When Will Solar ABS Finally Catch Fire?

There’s been plenty of talk about using securitization to finance solar energy, but to date, no deals. 

The Department of Energy’s National Renewable Energy Laboratory (NREL), wants  to jumpstart the process. It recently formed a working group of manufacturers and investors to facilitate securitization of solar energy by standardizing the power purchase agreements, leases, and other instruments on which deals are based and to provide more clarity about the risks involved.

The solar energy industry has experienced rapid growth over the past five years, thanks to declining solar panel prices, federal and state tax incentives, and standards that require utilities to generate a certain percentage of power from renewable energy sources.

But the tax incentives that helped fuel this growth are expected to be reduced or eliminated over the next few years, and many banks are limiting their lending because of regulatory restrictions.

Securitization could be a good fit. Even with the drastic decline in panel prices as the result of competition from Chinese manufacturers, rooftop solar systems are still so expensive that both residential and commercial property owners tend to finance them by entering into leases or power purchase agreements. So there’s a predictable, long-term stream of revenue that could serve as collateral for deals.

And the industry is approaching the critical mass and diversification needed to securitize contracts.  According to the Interstate Renewable Energy Council, approximately 1,845 megawatts of photovoltaic capacity were installed in 2011, which is more than 10 times the capacity installed in 2007. Roughly 45% of that capacity was installed on non-residential buildings, 38% from utility scale projects, and 18% from residential properties.

DOE Leads Standardization Push

Still, there are a number of hurdles. The NREL’s Solar Access to Public Capital (SAPC) group is focused on two of these: a lack of standardization of power purchase agreements, leases, and other documents relevant to residential and commercial solar assets, and the need for robust datasets to assess performance and credit-default risk.

The working group has over 60 members representing some of the bigger names in solar as well as capital market debt players — both from the sellside and buyside — ratings agencies and a handful of lawyers.
In March the NREL, with the help of SunSpec Alliance, a group of solar photovoltaic industry participants promoting information standards, began work on the Open Solar Performance and Reliability Clearinghouse (O-SPARC). The plan is to roll out standards by year’s end. 

In a March 22 webinar, Michael Mendelsohn, a senior financial analyst at NREL and project leader of the SAPC, said that by next year the datasets could be available for a wide array of solar assets, across the U.S.
Public utilities commissions are getting on board as well; they are expected to be organized so that “interconnection requirements are standardized among the various regulators,” he said.

In an interview with ASR following the webinar, Mendelsohn said that while he hopes the industry begins using the standard contracts by fourth quarter, “there is no guarantee on the standard contract adoption; and no guarantee if developers adopt the standard contracts, the projects will be pooled and securitized.  So, we will need to market the effort to various audiences.”

The NREL projects that the amount of capital needed by 2020 for both solar photo voltaic and wind powered projects will be $65 billion; double the $35 billion needed in 2012, which was itself a record year.
Paul Detering, chief executive of Tioga Energy, which owns and operates more than 100 renewable energy systems across the U.S., also spoke at the March webinar. He said that the “key to the industry’s growth will be access to large pools of capital at lower costs and securitization could provide that access.”

Tax Credits Going Away

Andrew Giudici, a senior director at Kroll Bond Ratings, which is also part of the SAPC working group, said currently financing is made up from about 50% of tax credit and depreciation — 30% comes from the investment tax credit and 20% comes from accelerated depreciation. But with the investment tax credit set to decline to 10% in 2016, rooftop solar needs will become a cashflow strategy.

What could a residential solar photovoltaic-backed securitization look like? Mendelsohn envisions residential leases of power purchase agreements or industrial leases, with the majority performing, pooled together. He believes that the asset can be structured with “incredibly high-rated tranches if the contracts are made to high FICO borrowers and issuers can prove that people really do pay their solar bill.”