, Rebecca Regan, and Sarah Boege
May 19, 2021
This material is based upon work supported by the U.S. Department of Energy’s Office of Energy
Efficiency and Renewable Energy (EERE) under the Solar Energy Technologies Office (SETO)
Award Number DE-EE0009009. The views expressed herein do not necessarily represent the
views of the U.S. Department of Energy or the United States Government.
Carsey School of Public Policy
®
2 C A R S E Y SCHOOL OF PUBLIC POLICY
Executive Summary However, the financing ecosystem does not work
nearly as well for these “mission driven” solar proj-
Driven by dramatic declines in up-front cost, the U.S. ects as it does for utility-scale projects. For home
solar photovoltaics (PV) industry has taken off over rooftop solar, even if low-income consumers have a
the past decade, growing from 1 gigawatt of installed home and suitable roof, they may fail to qualify for
capacity in 2009 to 89 gigawatts in 2020—or enough federal tax incentives, lack adequate credit to qualify
capacity to power roughly 19 million homes. The for a loan—or the mission-driven lenders seeking to
industry is expected to double in size over just the serve them may not be adequately capitalized to make
next 5 years.1 Much of the growth has been driven by long-term loans. For mission-driven commercial or
large, utility-scale projects that can produce 5 mega- community-scale projects, assembling nearly every
watts or more of power—enough to power at least component of the project capital stack—whether
1,000 homes. The cost of electricity produced by these bridging early-stage costs, attracting tax credit equity
projects has decreased by more than 70 percent since investors, securing long-term debt, or coming up with
2010. As of Q3 2020, development costs of large, util- sponsor equity and filling gaps—can present challenges.
ity-scale solar PV power plants were under $1 per watt, A variety of obstacles contribute to the scarcity of
down by more than 70 percent from 2010.2 A robust financing for low-income solar, including small project
array of investors has come forward to efficiently sizes, lack of developer balance sheet capacity, both real
deliver capital to these kinds of utility-scale projects and perceived issues with credit risk, elevated technical
including large banks, insurance companies, pension assistance needs, and greater subsidy requirements to
funds, and others. pursue goals such as deep energy affordability, climate
But low- and moderate-income communities, resilience, or job creation. Still other obstacles are
including communities of color, are at risk of being regulatory: for example, not all states allow community
left behind in the transition to clean energy. Mission- solar projects or Power Purchase Agreements, common
driven solar project developers and financial institu- strategies used for providing low-income solar—and the
tions have been working alongside energy justice potential for regulations to shift over time creates risks
advocates to open up solar access for these communi- that mission-driven projects can ill afford.
ties, using strategies ranging from community solar, to This report synthesizes information garnered from
solar installations on affordable multifamily housing, 47 key informant interviews, four focus group discus-
to distributed solar and storage programs, and more. sions involving 60 stakeholders, and a review of the
Their goals go beyond simply generating more green substantial existing literature on low-income solar
energy to advancing social equity by: finance to assess the current landscape of mission-
• empowering communities to control their energy driven solar development in the United States,
future examine the roles that community-based financial
• stabilizing energy prices, saving money, and build- institutions could play, and recommend public invest-
ing wealth for low-income families ments and policy changes that could help to scale the
provision of equitable solar finance. Key recommen-
• creating quality jobs dations for policymakers and funders in the renew-
• improving health by reducing pollution able energy and community development fields that
• providing energy resilience for vulnerable emerge from this process include the following:
communities • Help to capitalize and support community-based
lenders to provide flexible, low-cost, and long-
Mission-driven actors are successfully deploying a term financing to mission-driven solar projects—
wide variety of strategies to meet these goals, from including providing guarantees or other forms of
helping low-income homeowners get solar—and some- credit enhancement.
times battery storage, to developing solar projects serv-
ing affordable rental housing and community facilities, • Provide federal support for equitable solar,
to building larger “shared solar” projects to which including a grant-in-lieu-of-credits option for the
households from across the community can subscribe. Investment Tax Credit to improve access to this
critical government subsidy.
C A R S E Y SCHOOL OF PUBLIC POLICY 3
• Develop pools of government and philanthropic Low-income and BIPOC communities are in danger
support that can complement financing from of being left behind.
community-based lenders to complete the capi- Low-income communities, including many communi-
tal stack for mission-driven projects, as well as to ties of color, are in danger of being left behind as the
support education and technical assistance to both rest of the nation goes solar, due to a variety of chal-
consumers and potential project sponsors. lenges in access. Rooftop systems, the way in which
• Create a national Renewable Energy Credits pro- many higher-income homeowners access solar, are out
gram that includes social equity targets to provide of reach for many low-income households. Only 47
a baseline of support for clean energy generation. percent of households with under $50,000 in income
• Change utility regulations to remove barriers to own their home,10 and many other households face bar-
low-income solar projects; lower permitting costs; riers relating to roof shading, inadequate roof space, or
provide greater certainty for developers, consumers rooftops that need structural modifications in order to
and owners; and measure progress toward equity in support a PV system.11 Additional financing challenges
renewable energy policy implementation. further restrict the ability to serve low-income custom-
ers. First, many do not have sufficient taxable income
to access the federal renewable energy Investment Tax
The Promise—and the Challenge Credit (the “ITC”).12 Second, credit challenges can pre-
vent some borrowers from accessing a loan even from
A dramatic decline in the cost of solar has driven
a mission-driven consumer lender. Third, especially
exponential growth.
