Insights As Securitization Grows, Is the Solar Industry Ready for Wall Street’s Scrutiny?
In order for solar to become a mainstream security, companies must work for common standards.
Not that long ago, solar was largely the province of hippies and off-grid enthusiasts. But over the past decade, solar has emerged as a real force in the electricity sector -- providing nearly three-quarters of all new capacity to the U.S. grid in Q1 of 2014.
Nearly every week, there are record-breaking funding announcements fueling growth, which has exceeded 38 percent just since last year.
This boom is typically attributed to declines in the cost of panels. While lower costs are certainly a key factor, financial and business model innovations are also playing a very important role. As a unique asset class, solar is getting a strong signal from Wall Street that we are entering a new era for the industry. It is a real sign of maturation.
The billions flowing into the market in the form of venture capital, private placements and tax equity are an indication of market strength. But the three SolarCity securitization transactions, most recently the $201 million dollar securitization this July, truly demonstrate that this asset class is here to stay.
However, compared to other securitized assets, the risk factors for solar are still somewhat unclear for rating agencies and senior market investors.
Not only are there risks related to new technology and new financial instruments, but there are also risks associated with data. Investors are betting on the long-term performance of the solar fleets being securitized on the basis of a limited amount of performance data extending throughout the entire operating life of solar projects.
The role of rating agencies is to scrutinize investment opportunities to ensure adequate returns for investors, as well as manageable risk factors. Uncertainty leads to more costly capital and impedes growth. Developing a proactive response to this new level of scrutiny will make the industry more efficient, secure and profitable, helping to ensure that the solar industry gets it right. Failure to meet the expectations of Wall Street will hurt the industry and hamper growth.
To be viewed as a mature asset class, the solar industry must maintain credible standards and practices in order to ensure the consistency of the asset class over time. Over the past year, the National Renewable Energy Lab has been working diligently to enable solar securitization through the development of these standards through the Solar Access to Public Capital (SAPC) initiative.
SAPC committee members consist of leading developers, law firms, investment banks, capital managers, rating agencies, software companies and solar professionals all working to help securitization succeed. They understand how securitization will provide plentiful and cheaper capital for a healthy industry -- helping it thrive beyond the sunset of the federal Investment Tax Credit.
In order to meet investor needs, SAPC has been working to standardize power-purchase agreements, leases, data protocols, quality assurance protocols, and operations and maintenance (O&M) best practices. SAPC is also walking through mock securitization ratings with real solar system portfolios to identify and resolve industry gaps that need to be addressed.
“The work being performed by SAPC will provide a valuable foundation for wide-scale investment through securitization and other capital market investment vehicles," said Mike Mendelsohn, senior financial analyst at NREL.
There is also a major effort to establish national quality assurance standards in order to create a consistent baseline throughout the solar industry. This effort is driven by a need to create a standard of quality and third-party oversight across the industry to create confidence for investors, as well as a feedback loop on quality to help installers improve over time.
At the same time, the Institute for Building Technology and Safety, a 501(c)(3) nonprofit organization, has been working with many of the leading solar finance companies to increase the level of quality in the field. Solar finance companies are already focusing on total quality management through implementation of internal quality controls such as Sunrun’s Quality Assurance Program (described in this case study), which focuses on engaging installers in continuous quality improvement.
Other solar providers have their own quality programs, but there is significant diversity in the methods that companies are using to address these issues, as well as in the standards that are used across the industry.
While the standardization efforts undertaken by the SAPC members are making substantial progress, the industry needs to adopt standards and protocols in order to ensure long-term viability and industry-wide consistency. In addition, installation and O&M practices will need to be harmonized in order to make risk manageable for investors.
Because solar-as-a-service is still very competitive, this creates a degree of tension between organizational goals and the collective health of the industry as a whole. NREL's Mendelsohn is optimistic about the industry’s willingness to collaborate for the common good. As he explained, “The industry understands the benefit of collaborating to standardize and develop these quality assurance mechanisms -- to lift all boats and access lower-cost capital.”
While the level of financial scrutiny that comes with securitization is new to solar, the process of rising to meet this emerging challenge provides tremendous opportunity and will create the foundation for a sustainable industry. Maturity has many rewards, but also a price.
As solar seeks to become a mainstream security, it must move into new stages as an industry. This requires a shift from pursuing individual, company-level goals to also considering the common benefit to the industry.
Chris Doyle is program director for solar operations at the Institute for Building Technology and Safety. Matt Golden is currently a principal at Efficiency.org and is a senior advisor with IBTS.