New Financing Mechanism: Solar-backed Securities

Project developer Welspun Energy told Bloomberg that it has been talking to an Indian bank that wants to create securities backed by Welspun’s first solar power plant. Welspun Energy is part of Welspun Group, an Indian conglomerate that has built its fortunes in businesses such as textiles and pipes. Buyers of the securities would get payments from the revenues generated by the project. 

Creating securities backed by assets or debt isn’t a new financial instrument — we have all heard about mortgage-backed securities and the havoc they can create when lenders don’t do a good job of screening home loan applicants. But solar is not nearly as old and established as the housing market, so a tough challenge is to convince financial institutions, rating agencies and any organization that can guarantee securities that solar is an investment that will provide good, long-term returns without high default rates.

The discussion between Welspun and this bank, which it wouldn’t name, is interesting because the Indian solar market is so new that the country’s solar energy production should reach 141 megawatts by the end of 2011, according to GTM Research. That number, of course, is tiny compared to the gigawatts of solar power installed each year in Germany or Italy. India’s national solar program began only last year, and the government has held two auctions so far, the most recent took place this month. A few states in India, such as Gujarat, also run their own solar incentive programs.

Welspun only completed its first project — a 15-megawatt farm in Gujarat financed by ICICI Bank — under the national solar program in October. So the project has hardly had time to generate performance data to show how well it may perform long-term.

Solar-backed securities present a new way for developers to raise funds and for banks to monetize their solar investments. Lining up project financing has always been a huge stumbling block for developers in most solar markets, particularly because the global economy hasn’t recovered as quickly as anticipated. In fact, the financing challenge partly contributed to a lower-than-expected demand for solar energy equipment this year in Europe, which has been grappling with the sovereign debt crisis.

U.S. solar companies are keenly interested in raising money by selling asset-backed securities to institutional investors such as pension funds. SunRun and SolarCity are two companies that have discussed their plans to do so in a CNN piece and a Forbes story this year, and the market could see the first issuance of these securities in 2012.