Recent data has revealed that more solar has been installed in the past 18 months than in the 30 years prior. While the industry has relied for the most part on traditional funding sources – such as debt, tax advantaged equity and private “cash” equity – it’s reaching a point where it may need to begin seeking out alternative financing options.
This is a sign of maturity in the industry, as it indicates that solar projects are becoming more widely known as secure investments that investors are increasingly interested in funding. Much of this maturation has been dependent on the growing ability to operate solar projects more efficiently with the help of comprehensive solar asset management(SolarAM) and operations and maintenance (O&M) providers. A new National Renewable Energy Laboratory (NREL) report titled The Potential of Securitization in Solar PV Finance shares some insight into the change in financing and suggests that securitization could be a great option for financing PV assets. Highlights from the NREL’s report, includes the benefits and risks associated with securitization and how it can help shape the O&M market.
WHY THE NEED FOR SECURITIZATION?
Securitization essentially helps reduce friction in financing projects, making it easier for developers and owners to access lower cost capital. Lower cost financing is considered one of the keys to making solar more affordable and will help the industry grow as a whole by providing additional financing sources.
WHAT IS SECURITIZATION?
The NREL defines securitization as follows:
“The process of transforming illiquid assets (such as the cash flows from a solar lease or power purchase agreement) into standardized, tradable instruments (i.e., securities). Security issuers sell the rights to the underlying assets (via the securities), and the proceeds are used to finance business operations. Issuers pay an interest rate to each investor, the percentage of which is typically dictated by the rating of the securities.”
Institutional investors participating in the securitization capital markets generally prefer to deploy significant amounts of capital and invest in assets with strong diversification and reduced risk. In exchange, they can offer capital that is much more competitive. Solar has been kept out of this market to date because of the perceived lack of scale, concerns about a nascent industry that doesn’t have good depth of service providers for operating assets, and complexities around tax incentives. The recent securitization efforts demonstrate how many of these barriers are being overcome particularly in the residential sector. It will be interesting to see how this develops in the commercial and industrial sector where homogenized investment assets are less common.
WHAT ARE THE BENEFITS OF SECURITIZATION IN THE SOLAR MARKET?
As the NREL report notes, solar assets can be difficult to invest in for a number of reasons, including the complications of the tax credits and the illiquidity of the investment. Securitization, on the other hand, offers some of the following benefits, according to the NREL:
- Risk mitigation – Pooling assets diversifies credit risk, spreading costs associated with asset management performance management and reporting over a large base
- Access to broader capital pool – It opens the solar industry up to investors that might otherwise be unable to participate in private transactions
- Improvements in financing terms – It offers asset originators longer tenors and lower cost of capital, as well as other favorable financing terms than they may otherwise be unable to obtain from traditional sources
- Opportunities for market growth – Investor demand may create demand pull, which could in turn incentivizes the market to originate more solar systems
WHAT ARE THE RISKS OF SECURITIZATION IN THE SOLAR MARKET?
Naturally, there are some risks associated with securitization, which the NREL notes are as follows:
- General wariness – Regulators, policymakers and the general public are inherently wary of securitization, as it figured prominently in the Great Recession
- Risk spreading – There’s the potential that a single credit failure could initiate a fire sale of assets in the marketplace, which could undermine the otherwise healthy growth of the solar or other renewable energy sectors.
HOW CAN SECURITIZATION SHAPE THE SOLAR O&M MARKET?
As the NREL report states, the current (O&M) landscape in the PV market “comprises a patchwork of providers and practices” and there aren’t any national standards or best practices in place yet.
That being said, as the industry continues to learn from case studies and goes on to develop O&M best practices, it will be crucial to focus on comprehensive reporting. Reporting is what will help shape best practices and keep solar projects performing optimally. Going forward, RadianGEN anticipates seeing an increase of SolarAM providers working closely with O&M providers to optimize performance both technically and financially.
O&M is just one piece of the ROI pie, and SolarAM focuses on optimizing all aspects of a solar project through comprehensive management. These areas include:
- Technical (asset operations)
- Financial (financial management)
- Contractual (contract administration and regulatory compliance)
As projects become better equipped to deliver the expected ROI, there will likely be an increase in securitization as more investors will be interested in funding solar projects.
See how your O&M stands up to industry best practices and try our O&M Estimator