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Securitization: The Future of Solar Finance

Elias Hinckley's picture

Elias Hinckley is a strategic advisor on energy finance and energy policy to investors, energy companies and governments. He is an energy and tax partner with the law firm Sullivan and Worcester...

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  • Nov 6, 2013

solar energy securitization

The energy finance community has been eagerly anticipating the introduction of solar asset-backed securities – “solar securitization,”  – for at least three years, and may be waiting for another year or more. But sooner or later, securitization is coming to solar finance, and when it does, it will have a profound impact on the pace of solar industry development.

Sink or Securitize

The solar industry must find ways to continue to reduce costs as state and federal support for renewables shrinks, and access to less costly capital will be critical to that process. Asset-backed securitization would give the industry access to a much broader pool of investors, ultimately helping to cut the long-term cost of capital, reduce levelized energy costs, and enhance liquidity in the solar project market.

Securitization: The Basics

In the most basic form of solar securitization, the holder of a portfolio of solar assets bundles contracted revenues from a group of projects and sells that revenue stream to a special-purpose vehicle – an entity that exists solely to buy or finance specific assets.

That SPV issues that revenue stream as a tradable, interest-bearing security. Buyers of the security are senior to equity investors, thereby taking on a smaller degree of risk. For the security to be investment-grade, the project portfolio must be large, diverse and offer a credit-worthy source of revenue, which accrues from buyers of solar power.

Why It Hasn’t Happened Yet

The solar industry faces the following obstacles in bringing solar securities to the market with the kind of ratings they will need to enable solar projects to attract low-cost capital.

  • Scale and Geographic Diversity. Assets must hit a critical mass and must be pooled from over a geographically-diverse area, reducing the risk that regulation or market conditions will materially affect the value of all the solar assets in the pool.
  • Standardization of Asset Structures and Documentation. The structure and supporting documentation of assets must be more consistent and pools of assets standardized for underwriters and investors to have confidence in the underlying revenue streams.
  • Off-take Risk. Most residential solar sponsors manage off-take risk by limiting their eligible pool of potential customers to homeowners with a minimum FICO score. But management of off-take risk for commercial and industrial customers is less standardized, making commercial and industrial solar assets more difficult to securitize.
  • Technology Risk. Distributed solar asset revenue streams have tenors of 15-20 years, but most solar panels have less than 10 years of historical performance data.
  • Sponsor Risk. Sponsors are still relatively new to the market. Even more established market players, such as Solar City, SunRun, Sungevity, and Viridity, have been operational for less than a decade.
  • Market Risk. Solar energy might be less economical than traditional energy sources over the lifetime of the asset, and sponsors will need to persuade investors that their assets will continue to generate electricity at a price that is competitive with traditional energy, or find other means of ensuring that market risk won’t jeopardize asset values.
  • Regulatory Risk. Government agencies will need to update regulations, such as disclosure and liability rules, as well as assignee rights under government energy programs to ensure that investors in solar securitizations are protected against default risk. The government could also provide credit enhancement through loss reserves or investments through entities like government-backed “green bank” programs.

The Snowball Effect

When the above challenges are resolved, the number of solar securitization issuances is likely to grow rapidly.

With less than 1% penetration among credit-worthy homeowners in the residential solar market, there is tremendous room for growth. And ultimately, commercial solar assets will also be securitized, which could lead to issuances of mixed residential and commercial asset pools. This securitization process and impact will not be restricted to the U.S. and will expand to markets abroad.

The capital the securitization will add to the market will accelerate growth, geographic diversity, and standardization across the solar industry, driving consolidation among players at all levels of the industry supply chain.

This article was originally published by Breaking Energy and was based on a longer piece that was originally carried in Power Finance and Risk.  All versions were co-authored with John Frenkil, an energy and project finance lawyer with the law firm Sullivan & Worcester.

Photo Credit: Solar and Finance/shutterstock

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Lewis Perelman's picture
Lewis Perelman on Nov 9, 2013

This is a valuable assessment. The need for financial innovations in energy markets is often overlooked.

Nevertheless, securitization as presented here is not a substitute for the technical innovations still needed for solar energy to become commercially competitive and adequately reliable for most applications in most places. This need is implied by the point on “Market Risk” but perhaps not stressed sufficiently. So given that, and the other hurdles listed, consideration of securitization at this point is premature.

Even then, the derivative mechanisms posited in this essay are uncomfortably reminiscent of the bundled mortgage securities and derivatives that were instrumental in the global financial disaster of 2008-2009. (Energy derivatives also played a role in that financial calamity.) Any benefits for energy supply need to be weighed against the systemic risks posed by such synthetic financial devices.

For more on why breakthrough innovations in energy technology are needed, and a plan to accelerate their creation, see:

Lewis Perelman's picture
Lewis Perelman on Nov 9, 2013

It’s hard to envision how that could work.

Property & casualty insurance covers risks to the particular property that a policy covers. Insurers will give credit for measures owners might adopt that can directly reduce the risk of loss to that specific property — for instance sprinklers, burglar alarms.

Adding solar panels to a house or factory will add to property assets that might be subject to loss, but make no measurable contribution to reducing loss of that property.

Measures aimed at improving local resilience and adaptability to potential climate-related hazards, however, should be amenable to insurance premium credits.

Elias Hinckley's picture
Elias Hinckley on Nov 9, 2013

Capital at lower cost and greater scale that a seconadry market would make available will push down levelized cost of solar by as much as 16% (according to NREL’s SAPC group) – that really moves the needle on competativeness.

There’s a fundamental difference between 2nd and 3rd level derivatives of asset backed securities and actual asset backed securities. I don’t think anyone thinks we’d be better off economically w/o asset backed securities – they create enourmous liquidity and reduce cost of money.

Lewis Perelman's picture
Lewis Perelman on Nov 10, 2013

Re: “I don’t think anyone things we’d be better off economically w/o asset backed securities.”…

Here is one critic who thinks so:

Even those who don’t claim that asset backed securities should be banned altogether widely argue that regulation of these and related derivatives needs to be far more effectively regulated. But getting better rules implemented and then stringently enforced has proven to be a complex problem that remains yet unresolved, as this recent New York Times editorial notes:


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