in states with low electricity cost, the term of financ-
Over the past decade, the U.S. solar photovoltaics indus- ing may need to be quite long (15 years or more) for
try has taken off, growing from 1 gigawatt of installed higher-cost solar projects to be cash-flow positive for
capacity in 2009 to 89 gigawatts in 2020.3 Projections the borrower. Barriers to affordability can be magnified
anticipate that the solar PV industry will continue to grow if the goal of the project is to provide resiliency, since
in the coming decades. The U.S. Energy Information battery storage costs, while declining rapidly, remain
Administration estimates that nearly $650 billion will be high.13 Worse, depending on the utility rate design of
spent on solar PV system deployment from 2019 to 2050.4 their state, low-income households can even end up
Similarly, the Solar Energy Industries Association (SEIA) paying to help subsidize solar for higher-income cus-
and Wood Mackenzie Power & Renewables forecast that tomers, while they themselves are unable to access it.14
installed PV capacity in the United States will more than As a result of these challenges, residential adopters of
double in the next five years, adding sufficient capacity to rooftop solar have a median income that is 54 percent,
power an additional 19 million homes.5 or $32,000, higher than all U.S. households and 17
Dramatic declines in cost are the main driver of this percent (about $13,000) higher than owner-occupied
exponential growth. Solar photovoltaic cells that cost $77 households generally.15 Progress is being made—as
per watt in 1977 now cost only $0.13 per watt,6 and ‘soft’ of 2018, three states (CT, LA, and NJ) had reached
costs such as installation labor, system design, installer “income parity,” meaning that PV adopter median
margins, and permitting and inspection costs have also incomes are equal to or below that of other owner-
dropped. As of Q3 2020, total development costs of large, occupied households16— but rooftop solar PV systems
utility-scale solar PV power plants were under $1 per remain out of reach for many low-income households.
watt, down by more than 70 percent from 2010.7
However, despite the increasing affordability and cost Mission-driven actors are seeking to advance important
effectiveness of solar, there are still some key limita- social equity goals through solar energy.
tions. Residential solar prices have also dropped steeply Mission-driven solar developers are responding to the
over time but remain much higher than for utility-scale social justice challenge posed by unequal access to solar
projects, at around $2.85 per watt.8 Additionally, the cost energy, working to ensure that low-to-moderate income
of energy storage—critical for projects with resilience and disadvantaged communities are not left behind in
goals—remains too high to be affordable for many, with the green energy transition. Beyond merely providing
installed prices ranging from $800 to $1,300 per kWh of access to solar energy, these developers tend to seek at
storage capacity (a typical home would need at least 5 to least one or more of the following additional goals:
10 kWh of storage).9
4 C A R S E Y SCHOOL OF PUBLIC POLICY
• Improving energy affordability and price certainty. • Promoting community control and wealth
In the United States, low-income households pay a building. Community-owned solar installations
disproportionate share of their incomes for energy, provide communities and community institutions
and thus stand to benefit the most from the price with a greater degree of control over their energy
certainty and energy affordability that solar PV future—and ensure that the transition to a clean
typically delivers.17 According to 2017 home energy economy is done in a way that strengthens these
data, low-income households spend an average of communities, and builds wealth for them, rather
17.8 percent of their income on electricity—almost than negatively impacting them. Stakeholders
six times the average for non-low-income house- hold divergent views on whether community
holds (3.1 percent).18 Providing low-income house- ownership is desirable. Critics note the financial
holds with access to solar power can help alleviate risks that may come with ownership and sug-
this energy burden with electricity at lower rates.19 gest the key focus should simply be on whether
Further, low-income households are most vulnerable low-income households are saving money. On the
to uncertain and rising energy prices; solar energy other hand, as Shalanda Baker puts it in her book,
generation can provide households with foreseeable Revolutionary Power:21
and stable energy costs. “In my experience, ‘easy’ climate solutions might
It is important to note that despite dramatically actually threaten to leave marginalized communities
declining costs, it is still far from certain that a even more marginalized… Solving the climate crisis
given low-income household will save money by requires that we turn the playbook on its head, intro-
“going solar.” Energy cost savings are most difficult duce new players—those who were tagged as losers
to achieve where utility rates are already low, when in the prior two centuries—and bring their concerns,
resiliency through energy storage is also a goal, hopes, and dreams to the forefront in the design of the
or when energy assistance programs are already new system…I argue that people of color, poor people,
subsidizing the cost of energy. Rooftop solar can and Indigenous people must …actively engage in the
be especially difficult to generate savings, given its creation of the new energy system so as to upend the
higher cost per watt of installation, as well as the embedded and unequal power dynamics that are a
possibility that roof or electrical upgrades will also direct outgrowth of the current energy system.”
be needed to support installation. Long-term costs
of equipment replacement and disposal should • Promoting racial justice. Many fossil-fuel-based
be factored into the cost of solar. Furthermore, energy projects disproportionately harm commu-
long-term shifts in energy pricing or utility policy nities of color, for example through air pollution
(discussed in more detail later in this document) that contributes to disparities in the incidence of
can impact whether a solar customer will save respiratory disease. Mission-driven solar develop-
money over the long term. For all of these reasons, ers see building solar projects in and for communi-
mission-driven projects that seek to reduce and ties of color as a way of redressing this harm.
stabilize energy bills for low-income households • Job creation. The solar industry has seen sus-
may need significant subsidies. tained job growth, with employment increasing 167
percent over the past decade; median wages exceed
• Building resilience. Low-income communities $15 per hour across the most common job types,
and disadvantaged communities are disproportion- even for entry-level positions.22 Observers have
ately impacted by climate events,20 as most dramat- argued that solar developers should be willing to pay
ically evidenced by the months-long power outages prevailing wages for solar jobs;23 ensuring a diverse
in Puerto Rico following Hurricane Maria, but workforce with advancement opportunities across
also in other recent events such as the California racial, ethnic and gender lines is also an important
wildfires and Texas freeze. Solar and storage instal- social equity goal.24 Low-income solar programs can
lations can help to build much-needed climate incorporate workforce development goals that pro-
resilience for low-income communities, providing vide job training opportunities and direct pathways
a reliable power supply after a disaster or outage. to quality solar jobs for workers from low-incomeC A R S E Y SCHOOL OF PUBLIC POLICY 5
communities.25 Further, solar generation enables Due to the access challenges already described
economic development in communities with earlier in this paper, however, these programs cannot
high energy costs, particularly rural areas lacking provide a complete solution to helping low-income
natural gas and dependent on trucked-in propane. households go solar.
