The United States solar industry grew impressively in 2016. A confluence of market conditions, including lower solar system costs and attractive incentives such as the Investment Tax Credit (ITC), helped drive the residential solar sector to unprecedented levels of growth in Q3 of 2016. In just one year, there was nearly 200 percent growth in the residential sector with more than four new gigawatts (GW) of capacity installed nationally. But as we look ahead to 2017, the growth of residential solar is expected to stagnate, due in part to push back from electric utility influencers concerned about remaining equitable and profitable. However, another segment of the market, commercial solar, is well poised to support the growth of the broader solar market even as residential growth slows.
Net metering, a system in which utilities are required to pay solar customers a state-determined rate for excess energy produced, has taken an important role in the solar business model across the United States. According to the U.S. Energy Information Administration, over 2,100 megawatts in generation capacity was added through net-metered solar in 2015, enabling the industry’s fourth consecutive year of booming annual growth at above 50 percent. Net metering clearly drives the growth of solar, but many utilities argue that structuring a system to compensate solar users for excess power sent to the grid is not in the best interest of non-solar energy customers.
In 2016, 44 utilities in 25 states proposed a rate structure fee hike of at least 10 percent, and filed a total of 117 policy actions to change rates. With debates ongoing in Nevada and Florida, and net metering decisions expected soon in Massachusetts and New Hampshire, 2017 is likely to be a more challenging year for residential solar. The general utility pushback against distributed renewable energy led Bloomberg New Energy Finance to predict that the residential sector will experience 0.3 percent growth in 2017 – a marked difference from the 21 percent growth it saw in 2016.
But while we confront the growing pains facing the residential sector, the commercial solar sector is entering a period of growth. Corporations are leading the charge, with almost half of Fortune 500 companies and 60 percent of Fortune 100 companies having set aggressive sustainability goals. Large players like Target, Walmart, and Apple have installed nearly 1,100 megawatts (MW) of solar capacity as of October 2016, and the small- to mid-sized commercial solar market represents tremendous additional untapped potential. Over half of rooftop solar potential consists of “small buildings” that are not residential households. Wiser Capital estimates that the mid-sized commercial market potential in the Northeast United States alone represents a $67.5 billion opportunity.
What about the aforementioned net metering debates? Commercial entities interact with net metering in a way that it different from residential. Most use energy at the time of generation during business hours. With less excess energy being directed back to the grid than residential users, corporations are generally far less affected by net metering policy outcomes. In addition, commercial properties have more available roof space and higher electricity bills than other sectors, making them excellent candidates for solar. With strong corporate interest, a limited dependence on state incentives, and plentiful available infrastructure, the growth of the commercial sector depends primarily on increasing access to capital for the sector.
The commercial solar market in the United States has been underfunded since inception. With a diverse customer base ranging from small local businesses to large corporations like Target, the due diligence required for a project to be funded often results in prohibitively high transaction costs. The result is a market that lacks standardization and is often underserved by financiers and developers alike. Clean energy entrepreneur Jigar Shah recently referred to United States small commercial solar as the “disrespected asset class.”
The future remains bright. California, arguably the nation’s leader in solar, can provide a good indicator for what’s to come in the rest of the country this year. In 2016, California’s commercial solar sector installed roughly double the 114 MW that it did the year before. This growth was driven in large part by a continued commitment to solar by corporate buyers, as well as greater access to various financing options for developers. Emerging innovative financing solutions, that reduce transaction costs and time to secure funding, will be the catalyst for growth of the commercial sector in 2017. While there are plenty of unknowns around the state of the solar industry at the start of the year, the building blocks are in place for commercial solar to drive the industry forward.
Graham Smith is the CEO of Open Energy Group, a technology driven investment platform that provides accredited investors with attractive, steady returns from the generation of renewable energy.
Open Energy Group | http://www.openenergygroup.com