Solar financing models: Swimming around the sharks in the water

New Hampshire, USA -- A panel presentation last Friday at the MIT Energy Conference explored the evolution of financing sources for solar energy, particularly distributed generation, that are bringing new money into the industry.

Dan Seif, panel moderator from the Rocky Mountain Institute, pointed to SolarCity's 1 percent default rate, several policy angles (net metering, states' renewable portfolio standards, the eventual loss of the 30 percent investment tax credit), a lack of performance history, as "sharks in the water" to get solved. What needs to happen to make solar a safer asset class and allow more capital to flow in?

Omer Farooq, director at Bank of America/Merrill Lynch, acknowledged that activity and interest around investment strategies based on solar assets has picked up significantly in the past six months. Financing ideas such as asset-backed securities and yieldcos aren't new, but have been borrowed and tweaked from other industries. "What we really did was take structures that come out of real estate and added some nuances to it," explained Albert Luu, VP at SolarCity. The challenge, he said, is to address "certain hurdles why we can't execute around them. The question is, can we as an industry solve those?"

One of hurdles simply is a more equal playing field. Mike Mendelsohn, senior financial analyst at NREL, offered a slide showing $100 trillion worth of funds are available for investments -- but most of it is unavailable to renewable energy. Dan Reicher, professor at Stanford Law School, pointed out that one could pick up the phone, call a broker and ask to invest in an MLP structure for an oil/gas pipeline and "do that instantaneously," but that's not possible for a big solar infrastructure project. The MLP Parity Act would allow renewables and especially solar to obtain such MLP status, but that legislation is still churning through Washington. Farooq also pointed to the possibility to blend yieldcos with older assets as a way to shield tax attributes at the corporate level.

Another important checkbox in the emergence of new financing models, suggested Luu, is proving out performance data. "We have the most data but not enough for most rating agencies" who seek more like 10, 20, or even 30 years' worth, he said. On the other hand, the systems that are in the field are proving to exceed performance expectations; Luu said SolarCity's systems over the past six or seven years have averaged 106 percent output.

For those who argue that solar PV technology is becoming commoditized, how are performance metrics like system performance and component asset life being factored into financing decisions? Farooq noted that BAML has a list of "vendors we like," many of which are shared with SolarCity and others. "We want to see it become a commodity," Luu said, pointing out that solar developers "shouldn't have product lists that financiers won't back," adding that "we'll always take a loss on production technology." Nor will SolarCity purchase additional insurance to cover product warranties, as Luu said most live well beyond their actual warranty, and "we feel comfortable we'll be around and can swap out modules if needed."

As solar energy system costs continue to come down, what's the risk that homeowners might actually give up their contract and buy a cheaper system? SolarCity actually came up with a stress-case scenario if retail rates become lower than a PPA, Luu explained; given his company's average PPA rate (14-15 cents), retail rates would have to fall to 9 cents/kWh to pull homeowners away from meeting their debt.

Standardization of contracts, such as is the work of NREL's Solar Access to Public Capital (SAPC) initiative, also was identified as a pain point. It's not enough to have the same contract, but it needs to follow consumer compliance laws in all states, Farooq pointed out. Luu noted that suppliers shouldn't be competing on contract structures in the first place, but rather on quality of product. "It's easier on the residential side because homeowners don't want to go through it," he said, but "financiers want to know it's the same paper" which lowers costs. It'll be heavier lifting in the middle-market of commercial/industrial solar systems, he acknowledged, because deals are smaller and margins are thinner and it's tougher to pencil out projects. It's "a difficult market to tap," agreed Mendelsohn.

An audience question prompted a look at community solar and "solar gardens" that have been popping up in several states (Minnesota, Colorado, Massachusetts, Washington DC), in which a group of people come together to own pieces of a solar energy system. Such structures can be a struggle, Farooq pointed out, because on the local level the PPA might be very attractive "but it's not clear where the [tax] credit is going, if it's in the most efficient way. That has to get clarified." Mosaic's Greg Rosen was equally pessimistic about a broader nationwide rollout of community solar; "a few states have done a great job with enabling legislation," while other stakeholders have tried to gut it. He confessed to being "not overly optimistic," saying there "will be other ways for communities to participate" in that type of shared solar structure using existing methods.

Someone who wasn't in this MIT panel but has its own involvement in solar asset-backed financial structures is SunPower, which has been talking about doing a yieldco maybe in late 2015 and is planning a non-recourse debt facility later this year. Solar asset-backed securities (ABS) "will provide the lowest cost of financing for our residential cash flow," according to CFO Charles Boynton, discussing the company's most recent financials. He clarified in a follow-up email exchange: SunPower is looking at the gamut of capital sources for its projects: yieldcos, ABS, crowd-funding, REITs, and other public-capital vehicles, as well as joint ventures and other forms of debt and equity capital formation, he said. "As investors and, very importantly, rating agencies gain comfort with this asset class (technological performance, contractual terms, credit profile) and inter-creditor arrangements with the tax equity investor get resolved, it is anticipated the ABS market will become a major factor in residential and commercial DG solar finance."

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