Manufacturing and other industry may become • Distributed rooftop solar—solar lease and
feasible when solar generation is present. PPA models. In solar leasing or Power Purchase
Agreement (PPA) models, a solar developer
Existing Strategies for Low-Income Solar maintains ownership of the rooftop system. The
Mission-driven actors have used a variety of strategies homeowner either leases the equipment from the
to help low-income communities access solar PV. Each developer or purchases power by the kilowatt-hour.
strategy has different strengths and limitations. The chief advantage of this structure, compared
to direct ownership by the homeowner, is that the
• Distributed rooftop solar—homeowner purchase. developer can then monetize the Investment Tax
A number of community-based lenders have devel-
Credit (ITC) and pass the savings along to the
oped loan products to finance homeowners purchas- homeowner through a lower rate, providing an
ing rooftop solar installations, including low-income indirect way for low-income homeowners to ben-
and credit-challenged homeowners. Often, these efit from this subsidy. Furthermore, maintenance is
products take the form of consumer loans that are the responsibility of the developer/installer.
unsecured or secured only by the solar equipment,
generally with terms of 10 years or longer. In most x A notable mission-driven player in this space
cases lenders will also support energy efficiency is PosiGen, which has served over 16,000 cus-
upgrades, which often have better economics than tomers in three states (LA, CT, NJ). PosiGen
solar PV and can be combined into one loan. Some targets low-income homeowners with high
notable examples in this space include: energy burdens, offering a 20-year, fixed-price
solar lease in combination with energy effi-
x Inclusive Prosperity Capital’s “Smart-E” loan ciency improvements. The average customer is
program. The platform assists credit unions, saving $500 per year—but the model depends
Community Development Financial Institution not only on federal tax credits but other state
(CDFI) loan funds, and other community-based supports including sales of Renewable Energy
lenders to make solar loans by providing an Credits or elevated incentives.
online workflow management platform, con-
tractor vetting, and a standardized loan product x GRID Alternatives provides low- to no-cost
for low-income and credit-challenged home- solar installations through its Single-Family
owners enabled by loan loss reserves. The pro- “Solar for All” program. Project funding typi-
gram is active in 3 states (CT, MI, CO) with 16 cally consists of 20 percent low cost debt from
participating lenders; it has served over 22,000 foundations, 50 percent traditional debt from
customers with strong portfolio performance. Community Development Finance Institutions,
and 30 percent federal tax credit equity. Projects
x A number of credit unions have strong solar are further dependent on state supports such as
consumer loan products including Cooperativa Renewable Energy Credit sales or revenues from
Jesus Obrero in Puerto Rico; VSECU in cap and trade programs such as California’s.
Vermont; and Clean Energy Credit Union
(national field of membership). x A start-up nonprofit in Puerto Rico, Barrio
Eléctrico, is seeking to replicate the PosiGen
x Some states allow Residential Property-Assessed solar leasing but add battery storage to provide
Clean Energy (PACE) loans, where the loan is power resiliency. The highly distributed nature
secured as a part of the property tax assessment of rooftop solar makes it an ideal way to pro-
on the home. These loans can serve customers vide resiliency to low-income communities.
with more challenged credit but may also carry
higher interest rates.6 C A R S E Y SCHOOL OF PUBLIC POLICY
A primary barrier to scaling this model is x GRID Alternatives focuses on low-income
regulatory—not all states allow solar leases or community solar projects that seek both
PPAs. While these models provide a way for energy savings and workforce development
low-income homeowners to access the ITC, goals for these communities. It has partnered
low-income customers can face similar barri- with community-based nonprofit organiza-
ers to accessing solar leases and PPA models tions, Tribes, affordable housing providers,
as they do with direct rooftop solar ownership. and government and utility partners.
There can also be some customer hesitancy to x Both Co-op Power and Cooperative Energy
enter a leasing agreement, although it is possible Futures develop cooperatively-owned com-
to structure the agreement to allow for cus- munity solar projects where member house-
tomer purchase of the system after the tax credit holds have a say in decision-making over the
compliance period has ended. This hesitancy is management of the projects.
sometimes justified—a greater level of consumer
protections is generally in place when it comes x EnerWealth Solutions builds shared solar
to a household’s utility bill than is afforded that plus storage projects where stored energy is
household in a solar lease or PPA, and not all deployed during peak electricity cost peri-
providers of solar leases and PPAs are mission- ods to reduce overall costs to subscribers.
driven actors with consumer protection at the Projects are also structured so that revenues
heart of their business. support small and minority landowners as
well as community-based nonprofits.
• Community solar. Community solar—also
called solar gardens or shared solar—is a sys- Some actors are working to add a greater resiliency
tem where multiple users are able to purchase component to the shared solar model through the
electricity from an (often) off-site solar facility.26 development of microgrids, connecting mul-
In this way, participants (“subscribers”) are able tiple homes, businesses and community facilities
to buy a portion of the energy output without together with shared solar and storage. Various
needing to pay any of the upfront installation efforts are under way in Puerto Rico to develop
costs or provide the physical space—nor do they microgrids; another example is the Hunters Point
have to worry about whether their own home is Community Microgrid project in San Francisco.
suitable for solar.27 Community solar can refer Not all state regulatory regimes support or
to a distant solar project with multiple users allow community solar, reflecting a broader chal-
or to a more locally controlled, in-community lenge in which state utility regulations can inhibit
solar project.28 Due to economies of scale, the solar development, as we discuss in more detail
cost per installed watt of community solar can later on. Community solar projects also have dif-
be significantly lower than for rooftop systems. ferent subscriber and billing models. While some
The community solar space enjoys the involve- utilities will work with community solar develop-
ment of a large number of mission-driven actors, ers to allow on-utility-bill payment of community
including but not limited to these examples: solar subscriptions, others will not, resulting in
x Groundswell produces mixed-income commu- cumbersome dual billing systems.
