Sunnova Energy Corp., an energy-as-a-service (EaaS) provider, has snagged a first-of-its-kind conditional federal loan guarantee commitment of up to $3 billion for a project that could further future virtual power plant (VPP) deployment.
The Department of Energy (DOE) Loan Programs Office (LPO) on April 20 said it would provide a partial loan guarantee for up to $3 billion to Project Hestia, a Sunnova-originated “loan channel.” The project seeks to provide “disadvantaged individuals and communities with increased access to Sunnova services by indirectly and partially guaranteeing the cash flows associated with those consumers’ loans,” the company said on Thursday.
The financial transaction issued under Title XVII of the Energy Policy Act of 2005 is expected to close in the second quarter of 2023. If finalized, the partial loan guarantee would enable the EaaS provider to furnish approximately 75,000 to 115,000 homeowners throughout the U.S. (including Puerto Rico) with loans for clean energy systems. “Sunnova plans to issue its first securitization under the program in 1H 2023,” the company noted.
“Sunnova anticipates the DOE loan guarantee will support up to $4.0 to $5.0 billion in Sunnova loan originations, reduce the company’s weighted average cost of capital, and generate interest savings,” Houston-based Baker Botts, which represents Sunnova as part of the transaction, told POWER. The partial loan equates to a 90% guarantee of up to $3.3 billion of financing to support loans originated under Project Hestia, the law firm noted.
A Federally Financed Loan ‘Channel’
A VPP is a network of aggregated grid-connected distributed energy resources such as solar PV installations, battery storage systems, electric vehicles, and flexible power consumers. The interconnected units are typically dispatched through the central control room of the VPP but remain independent in their operation and ownership. EaaS, meanwhile, is a business model that typically takes the form of a subscription for electrical devices, enabling customers to pay for an energy service without having to make any upfront capital investments.
Project Hestia, notably, will serve as a pioneering financing channel that could expand EaaS capabilities and ultimately encourage more VPPs. The project is “designed to accelerate the deployment of new digital engagement and behavior modification technologies,” Sunnova explained.
Under its agreement with the DOE, Sunnova will extend loans to entities outfitted with its solar, storage, or other Sunnova Adaptive Home technologies that utilize Sunnova’s purpose-built demand response and VPP-enabling software. “The technology is designed to improve customer insights regarding their power usage and will facilitate demand response behavior,” the company noted. “Sunnova believes this approach is expected to expand access to Sunnova’s EaaS offerings, lay the foundation for future [VPP] activities, decrease greenhouse gas emissions, and increase the demand response impact of residential power systems.”
Sunnova has agreed to provide the DOE with “monthly servicing reports supplemented by hardware and software deployment information.” It will also “measure the reduction in greenhouse gases” associated with Project Hestia. “To advance economic and environmental benefits for disadvantaged communities, Sunnova would also be required to deliver collateral pools that realize agreed criteria related to FICO distributions, and certain concentrations of customers located in disadvantaged communities,” the company said.
A Concerted Focus on Energy Justice
According to the DOE, Project Hestia will have a lifetime of 25 years and could comprise about 568 MW of “solar installations, battery systems, and smart software to reduce energy waste.”
A more significant project objective, however, will be its role in bolstering the Biden administration’s energy justice programs, including Justice40, which seeks to decrease the energy and environmental burden in disadvantaged communities, LPO Director Jigar Shah suggested. “In support of Justice40, the project would actively seek to increase customer origination in communities identified by DOE as disadvantaged with a focus on communities with high energy burden, outage duration and events, and climate hazards,” he said on Thursday.
“Rooftop solar has reached commercial market acceptance, with lenders comfortable providing commercial debt to PV projects backed by well-capitalized sponsors. But not all homeowners can access affordable clean energy debt financing,” Shah said. “In particular, customers with lower credit ratings are typically unable to secure financing for such systems. This partial loan guarantee is expected to enable Sunnova’s dealer network to better serve this market.”
The DOE noted that as of Sept. 30, 2022, Sunnova served about 250,000 customers across the U.S. The partial loan guarantee to Project Hestia would enable Sunnova to expand into more markets, “including to homeowners with low credit scores and those facing high energy burdens,” it said. “Sunnova is targeting at least 20% of Project Hestia loans to assist customers with credit scores of 680 FICO or less. In addition, Sunnova anticipates 30% of Project Hestia customers will have batteries included with their system, doubling Sunnova’s battery system footprint fleetwide based on a September 2022 baseline.”
As significantly, Project Hestia may have a concerted focus in Puerto Rico. “Sunnova will aim to provide up to 20% of Project Hestia loans to homeowners in Puerto Rico. All installations in Puerto Rico will include both solar and battery storage,” the DOE noted.
LPO’s Loan Guarantee Commitments So Far
The DOE’s new conditional commitment is one of many under consideration at the LPO. Following a nearly decade-long pause, activity at LPO has kicked up since 2021. Among its offers is a $1 billion conditional loan guarantee to Monolith, a 2012-established firm that has developed a methane pyrolysis process to convert natural gas into hydrogen and high-purity carbon black using renewable energy. In another deal last year, the DOE offered to conditionally lend up to $107 million to Syrah Technologies to expand its capacity to produce critical materials for lithium-ion batteries at the Syrah Vidalia Facility in Louisiana.
LPO’s only finalized offer to date, however, is a $504.4 million loan guarantee that will bolster the first phase of the Advanced Clean Energy Storage project, a massive renewable-hydrogen energy project spearheaded by ACES Delta (a joint venture comprising Magnum Development, Mitsubishi Power, and Haddington Ventures).
The DOE’s last set of loan guarantees went to participants in the Vogtle nuclear expansion underway in Georgia. Between 2014 and 2019, the DOE issued up to $12 billion in loan guarantees to Georgia Power Co., Oglethorpe Power Corp., and three subsidiaries of the Municipal Electric Authority of Georgia (MEAG Power) to support the construction of two AP1000 nuclear reactors at Vogtle Units 3 and 4.
The Project Hestia conditional commitment—LPO’s first VPP project—is offered under the Title 17 Innovative Energy Loan Guarantee Program. “Just as Title 17 catalyzed the deployment of commercial-scale solar PV in the U.S. more than a decade ago, the program can accelerate the nascent VPP sector for market acceptance in support of the Biden-Harris administration’s clean energy goals,” Shah said.
Like other conditional commitment recipients, however, Project Hestia must fulfill several conditions before the agreement is finalized, Shah noted. “[S]everal steps remain for the project to reach critical milestones, and certain conditions must be satisfied before the Department issues a final partial loan guarantee, including finalization of definitive financing documents,” he said.