PearlX has a plan to bring solar and batteries to apartment buildings

Multifamily housing has lagged far behind single-family homes in adopting solar panels and batteries. But Michael Huerta, CEO of PearlX, believes his company has found a way to crack the market, starting in Texas.

Project TexFlex — the new program PearlX launched Thursday in partnership with SolarEdge, a vendor of solar power electronics, batteries and inverters — will start with a single apartment building in Houston. But it plans to expand to multifamily projects across the state, backed by $50 million of PearlX’s $250 million in commitments from institutional infrastructure investors.

“Multifamily real estate has not been touched by solar, let alone solar-storage,” Huerta said. PearlX’s approach is designed to work around the disconnects and misaligned incentives facing rental properties that could go solar — at least in the energy markets that support its novel business model.

“This is just the beginning,” Huerta said in an interview this week. PearlX and SolarEdge are also working together on projects in California, another market with ample solar opportunities that multifamily properties haven’t yet been able to tap into in a big way.

Solar incentive policies designed for single-family homes haven’t worked in the multifamily market, as a September report from the U.S. National Renewable Energy Laboratory makes clear. That’s not just because renters tend to earn less than owners of single-family homes but also because it’s hard for tenants and landlords to tap into the economic benefits of solar.

For example, the net-metering programs that drive the vast majority of rooftop solar installations in the country today reward customers by reducing their electricity bills and allowing them to earn money for solar power they send to the grid. But multifamily housing tenants can’t install solar without a landlord’s permission, and many won’t live in the same apartment long enough to earn back the upfront costs.

Landlords, meanwhile, rarely pay tenants’ electricity bills, giving them no economic incentive to invest in solar to power anything more than facilities in common areas. As Huerta put it in an interview last summer, a landlord might wonder, ​“What incentive do I have to let these yahoos on my roof and install solar if I’m not getting anything?”

How an ​“energy tenant” can connect landlords and renters

To get around this disconnect, Charlottesville, Virginia–based PearlX forms entities that become the ​“energy tenant” of apartment buildings or complexes, Huerta explained. Under those agreements, PearlX pays landlords for the right to install solar and batteries and to manage them on behalf of the property and the tenants.

“We’re paying our multifamily landlords rent to deliver electrons through that pipeline,” he said. PearlX becomes the landlord’s electricity provider, and the landlord becomes the electricity provider for tenants.

For example, 2410 Waugh, the Houston apartment building that’s the first TexFlex target, has already installed a 15-kilowatt solar array that helps power the building’s cooling, outdoor lighting and elevator, said Joey Romano, co-owner of Harvest Moon Development, the property’s owner. With the TexFlex model, the property will be able to add about 60 kW of solar, or about 4 kW for each of the building’s 14 units, and a 7.6 kW/10-kilowatt-hour SolarEdge battery for each unit, he said.

This structure also allows PearlX to overcome another key barrier to getting financial backers to invest in multifamily solar: the problem of credit scores. Lower-income households account for 38 percent of the country’s rental market, according to NREL. Renters tend to earn less and have lower credit scores than owners of single-family homes. And low credit scores are a key barrier to qualifying for the loans and power-purchase agreements commonly used to finance solar and solar-battery systems.

“Mainstream solar and especially storage [have] traditionally been an amenity for the wealthy,” Huerta said. ​“If you don’t have good credit, you don’t have access.” 

The secret to convincing would-be financial backers to invest in these circumstances is to build the case not on the credit scores of individual apartment tenants, he said. Rather, PearlX asks them to ​“bet on occupancy versus vacancy.”

In other words, as long as an apartment building retains enough tenants, the solar power PearlX generates can expect to have buyers.

“When you look at the data, electric bills are paid before rent, cell phone bills, even car payments,” Huerta said — an assertion that other low-income solar providers like PosiGen have used to convince lenders to back their business.

To be sure, the vacancy-based structure does carry the risk that ​“everybody moves out of that building, and nobody is buying our power,” he said. ​“That’s the bet we’re making.” 