nity solar projects where low-income house- • Solar installations for affordable multifamily
holds qualify for affordable rates, supported in housing. Solar PV systems can also be installed
part by other subscribers who pay the average on-site on community development infrastruc-
market rate. Groundswell is also a lead partner ture like affordable multifamily housing prop-
in the “LIFT Solar Everywhere” initiative, a erties.29 Often, these projects are structured
research and demonstration program seeking similarly to other community solar projects, but
to scale accessible community solar and energy they are worth a special mention because of the
efficiency programs for low-income households. role that the affordable housing owner can playC A R S E Y SCHOOL OF PUBLIC POLICY 7
in supporting their development. Some notable The Existing Financing Ecosystem
examples and initiatives in this space include,
but are not limited to:
and Its Challenges
x In Denver, Colorado, the Denver Housing To understand the financing challenges faced by
Authority (DHA) received a 15-year loan from mission-driven solar projects, it may be helpful to first
the Enterprise Community Loan Fund (a CDFI) briefly review how large, utility-scale solar facilities are
to build a 10-acre community solar project.30 built and financed. These projects are generally 5 mega-
watts or more in size, with the largest projects reach-
x NHT Renewable, an affiliate of the National ing hundreds of megawatts. Sophisticated developers
Housing Trust, has worked to support the (“sponsors”) with large balance sheets will acquire or
installation of 5 megawatts of solar on 50 lease land for the project—around 5 to 10 acres of land
affordable housing properties since 2014, per megawatt of capacity.31 The developer will secure a
using a portfolio financing approach in which multiyear contract with the local utility to be the “off-
a single entity is set up to own and manage taker” (purchaser) of the electricity, who will then resell
solar installations on multiple properties. the power to end-users at regular rates. The developer
x There are also opportunities to serve manu- will utilize an experienced team—whether in-house
factured housing parks in the same way. An or contracted—for Engineering, Procurement, and
example is the Mascoma Meadows Resident- Construction work, as well as ongoing operations and
Owned Community in New Hampshire. maintenance. For financing, the typical capital stack
Project financing included state grants and will be put together as follows:
debt from the New Hampshire Community • First, tax credit equity—driven by the federal
Loan Fund, a CDFI. renewable energy Investment Tax Credit (ITC)—
x The Clean Energy Group Resilient Power will provide around 26 to 30 percent of project
Project is looking specifically at how to deploy costs.32 Typically, the developer will set up a single-
solar and storage to affordable housing prop- project entity that is the vehicle through which
erties, as well as critical community facili- investors with tax appetite (such as large banks)
ties such as Federally Qualified Healthcare invest equity to claim the credits. These investors
Centers, fire stations, and the like. favor large project sizes of at least $50 to $75 million,
and projects with reputable, “bankable” sponsors.33
Some barriers specific to this space can include the
need for significant property-by-property feasibil- • Second, project debt will be sized off of net operat-
ity analysis when seeking to develop solar onsite. ing income, using a debt coverage ratio. Lenders
There can also be a “split incentive” issue: the ten- generally underwrite only to revenue that is fully
ant pays the electricity bill so the owner lacks the contracted with a creditworthy counterparty.
incentive to invest in energy-cost-saving improve- • Income from Renewable Energy Credits (RECs) can
ments like solar beyond measures addressing boost the revenue stream to increase the amount of
common-area electricity use. Further, complicated serviceable debt. RECs represent the “green aspect”
capital waterfalls in some affordable properties of the power produced and are purchased by utilities
make it difficult for housing owners to capture as a way of meeting renewable energy production
savings from energy investments. Instead, savings requirements imposed by state regulators.34
go to housing subsidy providers (like USDA and • The remaining project costs are typically covered
HUD) instead of paying for the system. by sponsor equity invested by the developer. In a
few cases this equity investment has had returns
enhanced through Opportunity Zone incentives,
when the project is in an eligible area.8 C A R S E Y SCHOOL OF PUBLIC POLICY
• During the project development phase, before tax offtakers might not pay their solar bill can make
credit equity and permanent debt come into the both investors and lenders reluctant to fund mis-
stack, projects may be financed by a combination sion-driven deals. Solstice has been developing an
of sponsor equity, acquisition, and predevelopment “EnergyScore” that initial research suggests will bet-
financing that may be provided at a corporate or ter predict credit risk for solar consumer customers.
project level, and construction financing. • Technical assistance needs. For projects seeking to
For utility-scale projects a robust, efficient financ- promote community ownership, significant commu-
ing ecosystem is in place. With a low cost-per-watt to nity outreach and education may be required before
develop, and large project sizes over which to spread the project can proceed (imagine, for example,
transaction costs for closing financing, such projects working with resident leaders of a resident-owned
can be economically competitive with no public sup- manufactured housing park to discuss the possibil-
port other than the Investment Tax Credit and the ity of a community solar development serving the
favorable tax treatment of depreciation such projects park). As noted by the Low-Income Solar Policy
receive. Large financial institutions such as Bank of Guide, “Often the targets of scams, customers in
America, Wells Fargo, U.S. Bank, and JP Morgan Chase low-income communities may be distrustful of
are leading investors in the tax credit equity market for claims relating to energy bill savings.” Other mission
these types of projects. Other large institutions such driven projects, such as rooftop solar on an afford-
as KeyBank, Santander, and HSBC are leading debt able multifamily housing property or community
providers; often debt financing is provided through health clinic, have additional technical feasibility
mini-perm structures before developers sell projects work that may be needed (for example to assess
to investors with long-term horizons. These long-term building rooftop condition). Projects with nonprofit
asset owners include utilities, pension funds, insurance sponsors require complicated legal and accounting
companies, and private equity funds.35 work to set up the affiliated entities needed to mon-
For mission-driven projects, however, the financing etize the tax credit. All of these projects may require
ecosystem is much more challenging. Broadly speaking, technical assistance to help the community or com-
these challenges are related to: munity organizations to assess project benefits and
costs in relationship to community goals.
