Solar Gets a Credit Check
With truSolar, RMI and partners make the “FICO score of solar” ready for show time
Imagine a mortgage market where 90 percent of eligible homeowners couldn’t get access to a loan because banks had no idea how creditworthy each applicant was. Before the days of the FICO score, that was the reality. Today, we are in the same situation for commercial-scale solar. Businesses can’t get access to capital from lenders, and as a result, the majority of potential projects ultimately fall through for lack of financing. Only the biggest firms able to undertake the robust due diligence investors demand have successfully navigated that project graveyard, which is why of the nation’s ~18,000 employers with 500 or more employees, just 0.001 percent are responsible for 13 percent of the commercial solar PV capacity cumulatively installed in the U.S. through mid-2013.
When truSolar launches this summer, there will finally be an accessible standardized test to assess the merits of pending commercial solar projects. Whether it’s a school or an office suite aspiring to add commercial-scale solar, truSolar unveils a framework designed to make solar projects better, and therefore easier (and cheaper) to finance.
Paradoxically, residential solar is booming, surpassing newly installed commercial solar capacity during Q1 2014 for the first time in over a decade. And utility-scale solar maintains its historically strong share of new installs. Yet commercial-scale solar (500 kW to 10 MW projects) has been stuck in slower growth, despite the fact that these projects should — and often do — have more favorable economics. Finding scalable and efficient financing remains the biggest hurdle. truSolar has emerged in response, creating a set of standards for commercial projects, offering a familiar look and feel that developers on the one hand and banks and other financiers on the other can rely upon.
Akin to the FICO score for residential mortgage creditworthiness, truSolar is a proxy designed specifically for commercial solar projects. truSolar’s working group is acutely aware of lenders’ need to understand the relative risk associated with a given project’s combination of physical system hardware, offtaker credit, regulatory environment, and more. The truSolar score is intended to become a way to pull all that together into a FICO-like package.
Distributed Sun CEO Chase Weir said his company realized this problem back in 2011. Conversion ratios were terrible — as few as 10 percent of deals were getting financed. Even though deals differed, they needed to start reviewing them similarly. “In this young industry you realize how many things they get right, but some things go wrong, like a contract that’s not bankable, terms that couldn’t be met…there had to be a better process to find those fatal flaws earlier,” Weir said. He realized these were the biggest impediments to getting deals done — and how big a task it would be to standardize lenders’ risk-assessment process.
Until now, there hasn’t been a common way to assess the risks of commercial projects even though the commercial segment is ideal for solar, says James Mandel, a manager in RMI’s electricity practice. Roofs tend to be big and flat. The scale is larger. It fundamentally lowers operating costs and price-volatility risks for businesses. Properly wired, it can give them resilient electricity even if the grid is down. And commercial real estate is an active market. “People are pretty comfortable investing in building small and medium-sized office spaces and warehouses, so why shouldn’t they be interested in investing in solar if it makes those buildings cheaper to operate?” Mandel asks.
They haven’t because there wasn’t a good way to assess risks. truSolar will change that, becoming an industry standard for credit evaluation in commercial solar that bears the expectation of creating more access to cheaper capital and getting more deals approved.
Setting a standard
For two years, the truSolar working group RMI convened has been evaluating a broad array of risks and creating a way to model them. Ultimately, their conclusions will help both financiers and developers assess risk. Today’s working group is made up of 12 diverse market leaders — including RMI, DuPont, Mosaic, Assurant, Panel Claw, and others — who have created a framework to determine what a good project looks like and assess every aspect that might affect its creditworthiness.
An important early decision was whether to create a proprietary or an open standard. The working group bet on promoting large-scale adoption of the truSolar standard as quickly as possible. truSolar evolved as an open standard with access for everyone, but the working group balanced proprietary concerns with a purely open angle to come up with a mixed approach.
