Solar barriers to entry for low and middle Income Marylanders:
Identifying roadblocks and proposing solutions
While Maryland ranks 14th in the nation is solar capacity installed and the state has established
solar goals in it’s Renewable Portfolio Standard, significant barriers to entry persist which
marginalize low and middle income Marylanders in accessing the benefits of solar power.
Inclusiveness in the state’s growing solar industry is essential as hard working families often spend
15 to 20 percent of their income on electricity bills. This paper is an effort to identify these barriers,
and then explore potential solutions for expanding the benefits of solar power to all Maryland
residents.
Part I: Barriers to Entry
1. Cost.
Based on MD Sun’s experience with neighborhood bulk purchases in Maryland and across the
region, the average price of a 3kW residential solar system is approximately $12,000. While
significant tax credits and other incentives exist to facilitate the purchase of solar panels, these do
not apply to some models (such as Power Purchase Agreements) and they are also limited by a
resident’s tax appetite.
Beyond the costs of installation, SRECs produced on a commercial scale are presently valued
equally to SRECs produced by residential suppliers. This reduces the marginal value of the SRECs
for homeowners in Maryland.
2. Credit score.
A credit score (FICO) of greater than 650 is generally required to obtain financing for either
purchasing a solar system or leasing one, with requirements closer to 700 for many lenders. Many
might assume that a “no money down” Power Purchase Agreement (PPA) would be ideal for low
income homeowners but this choice is not available to homeowners with low credit scores.
Furthermore, the somewhat predatory pricing of most commercial residential PPAs (3% annual
escalator in price) makes commercial PPA’s a bad choice for low income homes that are extremely
price sensitive.
3. Tax appetite.
While Maryland offers a $1000 grant for residential solar installations, the Federal tax incentive of
$4500 is non-refundable. Four counties offer non-refundable tax credits but significant waiting lists
may apply (for example, Prince George’s county offers a non-refundable $5000 tax credit but the
incentive has a cap of $250,000 per year which necessitates a waiting list through the year 2017).
4. Prohibition on virtual net-metering/Community Net Metering
Current law in Maryland prohibits virtual net-meting “community solar,” which would allow tenants,
those renting homes, people with shady roofs, and residents living in multi-family apartments to
share the benefits of solar power through buying a share in a solar system located on or off site
and net-metering it virtually to offset their monthly electricity bill.
In California, virtual net metering provisions for multi family low-income housing have been a huge
success for many years.
1. Financing
Part II: Solutions
Low-income housing finance is complicated and relies on a complex layering of state and federal
tax credits, grants, and investments. Solar finance is also complex, often relying on a combination
of tax equity, debt, and other financing. Combined, the two financing structures are even more
complex, with potential interactions between different tax credits unique to each project. Each has
unique loan horizons, credit sensitivities, and specialized investors.
Financing—Power Purchase Agreements (PPAs)
In the solar sector, specialized third party finance and ownership models have emerged in recent
years. These are often implemented by companies called Energy Services Companies (ESCOs).
Typically, these ESCOs finance the development of renewable energy projects and own and
maintain the systems. The investment is returned through tax credits, SRECs, grants and by
contracting with the building to buy the energy produced by the solar on the roof through a Power
Purchase Agreement (PPA)—usually at a rate below what the building is currently paying their
utility. While the modern ESCO seems like a great fit for the low-income housing sector, the
challenge is that ESCOs have low risk tolerance, high credit requirements, and, perhaps even
more importantly, lack the experience and comfort level for working in the low-income housing
sector. They also charge extremely high returns for their service with ESCO tax equity investors
often making 18% or more on their participation. Thus, most small and midsized PPA’s in the MD
market are priced at roughly 9 cents per kWh with a 3% escalator. The combination of this high
starting price and escalator means low-income families would save very little money on their
electric bill and might even be exposed to rates significantly higher than market rates.
One of the most popular ways to provide solar to people and organizations (such as non-profits,
churches and schools which are often the bedrock of low income communities) that do not have a
tax appetite is a with a PPA because it allows the tax credits to be utilities. ESCO finances and
owns a solar system and charges the building owner and or tenants only for the energy produced
by the solar system. Many of these arrangements are heralded as “no money down” solar.
This type of arrangement can be very attractive because it allows the ESCO to take advantage of
tax incentives and pass that savings onto the low-income housing providers or tenants (entities that
2 often cannot take advantage of tax credits because they do not pay taxes). A key roadblock,
however, is that lenders that finance typical PPA’s generally require a high credit score. This can
be a significant barrier for both single-family low-income residents as well as non-profits, although
multi-family building owners do not face the same hurdles and may be excellent candidates for
PPAs.
