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How California's proposed building standards will boost solar ABS

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New building standards requiring solar panels for all newly constructed residences in California is good news for investors who finance these systems, if only because it will help keep developers afloat, according to Moody’s Investors Service.

Developers who act as transaction managers in solar loan and lease securitizations are responsible for billing and collection services. They may also provide ongoing maintenance services for the systems, which puts both homeowners and investors in bonds backed by the leases at risk should developers become insolvent.

Last Wednesday, the California Energy Commission adopted building standards that, pending approval by the California Building Standards Commission, will require solar photovoltaic systems on newly constructed residential buildings in the state starting in 2020.

“Increased solar system installations will bolster solar developers’ cash flows and increase their operations and maintenance portfolios,” Moody’s said in a report published Monday. “As a result, the likelihood of developers failing to perform their obligations as a transaction manager in securitizations backed by solar leases and PPAs [purchase power agreements] will decline, a credit positive for the deals.”

The standards would be a negative for California’s utilities, however.

California is the largest residential solar market in the nation. The California Solar & Storage Association estimates roughly 150,000 solar system installations on homes in California annually. If the standards had been implemented at the beginning of 2017, given the state’s single-family housing starts of around 60,000, new installations would have increased 30% after accounting for solar systems installed on roughly 20% of new homes, per Moody’s.

The rating agency noted that the California Energy Commission expects the new standards to cut energy use in new homes by more than 50%. As a result, the new solar systems will likely be smaller, roughly three kilowatts compared with six kilowatts today. “Assuming a new home with around a three-kilowatt system and our forecast for single-family home starts of around 90,000 in 2020, we estimate incremental installations of more than 200 megawatts in 2020, assuming the same assumption of 20% above,” Moody’s stated in its report.

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Esoteric ABS Homebuilders Law and regulation California