How “open” actually works has been a complex discussion. “You want to make it high quality. In order to make it high quality, you have to get data from people. In order to get people to give up data, they’ve got to know it’s safe. But at the same time, if it’s expensive to participate in or takes a lot of resources, it becomes as expensive as business as usual,” explains RMI’s managing director of development Ned Harvey, who forged the relationship with Distributed Sun CEO Chase Weir early to create the truSolar working group. “We decided to make the framework, the data set, and the key indicators all open, and then people can use that and build out proprietary tools,” Harvey says.
A beta test ran through June. It shadowed 14 Distributed Sun projects that were moving through their typical chain of review, with hopes of gleaning insight about new or streamlined elements the truSolar score might bring to the table. Test projects were updated with real data and are being peer reviewed prior to truSolar’s launch.
As truSolar evolves as an independent nonprofit and the assessment program rolls out later this summer, RMI is leading the effort to develop processes and protocols to administer truSolar evaluations. RMI will staff the accreditation body, while a board comprising the 12 working group members is tasked with ensuring standards stay strong.
Ultimately, a nonprofit truSolar will steward the risk screen. An annual peer review will let industry explore the process and provide advice and data to improve it. Unlike FICO, a private company that guards its scoring protocol and took more than 30 years to get market acceptance as a standard, open-source truSolar is hoping to take the fast track to market adoption. “We’re trying to create something that becomes an industry standard much quicker. We don’t think we have 30 years to wait for a private company to build the trust in the capital markets,” Mandel says.
Eventually, “you will find components or sub-components of systems or project approaches that are so standardized that they can get certified as truSolar, and that will become the Good Housekeeping seal of approval,” Harvey says. As truSolar’s open standards come into play, users’ interactions will improve it over time. It has been created as a dynamic tool for industry.
Whether truSolar will be a game changer in the quality and reliability of commercial solar systems (since low-quality, poorly-installed systems would score poorly) remains to be seen. “The benefit that the risk screen brings to the industry is consistency and repeatability in the way PV products are examined. Whenever you bring consistency and repeatability and put it into practice, it has the effect of driving quality, safety, and reliability,” says UL business development manager Scott Jezwinski, another truSolar working group member.
Attorney Charlotte Kim, a partner with Wilson Sonsini Goodrich & Rosati, a firm that provides legal advice for technology and has played an advisory role to the truSolar working group, said clients could benefit daily from truSolar. “Negotiating these contracts and doing it in a cost-effective way is a difficult balance, especially at the smaller end,” she says. Attorneys see the same contractual issues come up repeatedly.
truSolar doesn’t replace the contracts, but it is can be helpful for investors and developers to evaluate these documents earlier in the life cycle of a project.
truSolar creates a common framework for talking about risk and understanding where risk lies, as well as a common understanding of what “good” looks like. This should be appealing to banks, pension funds, tax investors, and especially the small regional and community banks that are the traditional financiers of small business in their areas. While they provide much of the financing for local commercial retail development, at least 90 percent have not participated in solar projects because they haven’t had the resources for deep project finance analysis.
In the end, the ultimate goal of a mechanism like truSolar is securitization of solar portfolios that effectively evaluate and balance risk, creating a significant asset class out of commercial-scale solar. Weir says truSolar will democratize the path to commercial solar financing, raise the bar on products in a multi-billion-dollar industry, and unlock the potential of what could be a trillion dollar market.
Weir compares truSolar’s effort to the collaborative creation of CDMA protocols for cell phones, when competitors understood that growing markets were to everyone’s benefit. With truSolar, he says, commercial-scale solar gains a Rosetta stone: “If you don’t standardize, you can’t professionalize. People need to agree on the rules. The value is in the cost savings that it unlocks immediately because you’re making the project more affordable, and helping the capital markets remove basis points.”
Written by Jennie Lay, a freelance writer and editor whose work has appeared in High Country News, Bulletin of the Atomic Scientists, Wilderness, Yoga Journal, and elsewhere.