Published on May 18th, 2012 | by Andrew


Solar Energy Securitization on the Horizon as Industry Players Look for New Finance Vehicles

May 18th, 2012 by  

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.

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About the Author

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.

  • SolarOne

    The best ROI over the warrantied life of the system in the residential sector, aside from paying cash, is for the homeowner to purchase a system, not lease, with a mortgage backed loan. Securitizing these types of loans, as opposed to leasing, will likely be the primary solution to tax equity investments. Homeowners can collect the tax and other utility incentives and the investors can collect payment on the coupon.

    • do you know if this is something that is difficult for many households? in other words, is it currently possible for some houses to lease but not possible for them to get such a loan?

  • tuanzanthony

    Right now, the mortgage rates are so low that you might be able to refinance with a 15-year fixed-rate loan, thus escaping the debt trap faster than you might have originally planned, while also cutting your monthly loan payment. The icing on the cake is the outrageous amount of interest you will avoid paying. I have used only 123 Refinance to find rates

  • Ljpnatural

    The one thing I have trouble with in this area is a solar system will continue to produce electricity regardless of the financial worthiness or unworthiness of a commercial or residential solar customer. For example, in New Jersey for a typical residential system even if the house is vacant for whatever reason the solar system is still producing electricity and solar renewable energy certificates (srec’s). Based on this MONEY is still being produced by the solar system. What is the FINANCIAL risk for a lender? Granted there are legal issues but these could be written into the contract. With this in mind why is the credit score a major factor in leasing a solar system whether it is an equipment lease or a power purchase agreement. The typical credit score for qualifying for either of these is 670 or greater. Many companies involved in solar equipment leasing or power purchase agreements are missing the opportunity to sign a great deal of contracts because of their “preceived risk” of the potential customer. The “risk” is extremely low if nonexistant since the solar system is producing MONEY. Perhaps this view is idealistic but the upside is obvious.

    • Oakland

      In most cases, the SRECs alone do not cover the cost of the system. The credit worthy customer makes up the difference between what is owed on the system.

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