• Smaller project scale, which can result in both
higher cost-per-watt of construction, higher trans- • Sponsor balance sheet strength. Nonprofit or
action costs as a percent of total development costs, community-controlled project sponsors may not have
and difficulty in reaching the minimum deal size the balance sheet capacity to provide the required
desired by many investors and lenders. Transaction sponsor equity to a project—or the capacity to take
costs, particularly legal, audit, tax accounting on corporate debt that could then be redeployed as
and appraisal costs related to monetizing tax sponsor equity. Many of these sponsors require soft
credits, can render smaller projects infeasible. financing or grant support to be able to build capacity,
Construction costs can also be high in areas with meet working capital needs, and assemble a pipeline.
aging substation infrastructure, where developers • Elevated project costs to promote certain mis-
must pay for interconnection upgrades. sion goals. Mission-driven actors may have goals for
• Real or perceived credit risk of end users. Many energy savings that could require deeper subsidy than
low-income households or projects located in is available through the ITC alone, or they may be
low-income communities have a hard time meet- seeking to promote workforce development and job
ing the credit requirements needed for long-term, creation goals that cost more—or increase perceived
low-cost financing.36 For solar projects, where the project riskiness—relative to using mainstream
hard collateral provides poor protection to lenders contractors. Resilience-oriented projects require bat-
and investors, the key to protecting the investment tery storage—which has some potential to generate
is maintaining a reliable revenue stream—a major greater savings through peak demand reduction, but
reason why lenders and investors prefer projects with also adds significantly to upfront costs.
utility offtakers. The perceived risk that low-incomeC A R S E Y SCHOOL OF PUBLIC POLICY 9
These challenges can manifest themselves across all of many community-based lenders, who from a mis-
the components of the capital stack: sion perspective are most inclined to invest in such
• For early-stage project financing, sponsor balance projects—are not able to provide long-term debt,
sheet capacity as well as elevated feasibility and pre- because they too struggle to access long-term capital.
development costs both come into play. In theory, As a result, some interviewees reported that many
Community Development Finance Institutions mission-driven/community-controlled projects are
(CDFIs) excel at providing risk-stage capital to currently taking on both refinancing and interest
mission-driven projects, underwriting the ability rate risk to get the deal done. Cost of debt is also an
of their borrowers to get to permanent financing. issue, and also an area where CDFIs are not always
For example, this role is commonly played by price competitive despite their willingness to look
CDFIs in the affordable housing development space. at mission-driven projects. This latter challenge is
However, very few CDFIs are involved in providing particularly true of CDFI loan funds, which face rela-
this financing in the mission-driven solar develop- tively high costs of capital compared to depository
ment space, possibly due to a lack of familiarity. institutions. Yet many credit unions, despite their
lower cost of funds, do not have the project-finance
• Bringing tax credit equity to mission-driven deals background required to invest in these types of
faces myriad challenges, starting with the fact that projects, and must also manage regulatory concerns.
the structures most often used to bring this equity to A further issue is that as many lenders will only
low-income deals—solar lease/PPA structures and underwrite to fully contracted revenues, they may be
community solar projects—are not allowed in many unwilling to lend for a term that exceeds the length
states. Even where it is allowed, in many cases, such of the revenue contract, or to lend to projects with
as when the project owner is a non-profit, the ITC floating-rate power purchase agreements, as occurs
cannot be accessed directly. Instead, sponsors must in some community solar projects.
put into place complicated third-party-ownership Credit enhancements can play an important
structures involving substantial transactions costs, role in facilitating long-term debt. Currently the
greatly eroding the value of the credits. These most used programs are at the REAP grant and
structures can further raise concerns for community guarantee and the Business & Industry guarantee
members desirous of community control, greatly at the U.S. Department of Agriculture. However,
increasing the time and costs to educate them about projects in urban areas are not able to access these
the nature of the investor agreement. Perhaps the programs (nor are all projects in rural areas).
greatest challenge, however, is simply the reluctance
on the part of investors to place tax equity in small • Sponsor equity functions as the “gap filler” for
and mission-driven deals that carry additional mainstream, market rate projects—but for rea-
perceived risk (e.g. offtaker risk, developer risk) sons discussed above, mission-driven projects
and high transaction costs while failing to meet tend to have both larger gaps and more financially
minimum deal size requirements. These challenges limited sponsors. “Back leverage” loans (corpo-
were widely felt by our interviewees. The combina- rate loans to developers whose proceeds can then
tion of these challenges can be great enough that be placed into a project as equity) are less likely
some mission-driven actors have in fact forgone the to work for mission-driven projects, given both
ITC for some deals (including, for example, several the potential issues with sponsor creditworthi-
solar projects serving resident-owned manufactured ness, and the need for truly concessionary capital
housing parks declined to use the ITC). to play the “gap filler” role. As a result, for mis-
sion-driven projects, some or all of the sponsor
• The need for long-term debt is accentuated with com- equity, as well as any additional project subsidies
munity-controlled projects, since the community required to achieve deeper energy affordability,
organization is the long-term asset owner and sale to must be provided by philanthropic or state and
another owner goes against the goals of the project. local government sources. Instead, most mission-
The problem is that many lenders—and especially driven developers appear to rely on state funding10 C A R S E Y SCHOOL OF PUBLIC POLICY
programs to fill gaps, but states vary widely in • As of 2020, according to the Institute for Local
the supports they provide, not only in terms of Self-Reliance’s “Community Power Scorecard:”37
whether they offer any grant support, but also in x 31 states did not have policies in place allowing
pricing of Renewable Energy Credits. Pricing var- shared solar (community solar) projects, mak-
ies widely from state to state, ranging between only ing community solar not possible to implement
$10 all the way up to $400 per megawatt hour.
x 27 states did not have utility renewable energy
While a space with these kinds of financing chal- procurement requirements
lenges seems ripe for a combination of government, x 19 states lacked simplified interconnection
philanthropic, and CDFI intervention, the reality rules to facilitate interconnection of solar
is that the latter two sectors have played a limited installations to the grid
role to date in domestic low-income solar finance.
