ORIGINAL REPORTING, JUNE 24: INSIDE THE DEAL: WHY DUKE ENERGY IS BUYING ONE OF THE LARGEST U.S. COMMERCIAL SOLAR DEVELOPERS
[NEWENERGYNEWS is on the road today.Regular features will return next week.] Inside the deal: Why Duke Energy is buying one of the largest U.S. commercial solar developers ; Duke’s $225 million fund will ready commercial solar for a post-ITC market
Herman K. Trabish, February 10, 2015 (Utility Dive)
One of the largest U.S. power companies has created a new $225 million fund for commercial scale solar and bought a controlling interest in one of the biggest commercial solar developers.
“We are going to acquire controlling interest in REC Solar and we are going to rely on their business plans,” explained Duke Energy VP/Commercial Portfolio President Marc Manly. “They know what they are doing. And they have targeted markets where the retail rates make it economic for customers, where customers want it, and where the regulatory rules are appropriate.”
This follows other recent acquisitions of solar and energy service providers by utilities. REC Solar CEO Al Bucknam believes it to be part of an emerging trend driven by the coming change in solar’s 30% federal investment tax credit (ITC). He pointed to NextEra’s purchase of Smart Energy Capital and NRG Energy’s buys of Verengo Solar NE, Pure Energies, and Roof Diagnostics as examples.
“The ITC is dropping from 30% to 10% at the end of 2016,” Bucknam said. “While that will tighten economics, the lower rate is likely to make more capital available, at lower cost, because there are more investors that could absorb 10% than could absorb 30%.” Solar companies will need “scale and reach” to succeed. The partnership with Duke will give REC Solar the scale it needs to cover the entire U.S. market, to procure effectively, and to develop more standardized, lower cost construction processes. “A low cost position is going to be a critical advantage,” Bucknam explained. “We have a stronger balance sheet and support from Duke. This is a strategic partnership and not just a financial transaction.”
REC Solar's business
REC Solar has over 440 commercial scale projects built or in development representing over 140 MW of installed capacity. It also offers both financing for customers who don’t want to want to pay cash up-front and maintenance services for customers who don’t want ownership responsibilities.
“We don’t have our own captive funds. Prior to this, if a customer required financing we would find an investor with a tax appetite that would own the project and we would sell the energy or lease the project to the end-user,”Bucknam said.
With Duke’s dedicated $225 million fund comes established “project approval criteria” that provide REC Solar with a clear understanding of what projects will fit into the utility’s portfolio and what the necessary documents, pricing, and return requirements are.
“The traditionally difficult front end process of getting a project financed is now going to be much smoother and cleaner,” Bucknam said. “We can tell the customer, ‘we will deliver your project on this date with these terms and it won’t change.’”
And, he added, “it will be so closely integrated with REC Solar that from the customer’s perspective, they are dealing with REC Solar and we are making it all happen.”
More projects, smaller projects
Neither Bucknam nor Manly would specify the project approval criteria but Bucknam said REC Solar will use them to target markets. “We are looking at doing smaller projects. Our average project has been in the 800 KW range and that is likely to drop. We will likely be doing more projects under 500 kW than in the past.”
Smaller projects are not a requirement but the financing is set up to make them work.
“There has been a lot of whale hunting in commercial solar,” Bucknam said. “We are not giving up the larger stuff. But the smaller end of the market has been underserved so there is a lot more potential there.”
At that targeted size, it is mostly roofs, Bucknam said, but REC Solar is open toparking structures and fields, too.
“With this acquisition,” Manly said, “it will give us a full suite of services and products to offer, from utility scale to community solar, where we build with the economics of utility scale in one farm but through PPAs parse it out, and I think that is exciting, all the way down to, with REC Solar, if a customer wants it on their big box rooftop, on their garage top, in their back 40, we can offer that.”
Duke’s new solar reach
Indicative of this new reach are Duke’s just-proposed 110 MW of new solar by 2021 to the Public Service Commission of South Carolina (PSCSC). The utility now has less than 2 MW of grid connected solar in South Carolina. But it helped craft the state’s 2014 Distributed Energy Resource Program Act, which is expected to soon open the door to a solar boom in South Carolina.
Duke wants to offer: 1) rebates that could be up to $5,000 for retail rate, net metered rooftop and small-scale solar; 2) community shared solar for nonprofit organizations, churches, community centers, renters, and schools; and 3) over 50 MW of utility-scale solar installations.
In negotiating the REC Solar acquisition, it became clear Duke and REC Solar's interests were clearly aligned, Manly and Bucknam agreed. From a strategic review of the solar market, Duke concluded it did not want to be in the residential sector like utilities such as Arizona Public Service and NV Energy. REC Solar had come to the same conclusion and last year sold what remained of its residential business to Sunrun.
“It was a natural fit,” Manly said. “We wanted to augment what we were doing by getting into commercial and they got rid of stuff we didn’t want.”
Historically, REC Solar has sold turn-key systems in the commercial solar market and will continue to do development, sales, installation, and maintenance in that space, Manly said. The $225 million Duke funding is aimed at REC Solar customers who want financing. “If the customer meets credit and other criteria, we will finance the installation and give the customer a PPA,” Manly said. “Our existing utility-scale solar group will manage it.”
The kicker: Community solar
Both Manly and Bucknam were also enthusiastic about using the partnership and funding to move into community solar.
“It is something that has excited me for a long time,” Manly said. “What makes sense economically is for us to find a place to build a big solar farm and, as long as the transmission is not too expensive, sell that on a community basis. And that market is developing.”
“Duke won’t have to push us in that direction,” Bucknam joked. “The parameters might be a little different from the standard commercial deal because instead of selling power to the host of the system, you are now looking for subscribers for the power. The marketing and sales is new but it doesn’t mean we can’t address it.”
NEWENERGYNEWS IS ON THE ROAD TODAY SO NO QUICK NEWS, June 24.