James Montgomery, Associate Editor, RenewableEnergyWorld.com
April 24, 2014 | 2 Comments
The ability to lower the cost of capital deserves extra emphasis. SolarCity's securitization last fall had a 4.8 percent yield, only slightly higher than a 30-year fixed mortgage and with twice the payout on current 10-year treasury bonds, which is great for investors — but for the company it represented roughly half the cost of capital vs. what can be obtained currently for distributed solar PV financing, noted Rocky Mountain Institute's James Mandel.
"This trend is transformative for the solar industry" because of how it can unlock so much more value and generate more returns, explained Patrick Jobin, Clean Technology Equity Research analyst with Credit Suisse. (Disclosure: SunEdison is one of his top picks specifically for that reason.) "We're probably in the first or second inning of the public capital markets appreciating what this does for the industry."
Securitization vs. Yieldco: The Good, Bad, And Unknown
Both securitization and yieldcos increase access to lower-cost financing by pooling solar assets into an investment vehicle, separating the more reassuring elements of them (payments from operating energy assets under a power contract) from the riskier ones (project development). Both of them promise returns, though yieldcos come as dividends that vary with the company's performance while securitizations are fixed-income meaning investors get locked-in payments for a set period. And most importantly to the solar industry, they offer a lower cost-of-capital compared to the usual funding sources: debt, tax equity, and sponsor equity.
Generalized solar securitization transaction. Credit: NREL
One key difference: yieldcos own both the energy producing assets and the contracts, which means they can monetize federal investment tax credits. An equity owner can't use power-purchase agreements to create a securitization and also take the tax benefits. The real challenge, says Yuri Horwitz, CEO of boutique financial services firm Sol Systems, will be building a yieldco that has income-producing assets that create tax liability, coupled with solar projects that have tax benefits. NRG's yieldco last year did that, and he thinks they have a leg up because of it. Moreover, yieldcos will go out into the market to compete aggressively with other options such as specialty financing that offer similar returns. The hope is that as yieldcos mature and more operating assets are added in their competitiveness will improve.
Defining what assets are best securitized and best spun out into yieldcos exposes a gap that neither properly addresses. Larger projects are good candidates for yieldcos; securitizations typically involve residential solar assets. (An exception: MidAmerican used debt securities/project bonds for its 550-MW Topaz solar farm, as did NextEra for its two 20-MW St. Clair solar projects in Canada.) In between is the commercial/industrial segment which presents a more complicated financing challenge. "[Securitizations and yieldcos] don't really work in the center," Horwitz said. A different class of securitizations, "collateralized loan obligations," are more applicable to the commercial sector where less diversity in assets means more risk in making ensuring offtakers' credit-worthiness, suggests NREL's Lowder.
Something else that successful securitizations and yieldcos have in common: the more scale and diversity the better. But that's also a limiting factor: not everyone can pool a wide distributed portfolio of solar assets to mitigate risk, or a smaller portfolio of larger ones. And the more diverse it is, the harder it is to evaluate them as a whole, value them, and get underwritten. By definition, they require someone who can offer up a large pool of assets as de-risked and diversified as possible, and backed by a brand-name sponsor, pointed out Tim Short, VP of investment management at Capital Dynamics. "There's plenty in the wings that will never make it," he said. "There's not a whole lot of people to bring all the ingredients together."
One other factor to account for in any solar-backed financial models is the externality of policy changes. While investors appreciate the value in a solar offtake contract, but they need to factor in potential risk of any retroactive policy changes, such as is on the table in the net metering debates raging in several states. If net metering policies end up being reduced or even repealed, "solar contracts may default and reducing predicted income streams," Pearce said. "Ensuring policy stability and communicating that stability to investors will be key to the on-going attractiveness of solar assets."
The Need to Standardize
What will be critically important as more of these financing innovations emerge, and more solar companies try to take advantage of their promise, is pinpointing ways to standardize how the process works, in specific areas and as a whole. "The number-one priority is standardization, especially moving forward with vastly more distributed-generation assets coming online, said Haresh Patel, CEO of Mercatus. That's the glue that will hold these offerings together with both developers and investors — and it needs to be embedded in developers' DNA from the very beginning, so their solar assets can be evaluated and bundled repeatedly and reliably.
Addressing the databasing of solar asset performance metrics are NREL and SunSpec with their open-source OSPARC database. One "Gordian knot" issue: who owns the data and are they willing to share it? That pathway of data ownership can get muddled because not all issuers outright own their systems, and it gets worse by adding a tax equity layer. Figuring out that chain of data ownership protection and security is hugely important., notes Mike Mendelsohn, senior financial analyst at NREL. That's part of OSPARC: anonymizing and rolling up data into a friendly fashion so it's easy for solar companies to present to investors, and for them to digest. "We need to build confidence that those issues are adhered to," he said.
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