Using solar-plus-battery systems to generate revenue from the grid

Tenants in PearlX-equipped buildings won’t own the solar or batteries, but they will get the benefit of lower utility bills and backup power during grid outages, Huerta said.

Backup power is particularly attractive in Texas after a winter storm last February froze natural-gas delivery systems and power plants, forcing the state’s grid operator to institute rolling blackouts that left millions of people without power for a week and led to hundreds of deaths. Together, solar and batteries can turn apartment buildings into microgrids that can provide critical power for heating, cooking, refrigeration and medical devices during such grid emergencies.

The solar-plus-battery systems can also be used as ​“virtual power plants,” or VPPs, that are valuable not just to the people living in an apartment building but also to the larger grid. This gives PearlX additional ways to make money on the deal. SolarEdge embeds software in its inverters and batteries that can respond to signals from utilities or energy markets. The company can then sell excess power generated by solar and stored in batteries to the retail electricity providers that compete to serve customers in Texas’ competitive energy market.

Those retailers are eager for ways to buy power at times of grid stress. Prices on the wholesale energy market of state grid operator ERCOT can rise as high as $5,000 per megawatt-hour, much higher than the maximum prices allowed by the rest of the nation’s wholesale energy markets. (That maximum price used to be $9,000 per megawatt-hour but was lowered by the Public Utility Commission of Texas in December in response to the massive costs imposed on many electricity customers during the February blackouts.)

PearlX plans to make its VPPs available as sources of flexible energy demand — hence the name ​“TexFlex” — to give retailers a tool to protect themselves from having to buy super-high-priced power on wholesale markets to supply customers paying lower contracted rates. Huerta declined to disclose the energy retailer the company is working with at present.

PearlX partner SolarEdge’s equipment and software has played a role in VPP projects undertaken in collaboration with Vermont utility Green Mountain Power, California’s Sacramento Municipal Utility District and Australian utility AGL. SolarEdge’s software stack supports fleets comprising as many as thousands of individual solar-battery systems, said Gadi Michaeli, vice president of SolarEdge’s residential business unit.

“This provides…stable ground for innovating on the community level, where we know that things work and are stable and scalable,” Michaeli said. 

The idea of using demand-side assets, as VPPs are known in energy industry parlance, to serve the Texas market is not new. In fact, Tesla, the nation’s leading provider of household battery systems, in November won approval from Texas regulators to operate as an electricity retailer in the state. Other companies are working with commercial customers that have batteries or generators that can be fired up, or electricity loads like lighting or refrigeration that can be temporarily turned down, during grid emergencies.

The same goes for California, where companies such as Sunrun, Tesla, Sunnova and sonnen are developing solar-battery VPPs to earn money serving the grid and give customers backup power to ride through grid outages that are proactively initiated to prevent wildfires.

PearlX hasn’t disclosed any projects it’s working on in California. But Huerta did note that his company devised the financial structure and market approach for a project that sonnen, the residential solar-plus-battery company owned by Shell, developed for multifamily property owner Wasatch Group at an apartment complex in Fresno, California.

The structure of California’s energy market prohibits retail electricity providers from playing the same role that they do in Texas, which means that PearlX’s projects in that state need to be structured differently, Huerta said. PearlX’s model may not work in other states with vertically integrated utility structures unless the company can secure bilateral arrangements with individual utilities, he noted.

Tapping an underserved market

But where the energy market structures work, the PearlX team thinks it can access an almost completely untapped market for solar and battery installations at apartment buildings and other types of multifamily housing.

About 30 percent of Texas’ more than 29 million residents live in multifamily housing, Huerta said. PearlX hopes its $50 million in TexFlex investment will lead to signing up multifamily properties with about 3,000 housing units. If its approach succeeds, Huerta envisions being able to direct up to $500 million to equip 10 times that number of multifamily units over the next five to seven years.

This could also help meet state and federal goals to expand solar and battery access to lower-income customers. NREL’s September report found that only 15 percent of solar adopters in the U.S. as of 2018 were households classified as low- and moderate-income, even though such households represent 43 percent of the population.

