Another company likely to issue bonds partially backed by solar leases is Hannon Armstrong Sustainable Infrastructure (NYSE:HASI.) This REIT invests in a wide range of sustainable infrastructure, and then issues Sustainable Yield Bonds (SYBs) backed by these projects, but also keeps some on its balance sheet.
Hannon Armstrong’s CEO, Jeffrey Eckel, told me in an interview that he believes Hannon Armstrong is unique in that it explicitly measures the climate emissions reduction associated with each project it invests in. The first $100 million round of SYBs, issued in December, invested in projects which reduced greenhouse gas emissions by 0.61 metric tons per $1,000 investment. That means a typical US-based investor with a carbon footprint of 17.6 metric tons per year could offset a year’s worth of emissions with a $28,852 investment in the first tranche of SYBs. While that is far more than the cost of equivalent carbon offsets, such offsets are a cost, while SYBs are an investment which also pay a competitive 2.79 percent interest rate.
Investors interested in funding solar leases should be interested in Hannon Armstrong’s future SYB rounds, since the company just signed two deals to fund solar leases. On April 16th, the company announced a deal to jointly originate and fund up to $100 million financing for distributed solar projects with Sol Systems. This followed the April 3rd announcement that the company had provided $42 million in debt to fund SunPower Corporation’s (NASD:SPWR) residential solar lease program.
According to Eckel, solar leases tend to have a lower climate impact per dollar invested than most of it other investments, but the impact will be positive for both these investments.
Solar Lease Stocks
With bonds backed by solar leases mostly being sold to institutional investors, stocks are probably the easiest way for individual investors to gain exposure to solar leases. Both SolarCity and Hannon Armstrong are retaining a portion of their solar leases on their own balance sheets. By far the purest exposure to solar leases will come from industry leader SolarCity, while Hannon Armstrong’s exposure to renewable energy projects will always remain below 25 percent, since this is a requirement of its REIT status.
SolarCity had deployed approximately 380 MW of solar through the end of March. With a market capitalization of $5.28 billion, that means each $14 dollars invested in SCTY was backed by 1 watt of a solar lease. In other words, if you’re thinking of investing in SolarCity stock as an alternative to putting solar on your roof, you’re essentially paying $14 a watt. That is far more expensive than any installation SolarCity has installed. The typical cost per watt for a residential solar system in California was $5.75 in the fourth quarter of 2013.
While Hannon Armstrong has funded far fewer solar systems, the two deals for $142 million described above should account for about 15 to 20 percent of its future market capitalization. If the $42 million for SunPower comes in at $6 per watt, and the $100 million of distributed commercial systems cost $4 per watt, that will amount to a total of 32 MW of solar. As of the end of 2013, Hannon Armstrong had invested 32 percent of its capital (or $202 million) in clean energy projects, some of which would have been solar. If 20 percent of this was solar at $5 per watt, that would amount to another 40 MW of solar. Putting this together, my best estimate is that each $10 to $20 invested in HASI will include funding for 1 watt of solar, as well as 5 or more watts of wind and geothermal projects and yet more energy efficiency. Unlike SolarCity, Hannon Armstrong is currently profitable and pays a 6.6 percent dividend yield at the current $13.34 stock price.
Another yield-focused stock with some investments in solar leases is NRG Yield (NYSE:NYLD.) This company has a dividend yield of 3.1 percent at the current stock price of $42.50. The company owns a mix of thermal and renewable generation, with 34 percent of its generation from renewables in 2013. It owns 313 MW of mostly utility scale solar, and 101 MW of wind farms, and has a $2.09 billion market capitalization. Hence each $6.67 invested in NRG Yield funds 1 watt of utility scale solar and 1/3 of a watt of wind.
If you always wanted to own a solar system, but lack a suitable roof, a large and rapidly growing number of investments are now available. If your primary goal is attractive financial returns, the best investments are Solar Mosaic (4.4 to 7 percent yield) and Hannon Armstrong (6.6 percent).
Solar Mosaic investments have a number of downsides, such as the limited number of available projects, restriction to accredited investors and residents of New York and California, and the requirement that you hold your investments to maturity. While most of the money invested in Hannon Armstrong goes to fund types of sustainable infrastructure other than solar, each dollar funds approximately as much solar as a dollar invested in SolarCity, but also includes much larger investments in other types of clean energy and in energy efficiency.
At $6.67 per solar watt, NRG Yield is the cheapest way to fund solar with a stock market investment, but this company includes considerable fossil generation and has a much lower yield (3.1 percent) than Hannon Armstrong.
While none of these investments is perfect in its ability to replicate the economics and climate impact of putting solar on your home, the number of options is rapidly increasing. If you live in one of seven states (MA,CO, ME, RI, VT, WA,DE, OH) you may be able to invest in a solar garden. Until then, my top pick combining high climate impact with high yield and ease of investment is Hannon Armstrong Sustainable infrastructure.
Disclosure: I and my clients have long positions in HASI. I have sold NYLD $40 and $45 calls short.
DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
Lead image: Solar rooftop via Shutterstock