Any time you get a few solar financiers together, the conversation inevitably turns to the potential of financial tools and pooled assets such as securitization, REITs, and MLPs to disrupt the world of solar finance.

If those conversations are right, then today is a red-letter day.

SolarCity just announced its intent to offer a private placement of $54.4 million of an “aggregate principal amount of Solar Asset Backed Notes, Series 2013-1 with a scheduled maturity date of December 2026,” as per an SEC document.

That’s securitized solar, and it’s the first time it’s being employed for distributed PV. (We published The Encyclopedia of Solar Securitization in September.)

As defined by GTM’s Stephen Lacey, “Securitization is the practice of pooling disparate sources of debt and selling it as a package to investors on the secondary market.” You might recall that process being applied to package debt such as mortgages and loans as part of the machinery of the recent global financial crisis. Nevertheless, in solar — securitization improves liquidity and can spur demand. (Securitization could be applied to energy efficiency as well.)

Financing lore has it that the debt is usually packaged in $100 million increments, so the $54.4 million number might be due to SolarCity cherry-picking the contents of that particular asset pool. SolarCity could not comment at this time.

GTM Research’s Shayle Kann notes that this is the “first securitized portfolio of distributed solar assets” and likely comprises “the cleanest, most standardized” debt. He noted that the next step in the process is for a ratings agency like S&P or Moody’s to provide a rating for the pooled asset. From there, an investment bank markets the asset to institutional investors.

Kann sees this as potentially “a bigger deal than a solar REIT or MLP.” He said it was “no surprise that SolarCity is the first; expect to see Sunrun and others take a shot.”

A positive credit rating and strong reception could “open the floodgates” of solar finance, according to Kann.

The investment bank Baird has noted a positive initial reaction for securities that “could reduce SCTY’s cost of capital and increase company returns,” adding that it was good news for SolarCity and the solar industry. SolarCity has its Q3 earnings call later this week.

It’s fair to say that distributed solar has just reached the scale where it can access larger pools of once-unavailable, lower-cost capital. It’s another piece of the equation where solar is cutting cost and going mainstream.

Rob Day of Black Coral Capital said, “This will be a good opportunity to see institutional investors validate the distributed solar asset class. Securitization is a win-win-win for homeowners, solar developers and investors: lower financing costs result in more affordable solar for homeowners; deeper capital pools enable developers to scale faster; and stable, long-term solar assets create attractive returns for investors. SolarCity is the first mover here, but I expect they’ll be soon followed by other financing platforms like Clean Power Finance, OneRoof, Sunrun and the rest. Accessing low-cost capital will be a key competitive factor for this industry as it consolidates over time.”

Ed Feo, the COO of energy developer Coronal Management, thinks this is a big deal, saying, “It provides for long-term debt (maturity of 2026) placed with qualified institutional buyers. This is a milestone on the way to broader capital market financing for solar assets. Although the debt is non-recourse to Solar City, it would be interesting to know the extent of support through service agreements by Solar City and backup servicers required to market the institutional debt.”

Feo added, “It’s the kind of deal I would expect from a market leader.”

Securitization is one of the hot solar topics to be explored on the upcoming Standardization and Securitization panel at GTM Research’s U.S. Solar Market Insight conference in December. Panelists include Yuri Horwitz, CEO of Sol Systems, Richard Mull of KPMG, and Nicholas W. Lazares, Chairman of the Board and CEO of Admirals Bank. 

Source: http://www.greentechmedia.com/articles/read/Solar-Milestone-SolarCity-Introduces-Securitization-to-Distributed-PV

 

“I think, ultimately, securitization through the asset-backed market is the only thing we can do to achieve large scale,” said Cisco DeVries, president and CEO of Renewable Funding. He said it is crucial to get the secondary market to scale to reach national and state solar power and energy efficiency goals.

“We’re finally at the tipping point,” DeVries said. “We just have enough to make the leap to make the machinery work to access these large, low-cost sources of capital. We’ll be able to get even cheaper, better capital over time.”

Many stakeholders are working in parallel to develop securitization approaches. Some are combining solar and energy efficiency financing into one package. Others are beginning to securitize solar power and setting up the groundwork to support this practice in the industry. The Green Jobs – Green New York program is focusing solely on energy efficiency.

Surprisingly, developers of solar-only programs and developers of energy efficiency programs have rarely shared information until now. Michael Mendelsohn, a senior financial analyst at National Renewable Energy Laboratory, is working to advance solar securitization and is aware of this situation. He said he plans to compare notes with organizations working on energy efficiency securitization.