Community solar has been the primary route for multifamily housing residents to access solar power to date, via state-by-state programs that connect individual ​“subscribers” to solar projects. But according to NREL, as of 2018, only 5 percent of community solar projects in the country included at least 10 percent lower-income households in their total subscriber base.

Many states have created grant and incentive programs specifically aimed at boosting solar for lower-income and multifamily households. A handful of apartment buildings across the U.S. have used grants to add batteries to solar systems to help residents ride through grid outages, including a 50-unit building that kept running during widespread blackouts in New Orleans after Hurricane Ida last fall.

“Subsidies are great,” Huerta said. But solar and storage vendors and developers are eager for market opportunities that don’t rely on government largesse. ​“For this to succeed, this has to stand on its own.”

Last February’s blackouts have driven Houston and other cities in Texas to seek ways to use public funding and programs to drive more private investment into resiliency for multifamily and low-income housing, Romano said. He’s been involved in several projects aimed at that goal, including a community solar project with Texas-based retailer MP2 Energy and federal-grant-funded work with the Houston Advanced Research Center. The PearlX model offers another angle to serving the market.

“Rather than looking at individuals’ credit and going door to door, like the traditional model, let’s tie a bow around all these things and provide this as an integrated package,” Romano said. ​“Let’s try to make those alignments happen in multifamily housing, where there’s been historical misalignment.”

The Biden administration has made energy equity a centerpiece of its climate change policy, with a goal of ensuring that at least 40 percent of its climate and clean energy investments benefit disadvantaged communities. That includes the Department of Energy’s Loan Programs Office, which has about $46 billion in lending and loan guarantee authority. Jigar Shah, who leads the office, has identified VPPs for lower-income customers as a key area of interest.

Huerta, who formerly worked at Shah’s infrastructure investment firm Generate Capital, declined to say whether PearlX and SolarEdge planned to seek LPO loan guarantees for their multifamily solar-battery projects. But, he said, ​“I think it’s natural for us to investigate these kinds of programs.”

A new way to finance multifamily solar and storage

Pavel Molchanov, director and equity research analyst at Raymond James & Associates, said in an email this fall that the U.S. lags behind other solar leaders such as Germany and Australia in rooftop solar penetration, largely due to credit-score restrictions on who can secure financing to install solar.

“For rooftop solar (and integrated storage) to become much more mainstream, it will be important for families in the lower half of the income and credit-profile spectrum to participate in this trend,” he said. ​“Multifamily housing can certainly play a role in this.”

Scaling up its VPP capacity will be vital to achieving PearlX’s goal of driving down the cost of capital for multifamily solar-battery projects. And the company will need a lot of capital. ​“This is an infrastructure business,” Huerta said in an interview this summer. ​“You’re not anyone in this business until you get to a billion dollars.”

Michelle Davis, principal solar analyst with Wood Mackenzie, said in an interview this fall that PearlX must prove it can execute multiple projects across a ​“fragmented landscape” of property owners to give its financial backers confidence to keep going.

“They’re going to need enough scale to overcome the transaction costs of making these deals happen,” she said. ​“The multifamily and affordable housing segment is an untapped segment of the market, for sure. So with the increased focus from the [Biden] administration on diversity, social justice, all those types of things, it makes a ton of sense. That doesn’t mean it’s any easier.”

But if it works, the PearlX model could help push multifamily solar-battery financing costs downward, much as the growth of the single-family solar industry has been able to drive down financing costs from the 8 to 10 percent range in 2010 to less than 5 percent today.

“I’ve been in this business for 12 years,” Huerta said. Over that time, he’s seen financing for single-family solar projects go from being a novel challenge to being ​“entirely commoditized and ubiquitous.”

Today, the PearlX multifamily model ​“is relatively novel,” he said. ​“We don’t have low cost of capital. We work hard to build trust with our financing partners. But in five years, this will be ubiquitous.”