Challenges in the Middle Market
We often talk about solar energy’s “middle market” as the segment sandwiched between residential and utility scale projects. In the past it has been referred to as “commercial”, “C&I”, “commercial and community”, and our all-time favorite “non-residential”. It’s a segment so underserved that it hasn’t even had a good name.
The middle market is full of potential but held back by unique challenges. Historically, its growth rate has been less than half of the residential and utility segments. And despite growth across all segments, the middle market’s share of the US market has declined from about a third ten years ago to about a tenth today.
What is holding the middle market back? A comparison of key project characteristics across market segments offers some clues:
Challenges in the Middle Market…
Site types and project sizes include some added variety in the middle market, but a big difference is the diversity of offtake types and the lack of a consistent credit rating and underwriting methodology. More broadly, the residential segment benefits from standardization and repeatable business practices while the utility segment benefits from greater economies of scale.
Residential projects are numerous, and if you can’t figure out a way to do them over and over in a similar way it’s hard to scale a business. With PPAs, this has meant standardized documents that are basically take-it-or-leave-it contracts for homeowners. Imagine lawyers at a residential financing company going back and forth with every homeowner over red lines in their PPA agreements. Not going to happen.
Utility projects can afford bespoke contracts. Key agreements go through multiple iterations, and there are about a dozen really important ones in each deal. The costs of legal and technical experts add up, but they’re borne by the overall project. With budgets in the hundreds of millions or even billions, these costs are absorbed as a smaller percentage of the budget.
By contrast, middle market projects don’t have a consistent approach to soft cost management. They lack the standardization of residential projects and the scale of utility projects. By some estimates, the percentage of soft costs in their budgets mirrors those in residential solar, despite project sizes 25x greater!
…And Opportunity
Our goal is to unlock the middle market. And we’re very excited about what it can become. Wood Mackenzie has estimated that the US is sitting on 145 GW of unused commercial solar potential. And that figure doesn’t include the potential for ground mounts, either located on-site with a customer or for community solar projects.
There is a lot of work to be done to realize this. In future posts, we’ll look at additional opportunities and challenges specific to this market segment. To lay the groundwork for this, we wanted to start by contrasting the middle market with the segments on either side. Our team’s experience across all three made for some lively conversations. If you’ve worked across these market segments, let us know what you think!