Leading CDFIs that have engaged in financing x 7 states lacked customer-friendly net metering
mission-driven, low-income-focused solar projects policies, and 44 states did not have a feed-in
include, but are not limited to, Blue Hub Capital, tariff for distributed renewable energy
Coastal Enterprises Inc. (and its subsidiary Bright • Similarly, 20 states do not make legal provisions for
Community Capital), Self-Help, and Enterprise solar Power Purchase Agreements and leases—and 7
Community Loan Fund. However, a recent sur- of these states outright prohibit them, effectively tak-
vey conducted by the Richmond Federal Reserve ing away any possibility to use third-party-ownership
Bank found only 22 CDFIs, out of 205 respondents, strategies to monetize the investment tax credit.38
reporting any clean energy lending activity dur-
• Levels of partnership and support for mission-driven
ing 2019 and 2020—and more than half of those
projects can vary greatly depending on the utility and
lenders engaged only in consumer lending. On the
reflect broader policies such as whether utilities are
philanthropic side, Kresge Foundation has provided
subject to renewable energy procurement require-
a guarantee for low-income solar and storage financ-
ments. According to the Low-Income Solar Policy
ing, as well as support for a number of mission-
Guide,39 actions that utilities could take—but that
driven actors. Kresge and other foundations also
many don’t—to support these projects could include:
collaborated to create the Community Investment
Guarantee Pool. MacArthur Foundation has made x facilitating customer education, engagement,
investments in the space, including a $5 million and enrollment
investment in Housing Development Fund, a CDFI, x allowing on-bill payment of community solar
to lend for clean energy in multifamily affordable bills or on-bill financing of distributed rooftop
housing. Hewlett Foundation has also supported solar
efforts to train and support community-based lend-
x facilitating siting and interconnection for solar
ers in the United States to engage in clean energy
projects that will serve low-income customers
finance. Many interviewees did not feel, however,
that the scale of philanthropic sector involvement x enabling virtual net metering for community
was commensurate with the scale of the problem. solar subscribers
• While electricity pricing levels generally affect the
Regulatory and Policy Barriers viability of any solar project, a particular concern
we heard from interviewees about low-income
Regulatory barriers, especially but not limited to state
solar projects is that low-income energy assis-
utility regulations and local zoning practices, present
tance programs, by further subsidizing the cost of
significant challenges for developing low-income solar
energy, reduce the cost-savings benefits from solar
projects. Other literature has extensively discussed these
energy that low-income customers might other-
complex challenges and we try to summarize and high-
wise receive. Potentially, funds from such assis-
light some of the key issues here.
tance programs might be better invested in energy
retrofits and solar projects to achieve long-term,C A R S E Y SCHOOL OF PUBLIC POLICY 11
sustainable cost reductions for these consumers. • Facilitate engagement by community-based
Interviewees discussed similar challenges with lenders in low-income solar finance. Community-
affordable housing utility allowances, where if based lenders need more knowledge to engage
a resident’s utility bills decrease due to solar or effectively in the solar project finance space—for
energy efficiency improvements, their rent will most, it is an asset class to which they are new, and
increase by a corresponding amount.40 one where designing the underwriting approach
• Local zoning and development codes can create bar- requires nontraditional approaches to project cash
riers to solar development.41 Solsmart offers a toolkit flows and collateral. However, they also have the
for local zoning agencies to update their documents mission orientation, community connections, and
and processes to be more solar-friendly. in some cases, the tolerance for risk, that could help
them to play crucial roles. Several strategies could
Utility company opposition to rooftop and commu- help unlock the potential for these lenders to sup-
nity-controlled solar is one driver of these regulatory port mission-driven solar projects:
barriers, as such developments both pose technologi- x Training programs can help to broaden the
cal challenges for grid operations while threatening pool of community-based lenders with a basic
utilities’ ability to profit from existing and new capital working knowledge of solar finance opportu-
investments (including their own solar power plants).42 nities and mechanisms.
Creating long-term predictability within the regulatory
environment is also critically important. For example, x Core operating support for leading community-
changes to net metering rules, or decisions to impose min- based financial institutions to serve as capital
imum grid connection charges that are made after cus- aggregators could help those institutions who are
tomers have signed up for solar, could create unexpected already capable solar lenders grow into a core
costs that low-income solar consumers can ill afford. part of the financial infrastructure that pools
investment from various sources and flows it
out to worthy mission-driven solar projects. The
Recommendations for Scaling LMI leading community-based lenders in the space
Solar Finance already serve as a sort of aggregation mecha-
The ecosystem developments we describe above still nism, in that they are accessing a diverse range
require both public action and philanthropic invest- of capital—from government or philanthropic
ment to succeed. Low- and moderate-income (LMI) sources, impact investment, investment from
solar finance faces unique challenges to scale including: other financial institutions, and in some cases
deposits—and redeploying it to mission-driven
• smaller projects sizes with higher transaction and projects. A mix of institution types including
constructions costs CDFIs, loan funds and credit unions could pro-
• real or perceived credit risks from LMI offtakers vide a diverse and robust set of lead actors.
