Solar Power for Public and Affordable Housing May Emerge

Apartments in Baltimore

The solar market for affordable housing has been quiet in the last decade, but this may change. Stakeholders came together to discuss opportunities in Denver at the Solar for Public and Affordable Housing workshop hosted by Clean Energy States Alliance (CESA) on Oct. 17.  

Specific Financing Challenges

According to CESA’s guide “Bringing the Benefits of Solar Energy to Low-Income Consumers,” solar adoption by low-income households remains low despite rapidly declining solar power costs.

These households are often characterized by absent or low credit ratings and low tax payments, the report said. This diminishes their capacity to purchase solar products or access third-party energy services.

Some low-income households rent apartments, but others may own their homes.

Property owners also are central to this process, the report said. Solar investments that have direct benefits, especially cost reduction, become the most attractive to property owners who make direct payments to the utilities.  

In cases where the property owner only pays the utilities for common areas, these investments make less economic sense and they are thus reluctant to embrace them, the report said.

“The large corporations with large tax equity are not used to underwriting smaller projects,” said Bracken Hendricks, the president and CEO of Urban Ingenuity.

The fact that most solar projects in low-income households are often small and scattered across multiple property owners also makes it hard to engage with financiers such as equity investors who favor large projects, Hendricks said.

Proven Model Structures

Wayne Waite, principal of Waite & Associates, said the Low-Income Housing Tax Credit (LIHTC) and power-purchase agreements (PPAs) are the most mature financing structures for solar in the public and low-income space.

The LIHTC, a federal tax credit, is offered through housing-finance agencies to private owners to create and maintain affordable housing. The advantage of using this type of financing is that it can be blended with other tax credits such as the Renewable Energy Tax Credit and State Housing Tax.

Under PPAs, third-party owners – mostly utilities – engage with the property owner to set up and manage the system. The value in using PPA as a financing option is that it requires no upfront cost and maintenance of the system is transferred to the utility.  

However, these financing structures have limitations. The LIHTC has high transaction costs and raises the issue of who operates and maintains the property.

PPAs on the other hand have low profit margins and escalating rent prices as the additional cost is passed on to the consumers. 

Hendricks and Waite said they agree that property assessed clean energy (PACE) programs and special purpose vehicles (SPVs) are gaining momentum as the new financing options for affordable housing. PACE, which is now in 33 states including the District of Columbia, enables property owners to finance energy improvements through a special assessment on their property taxes.

According to the United States Department of Energy, PACE is offered on two different levels: commercial and residential. It is a suitable option for public and low-income housing.

Commercial PACE can be used as part of the base capital in financing solar projects for community organizations and in multifamily housing. A good example of this is the ongoing project by Urban Ingenuity in collaboration with National Housing Trust in Washington, DC.

Residential PACE, on the other hand, can be used by property owners in low-income areas to set up solar projects.

According to Hendricks, PACE has the ability to provide off-balance-sheet financing and a positive net operating income to the project. Coupled with housing bonds, PACE offers a robust structure for financing solar in low-income households.

Waite said that for the SPV option, a nonprofit housing agency can set up an SPV to develop the solar projects. The agency owns the solar assets and uses the revenue generated through PPAs with the households to pay for any debts incurred.

This involves setting up a blocker corporation. This is a type of C-corporation that can be used by tax-exempt individuals or organizations to protect their investments. One advantage of the blocker corporation is that the housing organization retains the savings and can use it for housing benefits. This financing strategy has been successfully implemented by Santa Barbara County Housing Authority.

Colorado and other states are using other existing funds to finance solar, said Amy Hollander, project manager at National Renewable Energy Laboratory (NREL).

These include the Low-Income Housing Energy Assistance Program (LIHEAP) and Weatherization Assistance Program (WAP), which target energy efficiency in low-income households. However, a previous article from Clean Energy Finance Forum reported that, in 2013, the federal budget for WAP was cut by 95 percent.  

Innovations around solar financing like on-bill recovery, solar utility allowance, pay-as-you-save (PAYS) and community solar highlighted by both CESA report and Wayne could also be used to promote solar for affordable housing.

Baltimore Apartment Building

Risks to Investors and Owners

According to Waite, property owners and investors face three major types of risks when it comes to solar for affordable housing: performance, credit/repayment, and pricing.

Performance risk is associated with under or overproduction by the solar asset, Waite said. Credit/payment risks rises from default in customer repayment which affects the cashflow and the debt repayment.

Waite said pricing risk relates to the utility rates and their periodic changes and changes in the solar valuation policies.  The changes in the pricing of solar directly impacts the revenue stream and the ability to meet debt obligations.

Mitigating these risks require a broad set of strategies. These may range from setting up performance guarantees to on-bill recovery, increased utility rates literacy, or indexed utility inflation.

Storage for Affordable Housing

Joint research by Clean Energy Group and NREL indicates that storage coupled with solar can greatly reduce demand charges especially for multifamily housing. According to the research, demand charges account for about 30-70 percent of a customer’s monthly electric bill.

The results show solar plus storage offers a leverage point for medium-to-large commercial customers including NGOs, community facilities, and multifamily housing. It can shave off their peak demands leading to reduced demand charges.

However, Joyce McLaren, research analyst at NREL, said the potential savings from solar plus storage are highly dependent on rate structures and load profiles. Customers with demand charges of $15 and above experience greater savings.

Seth Mullendore, project director at Clean Energy Group, remarked that adding storage to solar can act as a hedge against losses associated with shifts in time-of-use pricing periods, non-bypassable charges and proposed higher demand charges for property owners.

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