Summit Ridge Joins Reunion's Q3 Office Hours for Clean Energy Developers and Manufacturers

The current state of the residential ("resi") solar market

Residential, or "resi," solar, like much of the clean energy industry, has experienced its fair share of ups and downs in the past several years. Despite the obstacles, the industry remains resilient, and its leaders are more committed than ever to continually improving the ecosystem.

Poised for strong growth

2024 was a period of contraction for the resi solar industry, with an estimated 26% decline in installed capacity. This decline is largely attributable to a higher-for-longer interest rate environment that significantly impacted the cost of capital across the value chain, coupled with the phase out of NEM 2.0 in California.

However, the resi solar market is expected to grow significantly through 2030.

Increasingly financed through third-party ownership (TPO) arrangements

The bulk of resi solar is sold to customers as a financed product. Just as with other consumer finance asset classes such as auto, financing options make the product more accessible to a majority of homeowners. Resi financing comes in two flavors: loans and third-party ownership.

For much of the past decade, the resi solar market was dominated by loans. However, due to the combined effects of rising interest rates and the introduction of ITC bonus credit adders only available to TPO, the industry has shifted to a largely TPO-heavy financing model, which generate ITCs that are eligible for transferability.

‍

Considerations for buyers evaluating resi solar third-party ownership (TPO) tax credits

Exempt from prevailing wage and apprenticeship (PWA) requirements

Resi solar is exempt from PWA given the size of the systems (generally 5-30 kilowatts), which are well under the 1 megawatt threshold. This in turn reduces complexity and scope of diligence (and can drive cost savings) relative to other projects requiring PWA compliance.

Easily structured around quarterly payments in arrears

Large resi solar developers operating at scale are placing systems in service on a daily basis, resulting in the creation of sizable portfolios of projects that are available for sale to tax credit buyers on a regular, recurring basis — often quarterly. This structure benefits buyers seeking to make payments quarterly in arrears to align with quarterly estimated tax payments, maximizing buyers’ internal rate of return.

Minimized placed-in-service risk

Project delays typically impact only a portion of a resi portfolio. In contrast, a large-scale project that delays placed-in-service beyond year-end has a binary risk that 100% of credits slip to the subsequent tax year.

Geographical diversity

Resi solar credit opportunities are sold as portfolios, which consist of many projects that are likely to be distributed across multiple geographies (i.e., across several states, territories, or counties).

This geographic distribution provides a natural hedge against unexpected weather or other events impacting all projects / tax credits in the portfolio (including unforeseen delays or recapture risk — see more below).

Recapture risk mitigants

Before jumping right into risk mitigants, let’s first explore tax credit recapture itself — what are the requirements?

The IRS requires that:

1. Property remains a qualified energy property for five years after being placed in service. A property ceases to be a qualified energy property when an asset is disposed of, or otherwise ceases to be an investment credit property (i.e., destroyed and not rebuilt, abandoned, or repurposed to sell something other than electricity).
2. There is no change in ownership of property during the five-year recapture period, which commences once a project has been placed in service.

Should a project fail to meet either of these requirements, the IRS will recapture the unvested portion of the ITC, which vests equally over a five-year period — 20% of the total ITCs claimed will vest on each anniversary of the project’s placed in service date.

With recapture risk now defined, how does resi solar measure up and what mitigants exist?

1. The most common reason for a solar project ceasing to be a qualified energy property is the destruction of the project coupled with a failure to rebuild. Given resi solar projects are highly dispersed in location, systemic destruction is extremely unlikely. Furthermore, even if projects within a portfolio are destroyed, there is no mandated rebuild time following an insurable event — the developer must simply demonstrate intent to rebuild and place projects back in service.
2. Resi solar customer agreements (leases/PPAs) commonly contain clauses that prohibit a change in ownership during the recapture period (i.e., customer cannot buyout system in first five years). Customers are generally contractually allowed to prepay contract at any time and/or request a contract transfer and reassignment to another homeowner, however, neither of these events constitutes a change in ownership.

As a tax credit buyer, conducting appropriate due diligence on all aspects of the transaction, including a review of items such as P&C insurance limits/exclusions, ongoing operations and maintenance support, and customer agreements, is paramount.

Reunion supports its customers through every step of the transaction process, including due diligence, and we invite all interested parties to reference our Section 48 ITC due diligence guide.