• difficulty in utilizing the ITC x Promoting partnership and collaborations
• inconsistent policy environment across the country between community-based financial institu-
with powerful incumbents actively working against tions around solar finance. There may be
solar access opportunities for community-based lenders
to partner with one another, as well as with
• higher levels of technical assistance required to state or local green banks, to create further
develop projects efficiencies and opportunities. For example,
The result is the lack of a well-developed financing CDFIs commonly participate in aggregating
sector with streamlined financial infrastructure and vehicles together. A lead CDFI could create a
funding mechanisms targeted for LMI solar. Below we master participation agreement and provide
outline key high-level recommendations for scaling the expertise in underwriting and structuring
equitable solar finance: for the remaining CDFI partners to invest in
projects in targeted LMI areas of the CDFIs.12 C A R S E Y SCHOOL OF PUBLIC POLICY
This would reduce the costs for lenders who well as access long-term financing to fund
are not experts in solar finance but want to mission-driven solar projects. Similar accom-
participate. Shared operating platforms that modations might be created under the New
make it easier for community-based lenders Markets Tax Credit and Low-Income Housing
to do the work of solar lending are another Tax Credit programs.
key strategy, such as the Smart-E platform for x Various Department of Energy (DOE)
consumer clean energy lending.43 programs should be explored for potential
• Help to capitalize and support community- to provide financing to low-income solar
based lenders to provide flexible, low-cost, and projects. One option might be relaunching
long-term financing to mission-driven solar the Energy Efficiency and Conservation Block
projects. Multiple vehicles could be considered to Grant Program—in particular, its competi-
flow capital to community-based lenders such as tive grants program for nonprofits during
credit unions and CDFIs, who could then provide the Great Recession, which helped to spur
a variety of debt products to mission-driven solar the development of several innovative clean
developers. A mix of low-cost, flexible loan prod- energy lending programs. Alternatively, DOE
ucts is needed, ideally including working capital, could consider establishing a prize program
early-stage predevelopment and acquisition financ- for social equity-focused solar funds out of
ing, construction debt, and long-term permanent the Solar Energy Technologies Office.
debt. For community-based lenders to offer this full x The philanthropic sector could increase
mix of products, they would require in turn a mix deployment of grants and Program-Related
of equity and grants; non-recourse, unsecured debt Investments (PRIs) to capitalize CDFIs engaged
for early-stage project finance loans; and long-term, in low-income solar lending. Such investments
low-cost debt to be able to originate and hold per- might also help CDFIs to leverage increased
manent project debt. Credit enhancement tools will Community Reinvestment Act (CRA)-
also help lenders to lend deeper into the commu- motivated investments from banking partners,
nity while facilitating their efforts to raise capital. now that revised CRA regulations encourage
x Legislation for a National Green Bank (Clean banks to invest in clean energy projects.
Energy and Sustainability Accelerator) is pro- x Credit enhancement will also likely need
posed to work with state and local green banks, to play a role in supporting these capital
and comes with a requirement that 40 percent flows. Mechanisms such as funded reserves,
of its capital be invested in “climate-impacted unfunded commitments from foundations,
communities.” Community-based lenders or stand-by credit agreements could remove
could help both to deploy funds rapidly and to or reduce counter-party credit risk and could
ensure that the most vulnerable communities be aggregated to provide support for cer-
are well served. Program legislation and regu- tain project types. Programs like the USDA
lations should ensure that CDFIs and other REAP and Business & Industry guarantee
mission-driven, community-based lenders can programs are very helpful but do not provide
directly access accelerator resources to scale broad enough access for mission-driven solar
equitable clean energy lending programs. projects, especially those in urban areas. A
x The CDFI Fund has had special pools of DOE program that could potentially play a
money carved out for purposes such as role might be the Loan Programs Office, which
healthy food financing and assisting people has $4.5 billion in loan guarantees available for
with disabilities. Clean Energy set-asides renewable energy projects. Community-based
for the CDFI Fund and the CDFI Bond lenders could potentially serve as a capillary
Guarantee Program could help community- system utilizing the guarantee to deploy capital
based lenders cover capital requirements as to mission-driven projects.C A R S E Y SCHOOL OF PUBLIC POLICY 13 • Provide a grants-in-lieu option for the • Create a national Renewable Energy Credits Investment Tax Credit. Many interviewees program to provide a baseline of support for highlighted reforming the ITC as critical, since clean energy generation. A national renewable its current structure is regressive, providing energy portfolio standard would require retail elec- much greater benefits to high-income popula- tricity suppliers nationally to provide a minimum tions. Multiple studies have noted the ITC struc- percentage of clean energy. This standard would be ture does not work well for low-income solar, accompanied by the creation of a national RECs and at least one other study—along with numer- market in which such credits could be bought, ous interviewees here—recommended that the sold, and traded. Such a market could provide a credit be made refundable, to help low-income reliable and consistent stream of revenue to solar customers benefit from the full value of the projects across states, reducing the unevenness of credit without having to resort to complicated where solar energy has been able to gain market ownership structures.44 A further consideration penetration. Importantly, such a program should might be to deepen the ITC for projects meeting implement a requirement that a certain percentage certain mission-based criteria around serving of this generation go to low-income markets and/ low-income communities. During the last reces- or achieve other metrics for social equity. sion, the Treasury Department 1603 program • Remove barriers in utility regulations to low- provided grants in lieu of tax credits. Such a pro- income solar projects. Regulatory redesign at gram could level the playing field for mission- the federal, state, and local level should provide driven developers to be able to participate in the consistent support for solar projects while reducing largest source of subsidy financing available for complexity for installers, investors, and off-takers. solar development today. For example, currently, too many states do not • Develop pools of government and philan- allow mission-driven developers to build com- thropic support that can complement financ- munity solar projects, or for solar Power Purchase ing from community-based lenders to support Agreements or leases. Too often, permitting and mission-driven projects. For many projects and interconnection issues create project delays and project sponsors, some level of grant support is add costs. Utilities may need additional incentive needed to complete the capital stack beyond the to facilitate things like on-bill payment for com- financing that community-based lenders can munity solar customers. Beyond removing barri- provide. Additionally, grant support is needed ers, regulators also need to provide certainty for for the training and technical assistance work solar projects, to avoid creating unexpected costs that can help to make a deal bankable—whether that low-income solar consumers and mission- that is vetting contractors for rooftop installa- driven project owners can ill afford. Such changes tion jobs, helping mission-driven solar develop- are needed to create an environment that could ers build their operational capacity, or educating attract capital at scale and unlock opportunities communities and consumers about their clean to bring solar PV benefits to LMI communities. energy options. Providers of these “development Social equity needs to be a key component of the services” could include community-based lend- regulatory redesign process. A recent report by the ers, specialized platforms like Smart-E, special- Initiative for Energy Justice outlines specific tools ized TA providers like SolarOne, and business to measure progress toward equity in renewable service organizations. Both DOE and philan- energy policy implementation.45 thropic programming should seek to provide some reliable means of access to grant supports for these various and important purposes.
