There’s enormous potential for securitization of solar assets of small-to-mid size developers, said participants at Information Management Network’s 3rd Annual Sunshine-Backed Bonds conference.
But this market is only viable if these assets — leases or power purchase agreements financing solar panel systems, for instance — can be pooled into a single deal.
There are barriers to this, but some are already looking into it.
“You have thousands of residential solar developers/installers; many are very small but there’s a good number of larger ones,” Werner Nikowitz, a managing director at StormHarbour Securities, said on the sidelines of the conference. Nikowitz expects to do a deal in this “middle market” segment.
So far, a single U.S. solar panel developer has basically sustained this asset class in the public market: SolarCity. The company has issued three deals backed by pools of solar panel systems and related leases and power purchase agreements, mostly on residential homes. The commercial side has yet to see a public deal, although one is in the works.
Ronald Borod, senior counsel at DLA Piper, said that aggregating multiple originators — on both the retail and commercial side — would require a robust standardization of the entire process, including contracts and best practices in origination.
This kind of standardization is being facilitated by Solar Access to Public Capital (SAPC), a working group operating under the U.S. Department of Energy’s (DOE), National Renewable Energy Laboratory (NREL).
NREL Senior Financial Analyst Michael Mendelsohn said that consistency is key for both commercial and residential assets to be pooled into tradable securities. The SAPC already provides six standard contracts for financings such as leases and power purchase agreements, and is currently working on one for loans financing solar projects.
Mendelsohn said that a large bank providing a single warehouse facility for a number of originators — a common practice in a range of other asset classes — would be a good “bridge” to a deal backed by these pooled assets.
A big hurdle, though, would be getting rating agencies comfortable with a number of developers in a single deal, many of which may be quite young. Standardization would help mitigate, but not erase, the associated risks.
In a op-ed published in Asset Securitization Report last year, academics Joshua Pearce and Theresa Alafita argued that pooling the power purchase agreement (PPAs) of smaller developers into a securitization would cut their costs of funding.
But Nikowitz sees this asset class emerging, especially as players become more comfortable with solar in general.
“We’re overconservative with what we’re seeing in the market,” he said. “We’re very much in the beginning.”
Even without securitization, solar energy is booming in the U.S.
Some 6,201 megawatts of direct current in solar panels were installed in 2014, up 30% from 2013, according to the Solar Energy Industry Association (SEIA). The trade group forecasts an additional 31% expansion this year.
Among the catalysts are tax credits — which are being phased out partially in the commercial side and fully on the residential side — and the falling price of panels and related equipment.