‍

Market sizing and opportunity

Using back-of-the-envelope math and conservative assumptions, we estimate that the resi solar market will generate approximately $6 billion in 2025 investment tax credits and continue to grow. Of course, not all of these ITCs will be transferred, as some developers may pursue traditional tax equity, retain the credits, or utilize direct pay, but as we note in our Q3 2024 market intelligence report, we expect roughly half of the clean energy tax credit market to be transferred.

This represents a sizable market for tax credit buyers with a strong potential for repeat transactions. The team at Reunion is excited to be working with many of the largest and most established resi solar developers in the space, and we look forward to supporting new and existing buyers in every step of the transaction process.

‍

Frequently asked questions

Business model

What is the most common business model for resi solar developers operating at scale?

There are many different business models, but most scaled resi solar developers operate using an EPC/Sales Dealer model.

How does an EPC / Sales Dealer model work?

Under this model, the developer partners with EPCs (licensed contractors performing engineering, procurement and construction work) who design and install solar projects that are in turn purchased by the developer.

Occassionally, EPCs also employ salespeople to acquire new customers (i.e., homeowners). Most often, though, this work is subcontracted out to sales dealers employing individual sales reps at scale.

Customer acquisition

Who acquires new customers and what is the process?

Sales reps acquire new customers (typically single-family homeowners) via door-to-door sales. This conversation often involves looking at homeowner’s current utility bill and comparing future utility payments with and without solar. Developers often require upfront customer savings before moving forward with a customer and engaging an EPC.

How does a sales rep get paid?

Sales reps are paid a commission on each successful sale by the sales org employing him/her. EPC knows what it will get paid by the developer for each system configuration in each market and what it is willing to install the system for (the “redline”). Any amount over the redline goes to the sales rep as commission.

System construction and purchase

How is the system installed?

EPC procures equipment that is compliant with developer’s approved vendor list (including any manufacturer warranty requirements), designs and installs system subject to developer’s guidelines, and works with local utility to ensure system achieves permission to operate (PTO).

Who estimates the system production?

Developer typically partners with one or multiple approved system design tool platforms that are integrated into its systems. The production estimation engine behind these tools is often tested and validated by an independent engineering firm and published in a report.

What happens once the system is installed?

Developer “acquires” fully installed system from EPC at pre-determined price based on system configuration and utility market, aiming to achieve a minimum project-level rate of return on expected system cashflows (customer payments, net of expenses). Developer typically funds EPCs in two milestone payments to align incentives — a majority at install complete and the balance at PTO.

Developer third-party ownership

Who owns the system?

Developer owns the system and executes a lease or PPA with the homeowner that governs the monthly billing and terms of service which commonly include an operations and maintenance (O&M) obligation and a performance guarantee (PeGu) obligation.

Who is responsible for system repairs?

Developer is liable for any operations and maintenance (O&M) issue or system underperformance that is not the direct fault of the customer.

At Reunion, we believe that setting a strong company culture from the start is a critical part of building a high-performing company. Our founding team worked together to define company values that influence our everyday work; from how we screen and hire new employees, to how we collaborate and develop our product offering.

Our mission has remained constant. Our team members are motivated by our mission to make a meaningful difference in the fight against climate change. We believe that our team is uniquely positioned to increase deployment of renewable energy through our deep experience in financing.

We have five core company values. Every quarter, we re-visit our company values and ask whether these values remain relevant to how we work. This always spurs insightful and honest reflections on where we are succeeding and where we can improve. Sometimes, it leads us to adjust our company values to better reflect what is truly important.

Our mission

Reunion’s mission is to accelerate investment into renewable energy projects by simplifying the project financing process.

Our values

Communicate empathetically and directly

• We communicate openly and directly, even in disagreement
• We are kind and assume our teammates, customers, and partners have the best intentions

How can we go faster?

• We make firm and fast decisions, particularly on decisions that can be reversed
• We ship fast and adjust course based on data and feedback

How can we do it better?

• We run experiments that we can measure and are open to changing our minds when presented with data
• We keep an “enterprise-level” bar for excellence

Everybody is a leader and an owner

• Anybody can own an initiative and make it a reality
• If we commit to a project, we aim to follow through to finish

Continuous growth

• We strive to keep learning and improving, both as a company and as individuals
• Feedback is a gift; we embrace opportunities to grow

Come join us

Defining and refining our company values has helped us clarify who we want to be as a company. We have developed a high-performance culture, and we have surprised ourselves at times with our pace of execution despite having a small (but mighty) team. I should also emphasize that, although it’s not an official company value, we also have fun! 🙂

We believe that hiring and motivating the best people will be core to achieving our climate mission. If our mission and values resonate with you, we are always looking for talented people to join us – check out our open roles.