A creative solution to this dilemma is to use solar incentive money or other capital to prepay the
cost of a PPA. This reduces risk to lender and decreases the overall cost of going solar. For
example, in a recent analysis completed by CPN/MD-SUN in west Baltimore for pre-paid PPAs on
ten row houses slated for renovation and rental to low income families we found that a 3kw PPA
could be purchases for $5600 per house. Thus, using very modest assumptions about price
increases in the electricity sector we calculated the project could produce $78 in savings each
month, $930 in savings each year, and $18,600 savings over twenty years for each resident. 25
years of solar including operations and maintenance could be purchased for roughly $1.90/watt.
This suggests that fairly extensive deployment of solar on low income single family housing could
take place with relatively modest incentive structures.
Financing—Including Solar Investment in Mortgages
With new construction loans the challenge is often the low loan to value ratio required by traditional
lenders in the construction business. For new buildings, it is possible for the tenant to roll the cost
of a solar system into the cost of a long-term low interest fixed mortgage and still have a lower
monthly bill (combined electric and mortgage) than without solar. For example, a recent analysis by
Community Power Network/VA-SUN for a residential solar system in Virginia--showed a $300
annual increase in mortgage payments and a $600 to $1,000 annual decrease in energy bills due
to the solar installation. This assumes forgoing all tax incentives and SRECs and using a low
interest (2%, 20 year Habitat for Humanity) loan to pay for the cost of the system. In many
situations and project structures the addition of solar to new low- income housing could make
compelling economic sense for the resident and be revenue neutral for the developer, but financial
institutions do not take into account these energy savings and the subsequent increased ability to
pay in calculating loans. New solutions are needed for these types of construction loan projects
because currently, construction loan financing that includes solar is extremely restricted.
In addition, many low-income housing developers are finding that the addition of solar to the
building is cost effective for lowering the fixed costs of maintaining the building. In many low
income housing projects the developer rather than the tenant benefits from solar incentives by
reducing the costs the building owner must pay to keep common areas running. Many argue that
strengthening the low income-housing sector is an important and worthwhile policy objective and
ancillary benefit of low income solar.
Financing--Low Income Housing Tax Credit (LIHTC) Projects
Low-Income Housing Tax Credits (LIHTC) are one of the primary financing tools used to develop
housing for low-income households. Developers are awarded tax credit allocations that are then
purchased by investors and/or syndicators in exchange for an equity stake in the housing
development. This provides direct capital to the developer to reduce the amount of needed debt
and rent levels. The residents are limited to those that earn at or less than 60% of area median
3 income (AMI). For example, the AMI in Baltimore was $85,600 in 2013. In these types of buildings
owners are only allowed to charge Fair Market Rents (FMR) as determined by HUD. The general
guideline for FMR is that rent plus utilities should equal 30% of a resident’s income. Owners must
complete an often complex and time consuming approval process before establishing rental rates.
Because of this, if a building manager lowers energy costs they could potentially reap significant
benefits because they may be able to increase rent rates depending on the utility allowance
guidelines in place. Depending on the owner, the specific project site, and the building economics,
all the savings might accrue to the owner or might be shared between owner and tenants. These
projects could potentially take more advantage of additional energy tax credits if they explore
alternative energy, fuel cells and other newly emerging models of supplying power on site.
Because of these potential rewards many low income housing developers are becoming interested
in the solar sector as a way to make ends meet.
HUD Assisted Housing (Public Housing and Project Based Section 8 Multifamily Buildings)
Section 8 is a federal voucher program administered by HUD which provides rental housing
assistance to private landlords on behalf of approximately 3.1 million US low-income households.
In Section 8 buildings, HUD pays the power bills (heat, hot water, and electricity) for the residents
either directly or indirectly via a utility allowance or voucher. Therefore there is limited incentive for
Section 8 housing developers or building owners to lower energy costs (beyond those of common
areas) because any savings would go to HUD, not the private building owner. HUD has piloted test
projects that allow a “benefit share” whereby building owners and HUD would share the benefits of
lowering energy costs, however, there are significant legislative and programmatic hurdles that
make these arrangements challenging.
2. Sliding scale incentives.
Maryland’s Residential Clean Energy Grant Program presently awards $1,000 per house to offset a
portion of the cost for residential photovoltaic installations. A sliding scale accounting for both the
relative impact of electricity costs and the barriers to entry noted above could help to address this.
An example would be increasing the Residential Clean Energy Grant to $3,000 if for residents
earning 60% area median income (AMI) or less, or include systems installed in low-income rental
housing. One suggestion would be to offer a $6,000 residential grant for low income households or
low income rental properties for a year to entice the solar sector and low-income housing sector to
explore collaboration in this area.
