SolarCity borrowers in Nevada and Hawaii will face higher than expected costs of operating solar panels thanks to new legislation adopted by each state’s public utilities commissions.
Last month, Nevada’s public utilities commission issued a ruling ending net metering, which allows customers to sell excess energy produced by their solar systems back to the energy grid at retail rates.
Now southern Nevada’s solar panel users will sell back excess energy at a lower rate of 9 cents a kilowatt hour from the previous rate of 11 cents per kWH and customer s in northern Nevada will sell energy back at 10.5 cents per kWH versus 12 cents.
The Nevada commission also ordered public utility NV Energy to increase basic service charges for solar-panel users by 40%.
The Hawaii Public Utilities Commission issued a similar ruling in October that inpacts the rate at which new solar panel users could sell energy back to their utility. The Hawaii ruling reduces the rate at which excess energy may be sold back to the energy grid from the retail rate (average residential rate of 38 cents per kWh in 2014) to the wholesale rate (15 cents per kWh - 28 cents per kWh). The wholesale rate will be based on energy demand at the time of sale.
Both rulings change the economics behind solar panle installations. However the should have minimal impact on bond cashflows of SolarCity’s five securitizations (four are solar lease deals and the most recent deal is backed by solar loans).
For starters, loans and leases from the states contribute to only a nominal portion of the collateral of these deals. For example, loans financing panels domiciled in Nevada and Hawaii make up 0.10% and 0.12%, respectively, of the pool backing Solar City’s inaugural loan securitization, dubbed SolarCity FTE Series 1, LLC, Series 2015—A, which was completed in December.
The bonds are also structured with strong credit support. For example, SolarCity opted to put 40% equity into SolarCity FTE Series 1, LLC, Series 2015, resulting in an advance rate of 60%. The trust issued $151.6 million of class A notes that are secured by a $249.5 million portfolio of loan
Additionally, all of the SolarCity securitizations are structured with performance guarantees that essentially pay back customers if the cumulative energy production for the solar panle system during a calendar year is less than the contractual guaranteed amount.
The guarantee makes it less likely that customers would walk away from the loan or lease, but it also puts SolarCity on the hook to make up any shortfalls over the life of the loan. SolarCity leases typically have 20-year terms and the solar loans typically have 30-year terms. Kroll Bond Rating Agency, rates all of the SolarCity deals, said in the latest presale report “that a prolonged underperformance of solar panel systems under lease agreements will lead to increasing performance guaranty payments over time, which would adversely impact available cash flow to service interest and principal of the notes."
Nevada’s decision is retroactive and will impact existing and new SolarCity customers. The decision has prompted SolarCity to cease all sales and installations in the state, where it has over 12,000 existing solar customers, including schools. "The Nevada government encouraged these people to go solar with financial incentives and pro-solar policies, and now the same government is punishing them for their decision with new costs they couldn't have foreseen,” said SolarCity CEO Lyndon Rive in a press release on Wednesday.
The Hawaii decision won’t impact SolarCity’s current installations. Existing customer will continue to sell back energy at the wholes retail rates but KBRA said that the change may impact the ability of a homeowner to reassign his/her solar contract during the sale of a home, which may possibly increase prepayments in SolarCity pools.
Although increased prepayments are considered a credit positive, KBRA is concerned that if the contract is reassigned, the economics of the solar installation to the next homeowner may lead to higher defaults.
KBRA accounts for this risk by assuming a certain percentage of the contracts selectively default because of changes in regulations. "We assume that the new rate is reduced to an amount that is sufficient to provide the homeowner with ongoing savings," said a KBRA spokesperson.