As is true with other loan products, both solar power and energy efficiency securitization benefit from high transaction volumes, standardized documents, and compelling performance data. All of these factors will provide the necessary financial structure to give investors confidence in solar and energy efficiency loans as an asset class.

However, there are significant performance measurement differences between solar projects and energy efficiency projects. It is easier to estimate, measure and report the kilowatt-hours produced by a solar project than it is to report the kilowatt-hours saved by an energy efficiency project.

Combining Solar Power and Energy Efficiency Loans

Renewable Funding uses three approaches that can fund both renewables and energy efficiency – bundling unsecured residential financing, aggregating property-assessed clean energy (PACE) loans, and funding on-bill financing through securitization.

First, Renewable Funding works with the Pennsylvania Treasury, the State of Kentucky, and other partners to run the Warehouse for Energy Efficiency Loans (WHEEL) program. The WHEEL program bundles unsecured residential loans. The first securitization is scheduled to take place in mid-2014, DeVries said.

“The capital that we used to finance WHEEL projects is technology- and project-agnostic,” DeVries said. “It’s a traditional loan product. You can get it funded and closed in a day. It can be used almost anywhere in the country. It’s really great to have a loan product that works that way.”

Second, the CaliforniaFIRST program, which DeVries said includes 170 cities and counties, works with Renewable Funding to aggregate its PACE loans. DeVries said he estimates it will be at least one year before the commercial loans are ready for securitization. Residential loan securitization is on the horizon and may take place next year. So far, he said, the program has received 140 applications, over half of which are for solar projects. The remainder of the applications are for energy efficiency and water efficiency projects.

Third, Hawaii has been collaborating with Renewable Funding on its Green Energy Market Securitization program. DeVries said this program is likely to issue $100-150 million in bonds early next year. These bonds may fund both solar power and other clean energy projects.

“I think Hawaii’s model is the most exciting thing I have seen in years,” DeVries said. “They’re taking the kind of low-cost capital that has been used to build power plants and making that same kind of capital available for homeowners and businesses to put on their roofs. The Hawaii model is an exciting and dramatic change.”

DeVries also said he has heard of a financing program that is combining solar power purchase agreements with PACE.

Securitizing Solar Power Independently

During the past month, SolarCity announced it has securitized a $54.4 million pool of loans for solar photovoltaic panel installations. This amount is considered somewhat small by several industry writers. The asset has not been rated yet.

Almost in parallel with SolarCity’s news on securitization, a group called Solar Access to Public Capital (SAPC) just announced a standard solar contract that can be used across the industry.

SAPC is working to facilitate an industry-wide conversation about standard practices as part of the movement toward securitization. Mendelsohn organized SAPC after receiving a grant from the Department of Energy to advance solar securitization.

“We’re trying to build out a standard set of contracts across the solar industry — not with any specific state or program — and really get an understanding of how the rating agencies view the asset class,” Mendelsohn said.

SAPC is now convening stakeholders, building a system performance database for solar energy called oSPARC, developing best practices for solar system installation, and creating four sample structures for rating agencies to review, Mendelsohn said. Although the rating agency reviews will not be published, a report on the results will be available later. Mendelsohn also said a data structure for solar securitization will be publicly available once it is complete.

“The market needs to get comfortable with one technology at a time,” Mendelsohn said. “They like things very standardized and not a lot of risk factors combined. There’s definitely a market demand for yield.”

Securitizing Energy Efficiency Independently

Last summer, the Green Jobs – Green New York program began a securitization program for energy efficiency loans that does not include solar power. The bonds have earned an AAA rating from S&P and an Aaa rating from Moody’s.

N.Y. found an unusual way to guarantee these bonds. Through an arrangement with the New York State Environmental Facilities Corporation, the state is using funds earmarked for environmental purposes to make the bonds competitively appealing to investors.

Jeff Pitkin, treasurer at New York State Energy Research & Development Authority, said in an e-mail that the net interest cost on the bonds will be below one percent. The bonds will also benefit from federal Qualified Energy Conservation Bond subsidies.

This loan program is one of the first initiatives started by N.Y.’s new green bank, which opened its doors in January.

Two energy efficiency data and standardization initiatives are now in progress. Lawrence Berkeley National Laboratory is developing an energy efficiency loan data specificiation with standard data fields and definitions. Environmental Defense Fund, Clean Energy Finance Center, and University of Chicago plan to collect, aggregate and publish energy efficiency loan data from sources nationwide.