Solar Securitization: A New Frontier

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Originally published on Mosaic, written by Boyd Arnold

In a major milestone for the solar industry, SolarCity recently completed the industry’s first securitization of distributed solar energy. Our friends at Mosaic provide a closer look at securitization and what it means for solar.

Financing Rapid Growth

Every four minutes, a new solar photovoltaic system is installed in America. By 2016, new installations are expected to occur every 90 seconds. Two thirds of the solar capacity in the U.S. has been installed in the past 2.5 years and in the next 2.5 years the capacity is expected to double. Solar stocks have been on a tear over the past year with some companies seeing their value increase by as much as seven times.

In fact, the solar industry is growing so fast that companies and developers have trouble finding affordable financing to continue growing the industry. Considering the positive financial, social, and environmental impact that solar has on local and global levels, it is imperative that the industry has access to affordable capital to continue its growth.

New Financing Option: Solar Asset Backed Securities

Last week SolarCity announced an offering of securitized solar systems to investors. SolarCity is offering $54 million of solar backed notes that offer a 4.8% rate of return and mature in 2026. The notes are payable from the cash flow generated by the leases and power purchase agreements (PPAs) that SolarCity has with its customers. Standard & Poor’s has rated the notes BBB+.

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Pooling contractual debt to sell to investors is nothing new. It happens for mortgages, auto loans, airplanes, trains, and life insurance all the time. What makes SolarCity’s offering newsworthy is this is the first time that it has happened in the solar industry and it could potentially be a new way of financing the industry’s growth. Many people anticipate that other solar installers like Sungevity and SunRun will follow SolarCity’s footsteps if this initial offering is successful.

By receiving the money upfront from investors instead of over the life of the leases and PPAs, SolarCity’s cost of capital is reduced. SolarCity can take the proceeds from the sale of the notes and use that money to grow its business. Liability-driven institutional investors struggling in the current low interest rate environment are happy to purchase the notes because they offer a higher yield than they can find in many other places.

As with any new financial product, there are characteristics and risks of solar securitization that are not yet fully understood. In order to reduce risk and err on the side of caution, SolarCity shortened the tenor of the notes to 13 years (leases are generally 20 years) and funded a special reserve account for any equipment malfunction. The size of the offering, $54 million, is also smaller than normal securitized offerings and could indicate SolarCity’s testing the water on a small scale for its first offering.

Options For Individual Investors

While this new form of financing for the solar industry is important, it excludes individual investors as only institutional investors may invest in SolarCity’s offering. For individuals interested in investing in solar, Mosaic has created an online marketplace that connects individuals to solar projects. Mosaic provides investors with competitive returns (up to 7% on past projects) and reduces the cost of capital for solar developers.

Going Forward

Financing the continued growth of the solar industry will take a lot of capital. All forms of financing – crowdsourced, securitized, public, and private – will be needed. As the solar industry continues to grow and more people profit from the expansion, additional capital will flow to the industry and reduce the cost of capital for companies. While this flow of capital seems inevitable, it can’t happen fast enough.

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