Sunnova seeks $3.3B DOE loan guarantee to expand virtual power plants

The U.S. Department of Energy appears to be on the cusp of a multibillion-dollar deal that will expand access for lower-income customers to rooftop solar, backup batteries, smart thermostats and other tools of the modern-day ​“virtual power plant.”

Last Thursday, Sunnova, one of the country’s largest residential solar providers, disclosed in a regulatory filing that it is in discussions with DOE’s Loan Programs Office to secure an ​“indirect guarantee of 90% of up to approximately $3.3 billion of solar loans.”

This pledge of a federal guarantee to cover up to 90 percent of the losses on a portfolio of solar loans could ​“expand access to the Company’s ​‘Energy as a Service’ offerings” — Sunnova’s term for its rooftop solar, battery and home energy management technology and services — to ​“decrease greenhouse gas emissions and increase the demand response impact of residential power systems,” the filing states.

Representatives of Sunnova and DOE’s Loan Programs Office declined to comment on the statement, which appeared in an 8-K filing with the U.S. Securities and Exchange Commission. The filing made clear that the $3.3 billion indirect loan guarantee is not a done deal: ​“There can be no assurances that the Company and DOE will consummate the contemplated transaction on these terms or at all,” Sunnova states in the filing.

But the description laid out in the disclosure closely matches a concept that Jigar Shah, head of the Loan Programs Office, has been talking about since shortly after he took the job, two months after President Joe Biden’s inauguration.

“We’re thinking we can turn water heaters, refrigerators, thermostats, electric vehicles and batteries into virtual power plants,” Shah told Canary Media in late 2021.

The term ​“virtual power plant,” or VPP for short, is used to describe a wide array of technologies that can aggregate and control different devices in homes and buildings to support the power grid in ways that mimic a large-scale power plant. Those devices can range from smart thermostats and remote-controllable water heaters that reduce power use during heat waves to rooftop solar systems, backup batteries and EV chargers that can store and shift megawatts of electricity demand.

In speeches and in interviews with Canary Media and other news outlets, Shah has described how LPO could offer low-interest loans or loan guarantees to companies that provide these technologies. In exchange, LPO would require those companies to reduce the cost of buying or financing for customers who might otherwise struggle to afford them.

How federal loan guarantees could expand access to home energy tech 

This would be a novel way for LPO — which has backed nascent clean-energy industrial sectors over its 17-year existence — to use its lending authority. LPO loans and loan guarantees supported the country’s earliest utility-scale renewable energy projects and electric vehicle manufacturer Tesla during the Obama administration. During the Biden administration, LPO has loaned billions of dollars collectively to clean hydrogen production, EV battery manufacturing and battery materials mining, processing and recycling.

Using the same lending authority to lower the financing cost for solar-plus-battery systems or ​“smart” appliances could help achieve several different goals, according to Shah. The first is to create a ​“bridge to bankability” for private-sector investment in technologies that help combat climate change. The second is to meet the goals of the Biden administration’s Justice40 Initiative, which call for delivering at least 40 percent of the benefits of all federal climate and clean energy funding to disadvantaged communities historically overburdened by climate change and pollution.

A loan guarantee from the federal government would cushion technology providers and their financial partners from losses they may face when customers default on loans or can’t keep up with payments. That, in turn, can free companies to offer lower interest rates or more favorable financing terms to customers.

Many of the technologies that form the building blocks of these VPPs remain out of reach for people with lower incomes or credit scores. According to EnergySage, an online solar comparison-shopping platform, most of the loans available for homeowners to install a rooftop solar system require FICO scores of 600 to 650 to qualify, for example. Higher-end appliances equipped with technology that can turn them into grid-responsive devices are more expensive than standard appliances, with financing options that vary from lower interest rates for customers able to take out home equity lines of credit to higher interest rates for credit card purchases.

Federal backing could also help companies like Sunnova expand markets for solar, batteries, home-energy control systems and other tools of the VPP trade. Sunnova is already working on VPPs in various markets, with projects announced in California, Massachusetts, Rhode Island, Texas and Puerto Rico, but it’s far from alone in its efforts. Companies involved in VPPs include residential solar competitors such as Sunrun and SunPower, solar inverter providers Enphase and SolarEdge, battery vendors such as Generac, sonnen and Tesla, smart thermostat companies like Google Nest, demand-response providers like Voltus and CPower and aggregators such as Swell Energy and AutoGrid, to name a few.

The utility and energy market structures that allow these distributed energy resources to earn money for helping the grid are still in their early stages of development. Finding ways to improve customer access to these technologies is a vital step in expanding their role in the clean energy transition, said Mark Dyson, managing director of the Carbon-Free Electricity program at the nonprofit decarbonization think tank RMI. (Canary Media is an independent affiliate of RMI.)

In January, RMI launched the Virtual Power Plant Partnership, a consortium of companies working to increase opportunities for virtual power plants. The consortium was initially supported by General Motors and Google Nest and also includes Ford, OhmConnect, Olivine, Span, SunPower, Sunrun, SwitchDin and Virtual Peaker.

“We’ve had a lot of mega-scale VPPs in this country. With billion-dollar-level backing, we can get to giga-scale,” Dyson said. ​“What is the capital solution to get this to a ​‘giga’ scale? That’s definitely on the minds of many of our members.”

Breaking the barriers to ​“giga-scale” VPPs

Billions of dollars from the DOE Loan Programs Office ​“could help grow the economies of scale of any given VPP deployment,” he said. ​“You go from one-off projects hosted by a particular utility or community — that hard-to-replicate scale — to a whole new ballgame that gets a bunch of projects out there at once.”

The potential for LPO loans to expand access to lower-income customers is also a ​“unique value-add” for a VPP market that ​“has historically been targeted at more well-to-do homeowners who can afford the upfront cost,” he said. ​“It supports the broader goal of an equitable energy transition.”

Most VPP projects to date have targeted customers who already have or are planning to buy the technologies to enable them. But some companies are reaching lower-income families, Dyson said. One example is San Francisco–based startup OhmConnect, which has partnered with Google Nest to give free Nest thermostats to California homeowners and has targeted lower-income areas of the state. Today, about 40 percent of OhmConnect’s California customers qualify as low-income, he said.

Another example is Sunnova, which last year signed a contract with Northern California utility Pacific Gas & Electric to offer discounted solar and battery systems to low- and moderate-income customers in California’s Central Valley. Those solar-battery systems will be used to reduce peak electricity demand and allow PG&E to defer costly upgrades on grid substations in the area — a more locally targeted approach to VPPs, which have traditionally been aimed at managing systemwide grid imbalances.

VPPs are a particularly cost-effective way for utilities and grid operators to balance the increasing amounts of wind and solar power needed to decarbonize the power grid, or to provide resilience against the disruptions caused by heat waves, winter storms and other extreme weather events, Dyson said. Private-sector investment in solar, batteries, EVs, appliances and other energy technologies is expected to add up to billions of dollars and tens of gigawatts of potential grid capacity.

The more that utilities can rely on technologies like these to balance the grid, the less they’ll have to invest in grid infrastructure, big battery farms and other energy infrastructure.

Climate change is already driving up energy costs and creating more grid-reliability risks, Dyson noted. ​“I don’t think it’s widely understood how much it will cost to address the reliability challenge if you do it with the 20^th-century toolkit,” he said.