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

Study Shows Securitization Can Lower the Cost of Capital for Solar PV

The limited availability of low-cost financing is holding back market adoption of solar photovoltaics (PV). However, securitization can make project financing more affordable than it is today, according to new research from the Open Sustainability Technology Laboratory at Michigan Technological University.

Securitization of residential solar PV power purchase agreements (PPAs) can reduce the cost of capital for solar PV projects by between five and 13 percent, said the researchers, Theresa Alafita and Joshua Pearce.

The journal Energy Policy published the results online on Jan. 21 in an article titled “Securitization of Residential Solar Photovoltaic Assets: Costs, Risks and Uncertainty.”

To minimize the cost of capital, the researchers said, solar PV developers and policymakers should adopt policies that lower the risk of PPA and solar lease defaults, improve the accuracy of risk assessment, and increase the liquidity of solar asset-backed securities.

PPAs are a common means of funding solar power; they are contracts between electricity generators and electricity buyers. To access private sources of funding, solar lease providers can securitize the funds from these PPAs. Securitization is the practice of pooling debt and selling the consolidated debt as securities in financial markets.

The researchers built a mathematical model to measure the cost of the capital raised through securitization of solar PPAs. Their calculations produced some surprising results with important policy implications.

Required Rate of Return

The required rate of investor return was the primary determinant of financing costs. The researchers said that improving the liquidity of the securities would help reduce the required rate of investor return.

Securitizing all of the existing PPAs would create considerable liquidity, but the researchers said this is difficult to accomplish due to the tax equity structure of these contracts.

Risk Assessment Quality 

Changes in the quality of risk assessment had a large effect on the cost of capital. Poorer risk assessment led to a higher cost of capital. Moreover, this effect grew as the degree of accuracy declined. An increase in required credit enhancement from 0 to 1 percent added 0.34 percent to the cost of capital. In contrast, a similar change from 7 to 8 percent increased the cost of capital by 0.98 percent. 

The researchers said that policymakers could reduce this effect by having a public entity insure the assets. They said this could take the form of a government-supported loan guarantee

Default Rates 

The default rate for the PPAs had little impact on the cost of capital. But it had a large effect on the amount of capital that could be raised. The lower the default rate, the more capital was available to the solar PV developers for the same pool of solar PPAs.

The researchers said two policies would lead to a lower default rate: first, standardizing PPA forms to enable greater pooling and improved data collection, and second, diversifying programs geographically by encouraging more states to allow third-party PPAs.  In 2013, the National Renewable Energy Laboratory, through its Solar Access to Public Capital initiative, developed standardized PPAs for the residential and commercial sectors.

Implementing these policies that facilitate securitization could have a significant positive impact on solar deployment. The authors said that securitization of solar leases and PPAs can raise significant capital while reducing project financing costs far below the cost of alternative financing.

This article was originally published by the Clean Energy Finance Forum, a publication produced by the Yale Center for Business and the Environment. You can subscribe to our newsletter by visiting here. 

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.
Alexander Metz is a writer for the Clean Energy Finance Forum, a publication of the Yale Center for Business and the Environment. He is currently in his final year of the JD-MBA program at the Yale Law School and the Yale School of Management.

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...

CA Wine Industry's 2015 Solar Update- WEBINAR

Proceeds from event registration will go to the CA Sustainable Win...

SMA More Power, More Profit Tour - Duluth

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

COMPANY BLOGS

EU PVSEC 2014: Call for Papers Receives Great Response

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

EU PVSEC 2014 extends its Scope

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

Boulder County Residents Generate Their Own Energy with Community S...

Despite a soggy afternoon, solar energy advocates gathered at ...

NEWSLETTERS

Renewable Energy: Subscribe Now

Solar Energy: Subscribe Now

Wind Energy: Subscribe Now

Geothermal Energy: Subscribe Now

Bioenergy: Subscribe Now  

 

FEATURED PARTNERS