September-October 2005

SunE Solar Fund Bridges Investor Gap: Affordable Solar With No Upfront Capital

A new collaboration between BP Solar and SunEdison has radically altered the landscape (or should we say, roofscape?) for commercial-scale solar energy in North America.

A new collaboration between BP Solar and SunEdison has radically altered the landscape (or should we say, roofscape?) for commercial-scale solar energy in North America.

With BP Solar supplying photovoltaic panels and SunEdison coordinating a financial offering that features no upfront capital, the future looks bright for the SunE Solar Fund 1. And for potential distributed energy customers operating in solar-friendly states, the opportunities and benefits make it an easy decision. In fact, the only question is, will this program sell out too soon?

The fund officially launched in June 2005 targeting $60 million for the installation of solar electric systems at facilities owned or leased by national retailers and state entities. Long-term purchase power agreements provide incentives for both customers and investors.

According to Jigar Shah, SunEdison's CEO, half of the fund had already been committed as of August 2005. The success demonstrates a bold approach from some new and some old players in solar energy. And their goals are equally bold: a replicable and sustainable business model that harnesses economies of scale. One that could eradicate a long-term problem for the industry—the dependence on government subsidies.

With its first systems concentrated in two incentive-friendly states, New Jersey and California, SunEdison hasn't overcome the problem yet. In fact, the company's Web site asks potential customers if they're located in states that provide "significant solar subsidies," such as California, Connecticut, Hawaii, Illinois, Massachusetts, Nevada, New Jersey, Oregon, and Rhode Island.

But on the positive side of the fund's ledger, the subsidies reflect continued state support for solar's problem of affordability. Though prices have dropped about 5% annually for many years, it's only now that they are low enough to allow SunEdison to tempt the likes of two key financial heavyweights, The Goldman Sachs Group and Hudson United Capital. The fund depends on their participation for construction loans, senior term loans, and partnership equity. Hudson handles the construction and term loans, Sachs provides the equity.

"Sachs's interest is primarily driven by the tax benefits, and Hudson receives a majority of the cash flow for the first 10 years," Shah explains. He adds that the growth in venture capital activity in the renewable energy marketplace has reflected well on the credibility of the SunE fund.

The credibility should grow as SunEdison's 10- to 20-year contracts satisfy investment demands with returns typically approaching 10%. For customers, the draw is a reduction from current utility rates—typically approaching 5%. Also, customers get the important benefit of financial stability. "In the past, businesses haven't been able to sign contracts to hedge and protect themselves from rate increases," notes Shah.

Rate increases played a significant role in office supply retailer Staples' decision to work with SunEdison. With just about 10% of their California-based stores dependent upon power from investor-owned utilities, the company saw rates skyrocket during the California electricity crisis. One of their initial solutions was to install a wireless control system to automatically reduce lighting and HVAC loads at most of their California stores. The system curtails up to 2.8 MW of demand within minutes, without compromising customer comfort.

However, such solutions aren't much help with the company's huge distribution centers. These industrial buildings are more than 150,000 sq. ft., and mostly warehouse space. Staples ordered two 260 kW systems for distribution centers in Ontario and Rialt, CA.

At a recent World Resources Institute annual Sustainable Enterprise Summit, a Staples presentation about its commitment to green energy could have easily passed as a sales pitch for SunEdison. Their reasons included no capital investment, no maintenance expenses, a hedge against fuel-price increases, greenhouse gas reductions, renewable energy credit ownership and most notably from SunEdison's and BP's perspective, "Opportunity to integrate solar into our overall renewable strategy at an affordable cost."

According to Mark Buckley, vice president of environmental affairs at Staples, the SunE fund is the first solar solution that meets his company's stringent cost/investment requirements. Until Shah and BP came knocking, Staples had relied on meeting much of its renewable energy strategy by purchasing more than 50 million kWh annually, in the form of renewable energy certificates.

"We're very excited about this particular business model," says Buckley. "It's new and innovative and we like the idea of acting as a host where we have a long-term purchase power agreement from a system that's owned by a third party." That being said, Buckley adds that going solar required a new mindset for the company because it didn't "fit the traditional paradigm for thinking." Though expectations for success and growth with SunEdison are high, it's not likely that we'll be seeing solar panels on a large percentage of the company's 1,300 stores.

Like many large retail chains, Staples leases the majority of its buildings rather than owning them. So, matters are complicated by the need for a building owner's approval, the age of the roofs and possible warranties, and other factors that could influence legal liabilities. Nonetheless, Buckley says they are pleased with the partnership and hopeful that SunEdison's business model can be replicated at many more locations.

Staples is exactly the kind of customer that BP Solar wants to work with, according to Len Jornel, vice president of North American commercial sales at BP. "Their roofs are unused space that can become productive when managed in the correct way with an offer that finances with no upfront capital costs and below market electricity rates," says Jornel.

With more than 15 years in the business, Jornel adds that this is the first truly competitive package he has seen in North America.

"The commercial market is in its early stages and capital costs have long been a deterrent to solar," Jornel explains. "This is like the 'Holy Grail' because it brings the customer what they need in a simple and affordable package." Moreover, it fits well with BP's long-term plans.

In late 2004, BP Solar announced that it intended to grow its share of the US market by doubling capacity at a manufacturing facility in Maryland, and teaming up with retail giant The Home Depot to market BP Solar home systems. It's all part of a global expansion plan that aims to increase annual production to 200 MW by the end of 2006. Over the past five years BP has invested some $500 million in solar and continues to grow sales at approximately 20% per year.

As part of its commitment to the success of the SunE Fund, BP Solar includes its SurGen kWh energy warranty, a guarantee for a minimum output of the solar system for 10 years. Additionally, there's a 25-year general warranty on the product. The company touts its relationship with SunEdison as an example of extending its support into areas not traditionally served by solar manufacturers, including construction loans, working capital, project support services, and dealing with rebates from state agencies.

A rebate of $500,000 from New Jersey Clean Energy Program was key to launching the first BP and SunEdison project with Whole Foods Markets. As with Staples, Whole Foods has a renewable energy strategy. They signed on for a 20-year contract. Their system is located at the Edgewater, NJ, store, and produces 125 kW (peak), about 20% of the store's electricity needs. Whole Foods has a monitor in the store so customers can see how much green energy the company is saving.

SunEdison has also managed to snag another client with concerns about showing how much energy its customers are saving—the State of California. Two projects are at state universities in Dominguez Hills (559 kW) and Fullerton (279 kW). Two others will occupy roofs at the Chuckawalla Valley State Prison (1121 kW) and the Patton State Hospital (282 kW).

Shah believes he can win more contracts with both state agencies and commercial customers, such as Staples, and he promises more announcements soon. Some should come from a workshop the company gave in New Jersey in September 2004. More than 20 representatives from universities and commercial interests attended. According to Claire Broido, SunEdison's president, enthusiasm for the SunE Fund was very high and she expects to sign contracts with at least five of the attendees in the near future.

Based on the workshop and other sales activities, Shah predicts having 75% of the fund sold by October 2005, and the balance sold out by December. As far as the investors are concerned, that kind of success would make good on SunEdison's premise. Combined with BP's production goal of 200 MW per year, the company would move closer to its goal of reaching financially advantageous economies of scale. "Solar doesn't need more innovations or technology research as much as it needs technology deployment," says Shah.

If so, Shah may actually succeed in marketing future SunE funds without the need for subsidies. It's a goal he hopes to achieve by 2010. In the meantime, with new incentive programs brewing in Texas, New Mexico, Arizona, Colorado, and even Washington DC, he'll have plenty of continued state support along the way.