The Inflation Reduction Act confronts commercial and industrial property owners with a mix of challenges and opportunities around renewable energy and efficient consumption. Meanwhile state, county and city laws are introducing climate-friendly requirements of their own that add additional complexity. Last August, for example, the California Energy Commission passed clean energy standards for all new construction after January 1, 2023. That incorporates, among other things, mandatory inclusion of battery storage-ready solar power.
For many building owners and developers, the cost of installing such systems seems prohibitive. With budgets already earmarked for capital expenditures like a new roof, HVAC upgrade, and tenant improvements, a solar project can get deprioritized.
Coast Energy, a solar finance and development firm, provides a solution using Power Purchase Agreements (PPAs). Through this agreement, Coast Energy oversees the installation and provides ongoing maintenance for solar systems installed at a commercial building, typically located on a roof or covered parking. The cost of the systems is covered entirely by Coast Energy, requiring no upfront cost to building owners. Power produced by the system is then sold back to the building owner at a rate typically less than the local utility rate.
What owners typically don’t know? They can also finance their backlogged capital improvements through PPAs. According to Blair Herbert, chief executive officer and founder of solar firm Coast Energy, the arrangement is a mutually beneficial one.
“We work with a lot of building owners who can not only benefit from the financial advantages of a solar project, but also have unrelated projects, such as a new roof, tenant improvements and HVAC upgrades, paid for through the solar financing. We’re uniquely able to roll non-energy capital expenditures into our PPA as part of a solar project. This saves the owner significant cash alongside their long-term savings on energy.”
How much capex should a building owner expect to roll into a PPA? Typically, the larger the energy improvements, the more non-energy-related capital expenditures can be folded into financing. Herbert says Coast recently engaged with a prospective client that owned a building in Southern California. In the initial discovery process, his team learned the company had two large capital expenditures looming: one for ADA compliance, and the second for tenant improvements for office space within the building. Ultimately, Coast was able to structure $1.1 million in non-energy improvements into the financing of a “pretty large” solar and energy storage system, and that money would be wired immediately to the client once the system switched on.
“That equates to an immediate cash infusion for them,” Herbert says. “Because we were able to pay for those improvements, the building owner immediately has an increase in cash on its balance sheet, which can be repurposed – and they also had a long-term solar agreement which provides increased NOI from day 1.”
Another big advantage? The concept can also be implemented on new construction. That’s particularly advantageous in states like California, which is beginning to require solar for all new builds.
“A lot of building owners didn’t have solar as a line item in a budget, and with this new legislation they’re looking at solar as a meaningful, unexpected expense,” Herbert says. “We’re having many conversations with owners in jurisdictions like California and stressing the fact that we can bring a solar solution to them with no money out of their pocket – while also financing other non-energy improvements. And that applies to existing buildings and new construction.”
There is, however, a solution: a Power Purchase Agreement (PPA). Through this agreement, a partnering solar firm will oversee the installation and provide ongoing maintenance for solar systems installed at a commercial building, typically located on a roof or covered parking. The cost of the systems is covered entirely by the solar firm, requiring no upfront cost to building owners. Power produced by the system is then sold back to the building owner at a rate typically less than the local utility rate.