The Inflation Reduction Act (IRA) , which had a storied beginning as President Joseph Biden's signature social policy legislation, will have a new life significantly impacting energy-related markets—especially solar—and the asset-backed securities (ABS) that finance them.
Most renewable energy-related ABS deals to date have pooled loans financing the installation and maintenance of consumer solar panels, and that's where the IRA's earliest ABS-market impact will almost certainly be felt. Since the first solar ABS deals emerged in 2013, said Elana Lipchak, who heads up Bank of America Securities' ESG research for U.S. securitized products, there's been more than $17 billion in cumulative solar ABS issuance. The deals securitize loans as well as leases and power purchase agreements (PPA) that support consumer solar installations.
Solar ABS issuance reached a record last year of 14 deals totaling nearly $4 billion, and sponsors had almost reached that level by early September this year.
Existing federal investment tax credits (ITC) were set to expire in two years, but growth in the solar-panel market and the related ABS was likely to continue regardless, Lipchak said, given that demand for solar prompted most recently by skyrocketing fuel costs.
The IRA increases the ITC to 30%, compared with the current 26% and extends it to 2034, increasing the incentives to adopt solar and providing greater certainty to the market, Lipchak said. This support is unlikely to fuel an immediate surge in solar ABS deals, however, in light of ongoing supply chain issues. The IRA also provides incentives to increase domestic production of renewable energy equipment, reducing future snafus, Lipchak said, but that will take years to unfold.
Still, the IRA's ITC increase makes solar systems more affordable for consumers and should lead to better ABS, said Maxim Berger, a director at Kroll Bond Rating Agency focusing on consumer ABS. In addition, he said, the ITC has been expanded to include batteries, so now it can be used to pay down loans or portions of loans used, for example, to add a battery to an existing solar photovoltaic system or as a stand-alone purchase.
In fact, IRA tax incentives should accelerate the trend of consumers including batteries in their solar system purchases, said Nathan Gabig, a partner at KPMG focused on renewable energy finance, adding that one KPMG client is now including batteries in approximately 25% of the systems it sells. Including batteries that reduce consumers' reliance on utilities' power grids should increase their incentive to continue loan payments.
Gabig noted the first ever commercial solar ABS deal completed in May, a $402 million
The IRA should also accelerate issuance of the first ABS deals backed by "virtual power plants," in which companies such as Swell Energy and Soltage establish fleets of batteries in metropolitan areas to store solar energy that they then sell to utilities and corporations during off-peak hours or when outages occur. Such deals are now under discussion, Gabig said, and awaiting input from the rating agencies.
"The premise is no green electrons wasted," he said, noting the revenue streams stemming from highly rated utilities and corporate customers should make such deals attractive to investors who are demanding ever more exposure to credits adhering to environmental, social and governance (ESG) guidelines.
Another ABS market the IRA is likely to bolster will be securitizations of Commercial Property Assessed Clean Energy (C-PACE) loans, which commercial building owners use to finance clean-energy upgrades ranging from high efficiency lighting and heating systems, to heat recovery and steam traps, to renewable energy systems. C-PACE loans are facilitated by state level public-private partnerships that include state Green Banks, which the IRA allocates $27 billion toward. Borrowers repay the capital over time via voluntary property tax assessments, enabling longer-term financing and transferability of the repayment obligations to the next property owner.
"We see a huge need in the commercial real estate sector for financing to upgrade commercial buildings," said Alexandra Cooley, co-founder and chief investment officer of Nuveen Green Capital. She noted recent research from Jones Lang Lasalle showing a 6% rent premium and 7.6% sales premium for buildings with green certification.
Formerly GreenWorks Lending until it was acquired by Nuveen Asset Management in 2021 and rebranded in January 2022, the firm issued the first ever private ABS deal backed by C-PACE in 2017 and two more private deals since then. Last December, it completed the largest Rule 144A deal to date backed by those assets. Truist Securities and Guggenheim securities acted as joint bookrunners.
Cooley said that an obstacle to adopting clean energy has been the large capital expense upfront that results in relatively small operational savings over time. Tools such as the ITC and other tax credits—bolstered by the IRA—reduce that expense upfront, she said. When borrowers combine those credits with C-PACE benefits they can achieve significant operational savings.
"If you reduce upfront expense, then the impact to the bottom line starts to be a lot more attractive to companies and building owners, especially when combined with financing," Cooley said.
In addition, the new law greatly increases the types of technologies that qualify for tax credits, expanding the energy impact of projects that building owners deem financially attractive
"The IRA is transformative because it expands the technologies that qualify and it also makes those technologies much more affordable by a variety of measures," Cooley said. She added that new C-PACE loans—upwards of $2 billion are anticipated this year—can help make projects cash-flow positive from the start and energy costs more predictable, facilitating future ABS deals and especially those issued in the quasi-public Rule 144A market.
EV asset securitization still has low mileage
So much discussion around energy-related ABS markets naturally turns to securitizations involving electric vehicles. To date only Tesla has issued ABS deals backed by electric vehicles (EVs). However, the IRA's incentives to purchase EVs could accelerate the arrival of such deals from other issuers, Berger said, initially in the new and prime auto ABS markets, given the average EV's purchase price. And more generally, he added, the IRA and the billions of dollars it introduces into the economy to reduce consumers' energy and healthcare costs will serve to strengthen the broader ABS market.
"By reducing those costs, it will free up consumers' wallets to pay other debt," Berger said. He added, "over the medium to long term, as the IRA really begins to ramp up, it may reduce delinquencies and defaults in other consumer ABS markets."