14 C A R S E Y SCHOOL OF PUBLIC POLICY
Endnotes
1. SEIA & Wood Mackenzie. (2020). Solar Market Insight Report 2019 Year in Review. Solar Energy Industries Association and
Wood Mackenzie Power & Renewables. https://www.seia.org/research-resources/solar-market-insight-report-2019-year-review
2. SEIA & Wood Mackenzie. (2020). U.S. Solar Market Insight Executive Summary, Q4 2020. Solar Energy Industries
Association and Wood Mackenzie Power & Renewables. https://www.seia.org/us-solar-market-insight. Also see: Bolinger,
M., Seel, J., Robson, D., & Warner, C. (2020). Utility-Scale Solar Data Update: 2020 Edition. Lawrence Berkeley National
Laboratory. https://emp.lbl.gov/sites/default/files/2020_utility-scale_solar_data_update.pdf
3. U.S. Solar Market Insight. (2020). Solar Energy Industries Association (SEIA). https://www.seia.org/us-solar-market-insight
4. EIA (U.S. Energy Information Administration). (2018). Annual Energy Outlook 2018. U.S. Energy Information Administration.
https://www.eia.gov/outlooks/aeo/pdf/AEO2018.pdf
5. SEIA & Wood Mackenzie. (2020). Solar Market Insight Report 2019 Year in Review. Solar Energy Industries Association and
Wood Mackenzie Power & Renewables. https://www.seia.org/research-resources/solar-market-insight-report-2019-year-review
6. Will solar panels get cheaper? (Updated for 2021). (2021). The Solar Nerd. https://www.thesolarnerd.com/blog/will-solar-get-
cheaper/
7. See: Cox, M. (2020, December 17). Key 2020 U.S. Solar PV Cost Trends and a Look Ahead. Greentech Media. https://
www.greentechmedia.com/articles/read/key-2020-us-solar-pv-cost-trends-and-a-look-ahead#:~:text=According%20to%20
Wood%20Mackenzie’s%20recently,watt%20figures%20shown%20are%20DC. Also see: SEIA and Wood Mackenzie (2020).
US Solar Market Insight Executive Summary, Q4 2020. Solar Energy Industries Association and Wood Mackenzie Power &
Renewables. https://www.seia.org/us-solar-market-insight. Also see: Bolinger, M., Seel, J., Robson, D., & Warner, C. (2020).
Utility-Scale Solar Data Update: 2020 Edition. Lawrence Berkeley National Laboratory. https://emp.lbl.gov/sites/default/
files/2020_utility-scale_solar_data_update.pdf
8. Feldman, D., & Margolis, R. (2020). Q2/Q3 2020 Solar Industry Update. National Renewable Energy Laboratory (NREL),
U.S. Department of Energy. https://www.nrel.gov/docs/fy21osti/78625.pdf
9. EnergySage. (2020, August 31). How much does solar storage cost? Understanding solar battery prices. EnergySage. https://
www.energysage.com/solar/solar-energy-storage/what-do-solar-batteries-cost/
10. Analysis of 2019 1-year American Community Survey data.
11. Asmus, P. (2008). Exploring New Models of Solar Energy Development. The Electricity Journal, 21(3), 61–70. https://
doi.org/10.1016/j.tej.2008.03.005; Feldman, D., Brockway, A. M., Ulrich, E., & Margolis, R. (2015). Shared Solar: Current
Landscape, Market Potential, and the Impact of Federal Securities Regulation (Technical Report NREL/TP-6A20-63892; p. 81).
National Renewable Energy Laboratory (NREL), U.S. Department of Energy. https://www.nrel.gov/docs/fy15osti/63892.pdf
12. Bovarnick, B., & Banks, D. (2014). State Policies to Increase Low-Income Communities’ Access to Solar Power. Center for
American Progress. https://www.americanprogress.org/issues/green/reports/2014/09/23/97632/state-policies-to-increase-low-
income-communities-access-to-solar-power/
13. EnergySage. (2020, August 31). How much does solar storage cost? Understanding solar battery prices. EnergySage. https://
www.energysage.com/solar/solar-energy-storage/what-do-solar-batteries-cost/. Battery economics can be more positive for
consumers when utilities have time-of-use rates or demand charges, as consumers can use batteries to reduce usage and thus
electricity costs during peak (expensive) hours.
14. Mohit Chhabra and Julia de Lamare. (2021). “Rooftop Solar in California is Ready to Take the Next Step.” Natural
Resources Defense Council. https://www.nrdc.org/experts/mohit-chhabra/rooftop-solar-california-ready-take-next-step
This dynamic could occur to the extent that systems benefit charges paid by all utility customers are used to subsidize solar.
15. Barbose, G., Darghouth, N., Hoen, B., & Wiser, R. (2018). Income Trends of Residential PV Adopters: An analysis of
household-level income estimates. Lawrence Berkeley National Laboratory. https://eta-publications.lbl.gov/sites/default/files/
income_trends_of_residential_pv_adopters_final_0.pdf
16. Barbose, G., Forrester, S., Darghouth, N., & Hoen, B. (2020). Income Trends among U.S. Residential Rooftop Solar Adopters.
Lawrence Berkeley National Laboratory. https://eta-publications.lbl.gov/sites/default/files/solar-adopter_income_trends_
report.pdf
17. ACF (Administration for Children and Families). (2018). Low Income Home Energy Data for Fiscal Year 2017.
Administration for Children and Families, U.S. Department of Health and Human Services. https://liheappm.acf.hhs.gov/sites/You can also read
