The U.S. solar industry is an $11.5 billion market with over 360,000 systems in place. Since 2008, solar capacity additions have exhibited a compound annual growth rate of over 50 percent, with strong gains anticipated in the coming years.
As the industry grows, it is exploring alternative financing options outside of its traditional funding sources (namely debt, tax equity, and cash equity). Securitization — the process of structuring an illiquid asset into a liquid and tradable one (i.e., a security) — represents an emerging opportunity for the distributed solar market in particular. Access to the capital markets through security issuance can assist the solar market in achieving greater liquidity among investors and an advantageous cost of capital relative to traditional funding sources (namely debt, tax equity, and sponsor equity). Liquidity and lower financing rates have both proven somewhat elusive given solar's current reliance on project financing and tax equity structures.
A new report from the National Renewable Energy Laboratory, The Potential of Securitization in Solar PV Finance, explores this capital market finance option for PV assets. The report provides a general overview of the securitization process, the actors involved, the benefits (and risks), and the rationale for pursuing this kind of funding strategy. (Figure 1, right, represents the generalized solar securitization transaction. Green arrows represent cash flows, blue arrows indicate structuring.)
The report also offers a high-level analysis of the volumes of solar deployment that could be supported given a single securities offering. It posits that a single $100 million securitization transaction (not accounting for fees, overcollateralization, and other structuring/transactional costs) could potentially support 72 MW of residential solar assets, or100 MW of commercial, or 133 MW of large commercial and industrial (C&I) projects. See Table 1 below.
Solar projects will likely be pooled into different types of securities based on several factors, including: project size; the type of cash flows securitized; and the entity that will issue the securities. The report broadly identifies three classes of securities that, upon preliminary analysis, would be applicable to the solar industry: asset-backed securities (ABS), collateralized loan obligations (CLOs), and project bonds. ABS instruments are typically used in the securitization of cash flows in the consumer finance sector (e.g., credit cards, auto loans, and student loans); CLOs are securitizations of loan payments and are commonly used to alleviate banks' balance sheets; and project bonds are debt instruments that have been issued against project-level cash flows.
While there are several nuances that would determine which instrument would be applicable in a given solar project or portfolio of projects (such as a tax equity fund for residential assets), the report offers the following general classification:
Institutional investors, such as pension and insurance funds, will typically allocate about 5 percent of their assets for "alternative investments," such as a renewable energy project investment. Courting these entities will therefore require solar to transcend the "alternative" category and offer itself as a bankable, standardized, and transparent investment product. Institutional investors allocate as much as 40 percent of their assets to these types of investments, which, by some estimates, could amount to some $37 trillion at the outset of 2014.
Even if the PV industry posts half of the annual growth rate that it has from 2008–2013, this would amount to about 20 GW of capacity additions by the time the 30 percent investment tax credit expires in 2017. At an average of $3/W across market segments, 20 GW of solar PV represents $60 billion worth of assets, a third to a half of which would likely have securitizable cash streams flowing through them. A $20–30 billion base of long-dated assets, made liquid through securitization and investment grade through continued understanding of the credit risk, would be a strong draw for many of the investors in that conventional category.
This article was originally published on NREL Renewable Energy Finance and was republished with permission.
Lead image: Solar panels via Shutterstock