Financing Non-Residential Photovoltaic Projects: Options and Implications

Installations of grid-connected photovoltaic (PV) systems in the United States have increased dramatically in recent years, growing from less than 20 MW in 2000 to nearly 500 MW at the end of 2007, a compound average annual growth rate of 59%. Of particular note is the increasing contribution of "non-residential" grid-connected PV systems – defined here as those systems installed on the customer (rather than utility) side of the meter at commercial, institutional, non-profit, or governmental properties – to the overall growth trend. Although there is some uncertainty in the numbers, non-residential PV capacity grew from less than half of aggregate annual capacity installations in 2000-2002 to nearly two-thirds in 2007. This relative growth trend is expected to have continued through 2008. The non-residential sector's commanding lead in terms of installed capacity in recent years primarily reflects two important differences between the non-residential and residential markets: (1) the greater federal "Tax Benefits" – including the 30% investment tax credit (ITC) and accelerated tax depreciation – provided to commercial (relative to residential) PV systems, at least historically (this relative tax advantage has largely disappeared starting in 2009) and (2) larger non-residential project size. These two attributes have attracted to the market a number of institutional investors (referred to in this report as "Tax Investors") seeking to invest in PV projects primarily to capture their Tax Benefits. The presence of these Tax Investors, in turn, has fostered a variety of innovative approaches to financing non-residential PV systems. This financial innovation – which is the topic of this report – has helped to overcome some of the largest barriers to the adoption of non-residential PV, and is therefore partly responsible (along with the policy changes that have driven this innovation) for the rapid growth in the market seen in recent years Specifically, due to financial innovation, non-residential entities interested in PV no longer face prohibitively high up-front costs, no longer need to be able to absorb Tax Benefits in order to make the economics pencil out, no longer need to be able to operate and maintain the system, and no longer need to accept the risk that the system does not perform as expected.