Duke Energy Wants to Enter the North Carolina Commercial Solar Leasing Market
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Duke Energy wants to expand its solar footprint into the commercial-scale market. The regulated utility asked the North Carolina Utilities Commission for permission to lease solar to commercial customers, through a new non-regulated affiliate called Duke Energy Clean Energy Resources (DECER).
North Carolina trails only California for the most installed solar capacity in the U.S., thanks to its brisk pace of utility-scale construction. But solar at the commercial level has not accelerated in the same way.
The state installed an average of 15 commercial systems per quarter over the last four quarters, according to Wood Mackenzie Power & Renewables data. Quarterly commercial capacity additions have been stuck in the low-single-digit megawatt range for years.
"Sub-5 megawatts a year is basically a nonexistent market," said Michelle Davis, a senior analyst covering distributed solar at WoodMac.
The main impediment to growth was that third-party solar leasing was not allowed, until Gov. Roy Cooper signed the Competitive Energy Solutions for North Carolina law last year. Now companies can lease solar to customers, rather than making them buy the system upfront, provided they get permission from North Carolina regulators.
DECER’s offering, if approved by regulators, would let businesses lease solar facilities of up to 1 megawatt for up to 20 years. DECER would build, own, operate and maintain the plants.
In practice, it would probably function as a small business unit to handle the financial aspects of the deals, and then contract out the installation with local professionals, said Duke spokesperson Randy Wheeless.
"We think it will drive some additional business their way," he said. "We’ll do the contract; they'll do what they do best, which is install solar."
Since DECER would operate independently of the regulated entity (it's an LLC registered in Delaware), it would not take funds from other ratepayers to serve the C&I customers. It already won permission to lease solar in South Carolina, where it expects to bring projects online in 2019, according to the filing.
This kind of arrangement, in a competitive electricity market, would send solar companies ringing alarm bells; how can they compete with a century-old utility in providing assurances of service over 20 years or accessing low-cost capital?
North Carolina, though, is an old-school, vertically integrated state. Duke runs the show there. And the numbers show that there isn't much of a commercial market to speak of; setting up a new commercial developer actually adds to the competitive landscape.
This move also tracks with a macro trend in the segment: "As the commercial solar industry matures, more companies are figuring out they can get the most value if they do more of the development work themselves, in-house," Davis said.
Asset owners used to steer clear of early-stage development and the risk it entails. Lately, the competition for acquiring complete projects has gotten fierce; big energy companies are looking to take on more development risk in exchange for fatter margins.
Duke did just that when it acquired the remaining shares of REC Solar last year. That company focuses on the commercial markets in California, Hawaii and Massachusetts. DECER would do similar work for the Carolinas.
Though technically independent, the unit would benefit from its affiliation with Duke.
"The utility business is a longstanding business with lots of history and reliability and bankability," Davis noted. "A pure-play solar developer that’s only been around for a couple of years is riskier to a bank or investor than working with a utility affiliate."
Duke's existing customer relationships could also help in getting the leasing business off the ground, although Davis cautioned that such a cross-sell opportunity is not sufficient to close commercial deals, which have notoriously long development cycles.
Duke's latest planning document included scenarios with energy storage deployments of 300 megawatts up to 1,440 megawatts across the Carolinas over the next 15 years. If that market takes off, there could be commercial battery applications alongside solar, but commercial storage is likely years away.