Reunion officially opened its doors in December 2022, but my co-founder Billy Lee and I have laid the groundwork for this company over the last 15+ years of our respective careers.

Here’s the story of how we gained the confidence and the conviction to go all in and start Reunion. 

Part 1: How Reunion’s founding team came together

Billy and I first met in late 2008 when I joined SunEdison, a leading solar development company. Billy had been one of the first employees at the company, and had already spearheaded some of the earliest solar transactions in the market. We quickly closed our first transaction together in 2009, when we sold a portfolio of solar energy projects in New Jersey to a first-time solar energy investor. Believe it or not, this was a very novel concept at the time!

We developed mutual respect while working together; Billy led a dozen-person project finance team that completed many of the earliest solar tax equity deals, with major banks such as Wells Fargo and JPMorgan. My team was successful in convincing the first US private equity firm to invest in a portfolio of solar energy projects, and brought many first-time investors to solar energy including bond and infrastructure investors.

Every solar financing was challenging back then, so we bonded over the many ways we had to use tenacity and creativity to get deals across the finish line. 

Part 2: Achieving "founder-market fit"

After our work together in solar finance, we both started our own solar companies; Billy built out a solar tax equity financing company and partnered with investors such as D.E. Shaw. He later started a greenfield development company that developed utility-scale solar projects across the US. I started SunFarmer, a Y Combinator-backed solar energy company focused on developing countries that led the installation of 1,500+ solar energy projects in South Asia.

Billy and I joined forces in the summer of 2022 with the goal of starting a new company that would have a meaningful impact on climate. We quickly picked up a consulting contract from a California utility, while investigating several climate-related business ideas.

We kept coming back to the realization that we have a unique competitive advantage in renewable energy finance. Investors talk about "founder-market fit" - the unique insights and skills a team has to tackle a market opportunity. Billy and I have spent years driving real innovation in renewable energy financing by bringing new investors to the table and structuring first-of-a-kind deals. We have deep expertise, a strong track record, and vast networks in the space. In a way, we have spent our entire careers preparing for the launch of Reunion.

Part 3: A unique market opportunity

When the Inflation Reduction Act passed in August 2022, we immediately knew that the provision on “transferability of tax credits” would transform the way that renewable energy is financed. After years financing projects the traditional way (“tax equity financing”), we knew how painful the process often was for both renewable energy developers, and also for investors.

We spent our entire professional careers trying to make renewable energy financing more efficient and scalable, but there was one critical, insurmountable hurdle that we could not change - the US tax code. But with the passage of the IRA, tax credits became freely tradable for the first time - for tax nerds like us, we knew this would be massively disruptive (and no, we aren’t exaggerating!)

The market for transferable tax credits is also enormous; analysts expect upwards of $75B of clean energy tax credits generated per year by 2027 (see chart below), but the existing tax equity market only supplies roughly $20B in tax credit volume each year. Platforms such as Reunion will be needed to facilitate the transfer of large volumes of renewable energy tax credits.

Segue Sustainable Infrastructure has been at the forefront of the discussion on transferable tax credits, and they led a seed round in Reunion in December 2022, along with a dozen leading entrepreneurs and CEOs.

Source: CohnReznick

The future is bright; Reunion is growing

I listened to hundreds of business plans in my previous work as an early stage startup investor. While there are no rules to achieving startup success, several patterns emerged in teams I met with that ultimately were the most successful:

• Co-founders previously worked together on hard problems: The ideal co-founder brings relevant skills, similar goals and risk tolerance, and must be somebody you work well with. Not easy to find! As a result, it’s common for successful co-founder teams to have previous experience working together
• The team is uniquely positioned to solve the problem (“founder-market fit”): while some founders can pick a new market and just figure it out, it’s more likely that founders with a deep understanding or insight about their market find success
• Ripe market opportunity: The market has to be large, and growing in some interesting way that has not yet been exploited. Marc Andreesen says that when it comes to startup success, “market matters most”... even more than the product or team.

I am lucky to say that Reunion checks all three of these boxes. I have a long working history with my co-founder, who happened to be looking to get back into entrepreneurship at the same time I was. We picked a market that we know uniquely well, and it just so happened that a legislative change opened a huge new market opportunity.

Now is an exciting time to join Reunion at the ground floor; we have an incredible opportunity in front of us, and we are experiencing strong demand from both project developers and tax credit buyers. We are hiring for high-impact roles across marketing, business development, and project finance; please reach us with applications or referrals at recruiting@reunioninfra.com.