The recent U.S. residential housing and mortgage market collapse gave securitization a bad name, but the practice of aggregating and dicing up residential solar PV system leases and commercial solar power purchase agreements (PPAs) is bound to play a growing role in solar and renewable energy finance going forward.
Finding alternative means of financing poses the biggest challenge to industry participants with expiration of federal government investment and production tax credits (ITCs and PTCs) looming and renewal uncertain.
Tax equity financing has been the primary private-sector vehicle for financing solar energy companies and projects, but the tax equity market is too small and narrow to accommodate the scale of capital investment necessary if US solar and renewable energy installations are to continue growing apace. That has industry participants working with bankers to find alternatives financing vehicles.
Well-established across a range of financial assets, including student loans and credit card debt as well as home mortgages, “securitization is close to becoming a reality in the residential market space,” solar experts said at the SolarFuture: Eastern USA conference in New York City last week, Environmental Finance reported. “That’s really what’s going to enable more markets to come online,” Environmental Finance quoted Lux Research senior analyst Matthew Feinstein.
Securitizing Residential Solar PV Leases and Commercial PPAs
Securitization is a process through which individual financial assets, such as residential solar PV system leases, are pooled together based on statistical analysis of criteria including leaseholders’ credit quality and the geographic distribution of leases. The pooled leases are segmented according to their cash flow and credit quality characteristics, packaged and put into a trust that issues bonds with the underlying leases as collateral. Investors who buy the solar lease-backed bonds receive interest and principal repayments as leaseholders make their payments.
Securitization has gone from innovation to mainstream financing vehicle in the last two to three decades. Banks typically serve as intermediaries, buying up the individual leases or other financial assets, performing the credit assessment and statistical analysis and processing, contracting for the legal work to be done, and then pricing and selling them on to other “buy-side” financial intermediaries, such as mutual funds, retirement and pension fund managers and insurance companies.
It’s all well and good and to the better, providing investment capital for companies and industries looking to expand…as long as a close eye is kept on credit quality. There are significant risks, and they’ve manifested themselves most recently in the housing and mortgage market collapse of 2007, however.
Securitization: Risks and Benefits
Securitization of financial assets can, and has provided, substantial economic benefits, narrowly and broadly speaking, but realizing them requires that every “cog” in the securitization wheel carry out their functions honestly, and preferably transparently. Having checks and balances in place– read vigilant and effective regulation, are likewise essential.
Securitization does afford investors asset diversification, both within and across asset classes. It also enables bank intermediaries to free up capital on their balance sheets, as rather than holding the underlying leases or other financial assets to maturity, they are able to offload them from their balance sheets by selling them to investors.
That’s a double-edged sword. While it frees up capital for the banks, it places the burden of credit risk assessment on the bond buyers, which in turn, has typically been done by proxy via the few major U.S. credit ratings agencies. Abuse all along the securitization value chain led to the collapse of the U.S. housing and mortgage market, a cautionary tale if ever there was one. Nonetheless,
“Securitization of solar leases and power purchase agreements is ‘certainly going to play a very large part in introducing more liquidity in the US solar market’”, Environmental Finance quoted Anthony Kim, North American solar analyst for Bloomberg New Energy Finance.
Investment Capital for a Fast-Growing U.S. Industry
Residential solar PV system leases look most promising in terms of solar industry securitization candidates, but experts speaking at the New York City conference said commercial-scale projects could and would be securitized as well. “I do fully expect large commercial funds to appear in the $100 million-plus for systems of 500kW to 2MW, and larger funds if system sizes exceed that,” Tom Leyden, a solar energy industry veteran executive now an industry advisor said.
Investment management house BlackRock is said to be nearing the close of a first $400 million renewable energy fund that it had announced in March 2011. Blackrock’s ultimately looking to raise as much as $1.5 billion for the fund, which is to be managed by former Irish utility CEO Jim Barry.
“We need securitization to ensure more low-cost capital,” added SunEdison founder and president of the Coalition for Affordable Solar Energy (CASE) Jigar Shah. “The vast majority of our money comes from commercial banks and insurance companies – and we are tapping them out. They don’t actually have enough money to keep up with our growth globally.”
Shah pointed out that with PTC and ITC expirations looming, solar and renewable energy industry participants are going to be battling it out with each other even more fiercely to gain access to a relatively small base of tax equity investors, Environmental Finance also reported. Just $3.6 billion of tax equity financing will be available for renewable energy projects in 2012, according to a survey carried out by the US Partnership for Renewable Energy Finance. The tax equity market typically contracts and expands with accounting profitability and the desire for companies to offset taxable gains and income in any given year.
I've been reporting and writing on a wide range of topics at the nexus of economics, technology, ecology/environment and society for some five years now. Whether in Asia-Pacific, Europe, the Americas, Africa or the Middle East, issues related to these broad topical areas pose tremendous opportunities, as well as challenges, and define the quality of our lives, as well as our relationship to the natural environment.