The World's #1 Renewable Energy Network for News, Information, and Companies.

S&P Opines on Securitizing Distributed Generation

Renewable energy-related asset securitization has been gaining a lot of traction lately as a number of key stakeholders from both the private and public sectors have been stepping up their collaborative efforts. To help frame the discussion and facilitate the creation of ratings-quality renewable energy asset pools, Standard and Poor's (S&P) rating agency has recently produced high-level guidance on various possible risk factors in the potential securitization of renewable energy assets, cash flows, or loans.

An opinion paper published by S&P earlier this year titled, "Will Securitization Help Fuel The U.S. Solar Power Industry?" (accessible here) focused on a number of risks associated with the securitization of future solar lease or power purchase agreement (PPA) payments. Like mortgages, in order for S&P to adequately assess the credit risk associated with these cash flow-based securities, payment default risks must be understood and reasonably quantified. From S&P's perspective, much of this payment default risk can be attributed to system performance, of which there is not an adequate amount of historical information that ensures solar panel performance is maintained over the full length of most 20-year PPA and lease cash flow agreements.

The main concern for S&P is that a decrease or lack of performance could eventually lead to an increase in defaults if off-takers decide to stop making payments because actual production is not what they expected or were told by developers. Product failure rates could also negatively impact cash flows if they force either manufacturers or developers out of business. In addition, a potential lack of serviceability is another concern for S&P as it believes there is a current shortage of operation and maintenance providers with a national presence.

Interestingly, S&P also cites solar system price declines as another potential cash flow risk factor. Cognizant of the recent run of payment renegotiations and defaults experienced by both the mortgage and credit card industries, S&P points to similar risks that could develop from technological advancement and continued price declines. According to the paper, "As the price of solar systems decline, it is likely solar lease and PPA prices will fall as well…[which] could leave many PPAs being underwritten today to be above market contracts [in the future]." Analysts contend that these future out-of-market contracts may cause off-takers to feel a sense of "buyers' remorse," which could cause them to attempt to reduce future payments.

While payment renegotiations are possible, it seems the default risk associated with buyers' remorse would be low as long as the production value of electricity meets or exceeds the off-takers' monthly payments. For most agreements this will be dependent on retail electricity prices, not installed system costs. That said, predicting long-term (20-year) utility rates "has a high margin for error," according to the S&P paper, so PPA agreements with built-in price escalators may carry more risk than lease-based cash flow agreements.

In the event of default, recovery rates are also deemed questionable primarily due to the costs associated with system removal and reinstallation. Systems not removed that fall under PURPA (Public Utilities Regulatory Policies Act), however, could generate revenues from sale-back prices that reflect a utility's avoided cost. Finally, S&P believes there to be a number of so-called liquidity risks, including "ramp-up" or "roll-out" risks that include geographic concentration risk, dividend/equity payments, and other potential cash leakages such as inverter replacements.

Clearly, there are a number of risks associated with securitizing any pool of assets, renewable energy-related or otherwise. Given the financial market's propensity to aggregate, package, and sell assets in the spirit of risk diversification, it seems renewable energy-related securitization is only a matter of time. That said, the ability to accurately price these financial assets hinges upon the market's ability to appropriately price risk — a goal everyone should be mindful of and an endeavor regulators and ratings agencies must ensure.

This article was originally published on NREL Renewable Energy Finance and was republished with permission.

Image: Maryna Pleshkun via Shutterstock

RELATED ARTICLES

First Anniversary of The Balkan Floods Highlights Renewable Energy Market Opportunities

Ilias Tsagas, Contributor One year ago this month, severe flooding in Serbia, Bosnia-Herzegovina and Croatia killed 79 people, displaced about half a million and caused economic paralysis of the region. In the wake of these the catastrophic events, ...
Canadian Climate Goals

Canada Announces Weak Climate Target

Danielle Droitsch, NRDC Last week, Canada has announced its contribution to the global effort to reduce greenhouse gases by announcing its post-2020 target. The target announced today is off-track to the 80 percent cut by 2050 they committed to in...
Renewable Energy Stocks

What Drives Alternative Energy Stocks?

Harris Roen, The Roen Financial Report Alternative energy became a serious market player after the turn of the millennium. Since that time, solar, wind, smart grid and other alternative energy stocks have experienced both strong up and down trends. The forces at...
Rooftop Solar Panels

Hypocrisy? While Buffett Champions Renewables, His Company Fights Rooftop Solar

Mark Chediak, Noah Buhayar and Margaret Newkirk, Bloomberg Warren Buffett highlights how his Berkshire Hathaway Inc. utilities make massive investments in renewable energy. Meanwhile, in Nevada, the company is fighting a plan that would encourage more residents to use green power.
Ryan Hubbell is a Research Program Participant with the National Renewable Energy Laboratory’s project finance team. He has an MBA with concentration in renewable energy development in addition to numerous years of experience in corporate finance ...

CURRENT MAGAZINE ISSUE

03/01/2015
Volume 18, Issue 3
file

STAY CONNECTED

To register for our free
e-Newsletters, subscribe today:

SOCIAL ACTIVITY

Tweet the Editors! @megcichon @jennrunyon

FEATURED PARTNERS



EVENTS

EU PVSEC 2015 (European PV Solar Energy Conference and Exhibition)

The EU PVSEC is the largest international Conference for Photovoltaic re...

SMA More Power, More Profit Tour - Orlando

SMA’s More Power, More Profit Tour is aimed to provide highly-valu...

Energy Security: AC Coupling and the Sunny Island Battery Inverter ...

Don’t let a hurricane or polar vortex get your customers down. Exp...

COMPANY BLOGS

EU PVSEC 2014 extends its Scope

Added focus on application and policy topicsAbstracts for conference con...

EU PVSEC 2014: Call for Papers Receives Great Response

More than 1,500 contributions apply for presentation in AmsterdamScienti...

Solar Impulse Flying From China to Hawaii

The team behind Solar Impulse, the solar-powered airplane, is prepa...

NEWSLETTERS

Renewable Energy: Subscribe Now

Solar Energy: Subscribe Now

Wind Energy: Subscribe Now

Geothermal Energy: Subscribe Now

Bioenergy: Subscribe Now  

 

FEATURED PARTNERS