Even as the market grows, developers struggle to obtain microgrid financing. Why? What are the obstacles? And how can project developers overcome them? The Microgrid Knowledge white paper, “How to Get Your Microgrid Projects Financed,” explores these issues through interviews with prominent developers, financiers and other sources. Below is an excerpt.
The microgrid market is expected to reach $30.9 billion by 2027, according to Navigant Research.
North America is currently the top market and is expected to remain strong as the nation focuses on modernizing its grid and increasing electric reliability.
In spite of this growth, microgrid financing is still evolving, due in part to the complexity of microgrids: They incorporate numerous technologies and are deployed using many different models, including community, utility and remote options. What’s more, microgrids often add components over time.
The lack of standardization and developers’ inexperience working with the investment community are also obstacles. In addition, ever-changing regulations and technology make microgrids appear risky to investors.
This paper examines the evolution of microgrid financing, identifies challenges, and presents advice that will help developers better connect with the investment community, find financing and move the industry forward.
The evolution of microgrid financing
Initially, under more traditional financing models, developers secured a lease or a loan; a bank gave the developer a large sum upfront with an agreement to pay back that money over a defined period of time with a defined number of payments.
Also for early microgrids, power purchase agreements (PPA) and government funding such as Commercial Property Assessed Clean Energy (C-PACE) were options, as they were early on for solar projects. Under a PPA, a developer arranges for the design, permitting, financing and installation of a solar energy system on a customer’s property at little to no cost. The developer sells the power to the customer at a fixed rate, often lower than rates from the local utility.
PACE programs cover the up-front cost of the projects and the property owners pay the cost back over a set period, 10 to 20 years, through property assessments that are secured by the property, and paid as an addition to property taxes.
For example, in 2015, FuelCell Energy sold a university microgrid to NRG Energy via an all-cash deal structured under a 12-year PPA. In 2016, Becker and Becker used commercial PACE funding provided by Greenworks Lending to implement energy solutions at its Main Street property in Hartford, Conn.
Today, more and more energy-as-a-service (EaaS) agreements are being inked. Navigant Research found that globally, EaaS leads among financing models. In fact, they now make up about 25 percent of the financing for microgrids. EaaS contracts are flexible agreements that transfer risk from the customer onto the financiers or owners of the system. They are highly customized and designed to meet the host’s energy needs, goals, local regulatory issues and available energy resources.
Over the next 10 years, EaaS is expected to become the leading model. This format is wide ranging, including both PPAs and pay-as-you-go arrangements. Pay-as- you-go evolved as a solution for smaller, remote, off-grid systems in developing countries. The pay-as-you-go model is designed to bring solar electricity and other services to people who don’t have access to electricity. The model generally involves low-cost payment plans, low initial deposits, and daily or weekly repayments, generally through mobile money. After completing the payment plan, customers own their solar systems, which might include lights and a mobile charging facility.
The EaaS model works particularly well with grid-tied commercial and industrial projects because it transforms a capital expense into an operating cost.
And it’s possible the EaaS model can move the microgrid industry in the way the solar lease model sparked growth in the solar industry.
What stands in the way of microgrid financing?
While EaaS and other models show promise, obstacles remain.
One problem: Microgrids are made up of various types of equipment, generally from different vendors. Projects tend to morph as they’re developed or as they mature. For example, a project might begin with a combined heat and power plant. Over time, the project developers might add renewable energy, storage or controllers.
As a result microgrids haven’t fit into a traditional financing model.
“Because microgrid projects are complicated, the industry needs to find ways to standardize them.” This will help attract financing, says Ryan Goodman, CEO and co-founder, Scale Microgrid Solutions. That’s his company’s mission.
Another obstacle to attracting microgrid financing: Developers often don’t understand how to pitch their projects to financiers.
Often, developers will focus too much on their dreams or what’s innovative about their projects when talking to financiers. Instead, they need to talk about how their projects avoid risks and make investors money. They also need to learn how to speak the investors’ language.
In short, they need to consider the financier’s perspective.
Part of the challenge is that banks don’t view microgrids in the same way they view single distributed energy resources, such as solar systems. That’s because microgrids aren’t as simple and often involve equipment from many vendors.
Benefits of microgrid standardization
Standardizing microgrids can help overcome some of these hurdles. When microgrids are standardized, the developer offers a uniform package that might include a natural gas generator, a battery system and renewable energy, all from well-respected companies. This compares to early microgrids that were largely customized to each host site, an approach that can drive up costs and cause delays in development. Customized microgrids also require very specialized financing — specific to each piece of the overall equipment.
Standardizing the designs and contracts is the next step in microgrid financing.
“The financing community hasn’t seen enough transactions to have a point of view on what standardization would look like,” says Jigar Shah, who founded SunEdison and is now co-founder and president of Generate Capital. “It’s incumbent on the finance community to say, ‘If you meet these standards, then we can underwrite the deals.’ But it’s hard to set standards without commonalities,” he says.
Goodman points out that standardization can also help overcome regulatory obstacles, such as the complexity of interconnecting to utilities — often a big hurdle to both microgrid and solar developers.
When utilities know what to expect, because they’ve worked with a standard design in the past, they’re more
likely to facilitate the interconnection process, rather than place obstacles in the way, notes Goodman.
The solar industry has fewer problems with regulations because the rules and regulations are more mature. Solar providers also know they must comply with certain structures to gain financing.
Another obstacle is microgrids’ tendency to add new components as technology matures. This creates the need for flexible financing solutions.
Microgrid developers can overcome these obstacles, however, by focusing on the financiers’ needs and being as flexible as possible.
Download the full whitepaper, How to Get Your Microgrid Projects Financed, free of charge, courtesy of Scale Microgrid Solutions.