3. Community Solar/Community Renewable Energy Facilities (CREFs).
Legislation on community solar (SB 786/HB1192: Community Renewable Energy Generating
Systems – Pilot Program) was defeated in the MD State Senate Finance Committee this March.
This bill would have created a pilot program allowing renters, apartment tenants, and people with
shady roofs to purchase a share in a solar system installed elsewhere in their community. They
would then get a credit on their utility bill for the electricity produced by their share in the system.
In this approach, community solar facilities would be built on roofs, such as those owned by the
state or federal government or on commercial properties. Projects could also be built on lowincome housing buildings themselves. Direct subsidies would be provided to Community Solar
4 developers to ensure that each project includes a dedication of part or all of its capacity to serve
low and middle income residents.
This approach would take advantage of existing federal and local incentives but still ensure that the
benefits of the legislation are shared in the low-income community. If sliding scale incentives were
available for CREFs it would allow any CREF to be open to anyone in the neighborhood, rather
than some CREFs being designated low-income and others being market value.
Another potential advantage of this approach is that tenants could own a portion of the renewable
energy system through a tenant-owned organization. Under the Renewable Energy Tax Credit
program, Tenant-Owned Entity would be given a 1% share of the Solar Owner, which would
become, after five years, a 90% share. Tenants would not pay any part of the cost of the system.
The cost of the system could be paid through of combination of a loan from MEA (20%), tax equity
(35%), and market-rate debt (45%).
4. Dollar Per Watt Incentive
In this option MEA would provide a dollar per watt after installation rebate or sliding scale. Currently
MEA does not finance PPAs. A sliding scale payment for pre-paid PPAs might help jump start this
sector. Also, a direct payment possibly $3/watt, could be provided for low-income projects. This
model was used in the D.C. Department of Energy’s low-income pilot program last year. A key
provision, for an after construction rebate would be to make it possible for homeowners to sign
over the rebate to installers. In DC installers bore considerable risk developing no money down
projects in hope that the homeowner would be forthcoming in signing over the incentive payment.
Creating an option to “pre-sign over” the incentive payment will significantly decrease the costs to
the program and costs to homeowners.
Beginning this year MD SUN has organized several group purchase programs. By aggregating
customers, the organization has been able to achieve significant savings for homeowners and has
facilitated more than 100 solar projects on homes in the past year. In each group participants paid
roughly $3/watt for their systems. An incentive rate provided on a sliding scale could allow any
homeowner to participate in the program. A $3/watt incentive would allow low-income homeowners
to invest in a solar system and keep the SRECs as an additional source of income. A $2/watt
incentive would allow moderate income residents to go solar by using their SRECs to fill the gap
between incentive and cost, and a $1/watt rebate would allow most moderate income residents to
afford solar.
This approach is fairly simple to administer and would not require changes in procurement policy. If
well advertised and provided on a first come first serve basis, this approach could be considered
an equal opportunity for any qualifying homeowner. Providing the benefit only after a system is
installed benefits completed projects, does not pick winners and losers, and does not constrain or
slow the pipeline by having people wait for grant approval before the move forward with a project.
The dollar per watt rebate can also be combined with customer aggregation efforts to provide a
good tool for driving large quantities of low-income residential solar projects. An approach like this
could leverage existing programs such as MD SUN’s bulk purchase programs, the Baltimore
Housing Authority’s Office of Rehabilitation’s roof replacement program, or Habitat for Humanity’s
new homes programs. In addition, participation could be driven by homeowners and residents
5 rather than by developers or government.
5. Solarizing critical infrastructure to protect vulnerable LMI populations.
Heat waves in 2012 and 2013 demonstrated that vulnerable populations such as the elderly and
low-income residents are disproportionately impacted by disruptions to the power supply caused by
extreme weather events. A report funded by the Abell Foundation entitled “Clean Energy for
Resilient Communities” recently recommended investing in equipping critical infrastructure with PV
off-grid, on-site power generation capability through models such as solar with on-site battery
storage to ensure that vulnerable populations will be better protected from such events in the
future.
6. Incorporating Solar into Existing Low Income Housing Assistance Programs
Incorporate solar into existing programs benefitting LMI Marylanders such as MEAP or the
Baltimore Housing Authority’s Senior Roof Repair Program. For example, MEAP provided
electricity bill assistance to more than 270,000 Marylanders in 2013, accounting for a budget
allowance of more than $44 million. Using a portion of these funds to finance solar installations for
low income Marylanders could save both the residents and the state tens of millions of dollars in
coming decades.
7. Introduce a sliding scale SREC market.
The marginal value of SRECs in MD increases dramatically with scale. Introducing a stepped
valuation based on volume would ensure that residential producers could reap benefits more
proportionate to their investment, and supplement a revenue stream that is essential to the
economics of solar power at the homeowner or tenant level.
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