A drop in California’s electricity rates could reduce cashflows for securitizations of solar panel leases, according to Moody’s Investor Report.
On July 3, California’s Public Utilities Commission approved a plan to adopt a new, two-tiered rate structure. It applies to residential customers of the state’s three major investor-owned utilities: Pacific Gas & Electric, Southern California Edison, and San Diego Gas & Electric.
Moody’s, which has yet to rate a solar securitization, is concerned that the reduction could make the lease payments on rooftop solar panels and power purchase agreements appear less attractive, because they would result in less savings. This could encourage customers to renegotiate the terms of leases, lowering funds available to pay bonds backed by these leases.
Standard & Poor’s and Kroll Bond Rating Agency, which have both rated securitizations from SolarCity, have yet to weigh in.
Under California’s current, four-tiered structure, customers who use large amounts of electricity are charged a higher rate, which creates an incentive to invest in rooftop solar panels and energy efficiency upgrades.
"Existing solar customers in California entered into contracts with solar providers who promoted long-term savings based on the previous electric rate structure," Moody’s Vice President and Senior Analyst Tracy Rice stated in a report published Wednesday.
"The new rate structure will bring down the price of grid electricity for many of them, which could lead some to try to renegotiate their solar contracts because they are not seeing the savings they expected," she said.
Since existing customers are locked into leases and power purchase agreements, the greatest renegotiation risk will come from solar consumers looking to sell their homes. Moody’s believes that consumers who buy homes already equipped with solar systems will have less inventive to assume solar contracts. "This could jeopardize solar contracts or lead to contract renegotiations in which customers pay less for solar," Rice said.
Solar leases produce a stream of revenue that is predictable, but have terms of up to 20 years, much longer than other assets more commonly securitized. The terms are also longer than the average homeowner stays in a home. This creates a risk to cash flows to a transaction because it exposes contracts to default or re-negotiation of the solar utilization contract.
SolarCity’s outstanding solar securitizations (the issuer has completed four deals since its debut in 2013) have a high exposure to California. For example in the issuer's most recent transaction issued in August, residents from the state represent approximately 46.3% of the pool.
S&P, which rated Solar City’s first three deals, caps ratings at BBB+’. But Kroll assigned an A’ to SolarCity’s 2015-1 transaction, completed this month.
For the 2014-2 transaction, the last deal rated by S&P, more than 1,500 contracts representing approximately 2% of the pool, were reassigned, as of May 2014. Of those cases, more than 86% were because of a normal sale of a customer's home (i.e. not associated with foreclosure, short sale, death, or divorce). The weighted average recovery rate for contract reassignments related to normal sale is approximately 99%.
Although rating agencies’ methodologies already take into account the risk of contracts renegotiation, Moody's believes that "the degree of contract renegotiation risk is somewhat uncertain because there is limited historical performance data on the payment behavior of solar customers."