When it comes to solar, the equity market’s loss might prove to be securitization’s gain.
In a report today, analysts at Moody’s Investors Service predicted that both the volume and number of bonds packaging solar assets in the U.S. would grow in 2016.
And one of the ingredients of that growth might be the higher cost of financing through yieldcos, equity vehicles that solar developers have set up to fund themselves. Yieldcos are listed companies. Investors own shares that produce a dividend based on flows from the contracts between underlying solar projects and customers.
Among yieldcos that solar developers haves used to package projects are TerraForm Power (SunEdison), 8Point3 Energy Partners (SunPower and First Solar), NRG Yield (NRG Energy).
Developers have looked to yieldcos as a way to finance on attractive terms. But this has changed over the past several months, with yieldco share prices plunging. TerraForm, for instance, is down about 77% in the past six months.
All this opens the door for more securitization.
“If investors continue to view YieldCos less favorably and equity capital raising becomes more expensive for solar developers, ABS securitization is likely to become a more important financing source for the developers,” the Moody’s analysts said.
The current year’s figures on solar securitization are, at any rate, underwhelming, especially for a sector with such heady growth potential.
There has been $234 million in solar securitization volume so far in 2015. That's been split between two deals—one from SolarCity and another from SunEdison. A third from AES Distributed Energy that was announced in late September appears to still be in the works. An emailed request to AES for more info on the status of the deal hadn’t been returned as of press time.
Double-Edged Sword of Tax Credit Phase-Out
But the industry’s overall financing needs are expected to rise once federal tax credits phase out beginning in 2017, even though diminished tax incentives will dampen growth for a time.
The tax credit—currently 30%—will be eliminated for homeowners who own their systems and fall to 10% for everyone else, including utility-scale projects and commercial customers.
This is expected to make installations “fall sharply” in 2017. But, the analysts see growth resuming after 2017. And there’s clearly room for expansion. On the residential side, for instance, PV systems account for less than 1% of power generation outside of Hawaii, California and Arizona.
Moody’s said that in 20 states, the price charged customer for solar is equal to or below that of the grid, even when you factor in current tax credits and subsidies. The average installed cost for a residential rooftop system dropped by 6% year-over-year as of the second quarter of 2015. For non-residential rooftop systems, the figure was an even steeper 11%.
Introducing Solar Loans into ABS
In terms of contract types, the analysts see loans getting securitized for the first time even though they will get hit hardest with tax credit expiration. So far, solar asset-backeds have only packaged leases and power purchase agreements (PPAs).
In a PPA a customer normally pays the developer for the actual amount of power generated at a price for kilowatt-hour. In a lease, the customer pays a fixed charge regardless of the actual power the solar system is producing.
Customers who opt for loans actually purchase the solar power system. Loan terms can vary from 10 to 30 years. A key difference: “Unlike a lease or PPA contract, a customer with a solar loan bears the risks related to the equipment,” For customers with a lease or PPA, operation & maintenance is in the hands of the developer.
Moody’s also said that the tax equity structures in securitizations—that is, the method used to avoid a potential recapture of unvested tax credits—will continue to vary from deal to deal.