Insights In the Age of Solar Securitization, Is It Time For Real Third-Party Assurance?
by Matt Golden, IBTS Senior Consultant
In early November, the Solar Industry reached an important milestone. SolarCity, the largest vertically integrated residential solar installer in the country, was successful in selling a portfolio of solar leases into the secondary market as a unique asset class. This new solar security represents an unprecedented opportunity to lower the cost of capital and bring solar into reach for millions of homeowners.
Securitization provides a pathway to large-scale capital markets and significantly lower interest rates. This brings down the cost of Solar PV to consumers, giving solar companies access to virtually limitless funds as long as these assets continue to perform.
Securitization represents a critical step forward will help drive the solar marketplace well beyond its current scale to reach full potential of this important clean source of energy. However, securitization does not come without risk. We believe that as the industry continues to mature, so must the underlying systems that protect consumers and investors alike.
Lessons from the Past
In 2008, mortgage-backed securities were a significant driver for a virtual collapse of our economic systems. While there are many facets to this story, at a fundamental level, one of the key breakdowns was in the third-party system designed as a check for quality and risk, as well as to avoid conflict of interest.
There were two key areas where this breakdown occurred. First, appraisers developed relationships with mortgage brokers and real-estate agents that represented a conflict and created an incentive to overestimate home values to facilitate sales. The fact that appraisers were not functioning as a true third-party led to a system-wide over-valuation of assets. Second, rating agencies responsible for rating the risk for pools of mortgage-backed securities had economic ties that some would argue were too close to the banking industry, and created an incentive to overlook potential risks to drive deal flow.
To overcome these issues in the mortgage backed securities industry, these issue were partially remedied by requiring appraisers to be selected by a neutral third-party to avoid conflict of interest.
A 2009 Bloomberg Business Week article byChad Terhune, “Housing Appraisals: Still Blowing Bubbles?,“ summarized the issue as follows: “Home appraisers played one of the less well-known roles in pumping up home values and contributing to the current financial crisis. Retained by lenders or brokers, they frequently colluded—explicitly or tacitly—in overestimating the worth of houses to justify large mortgages and the lucrative fees each member of the real estate food chain received at closing.”
As the solar industry enters into the securitization market, the mistakes made with mortgage-backed securities should be closely reviewed to avoid a similar problems in the future. Setting up a system of true third party review and quality management for solar securities, that avoids potential instances of conflict of interest, is a necessary step to ensure the sustainability of this new asset class.
To start with, it is in the interest of the solar industry to agree on basic standards for quality and ensure that all players meet the same minimum bar. Solar needs a standard for quality installation practice and third party review, representing a minimum quality level required by all solar installers and finance firms. This will provide a benchmark for quality and prevent a competitive marketplace where quality is compromised and assets are not properly valued.
Creating a system that ensures solar PV systems are installed per a national protocol is essential for investors in the secondary market. Trading paper without a physical record of the assets and the verification that each solar PV system is installed correctly poses potential risks, and sets up a system that does not reward quality and creates a race to the bottom. Investors should require that Solar Securities have been verified and held to a minimum standard to ensure long term performance.
A quality assurance system that is applied equally will protect those companies in the market from unfair competition, ensuring that they are not being undercut by providers attempting to take market share by competing on cost through low quality. This type of situation could damage the reputation of solar as a class, and weaken access to capital for the entire industry.
There is a current effort underway to develop a National Quality Assurance Protocol, being led by some of the leading solar finance providers. The solar industry should view this protocol and the development of a true and required third-party review system, not as unnecessary regulation of the market, but instead as a necessary foundational step that will ensure the longevity of the solar marketplace and help prevent a race to the bottom in quality.
If you share both our enthusiasm for the long term growth in the solar market, and the belief by many in the industry that we need to ensure quality to avoid potential failures that could be detrimental to solar in the long term. Visit www.ibts.org/qualitymatters and join other industry professionals interested in establishing a National Quality Assurance Protocol.
Matt Golden serves as a Senior Consultant to the Institute for Building Technology and Safety (IBTS). IBTS is a leading provider of Investment Grade Quality Assurance services to public and private sector clients for the past 35 years. As a non-profit organization, it is our goal to provide Quality Assurance services to our private and government partners to ensure reliability, production and safety of installed systems, increase local jurisdiction and utility responsiveness, and provide overall support to enhance the renewable energy industry growth.