New NREL Report Explores Solar Securitization
The U.S. solar industry is an $11.5 billion market with over 360,000 systems in place . Since 2008, solar capacity additions have exhibited a compound annual growth rate of over 50%, with strong gains anticipated in the coming years.
As the industry grows, it is exploring alternative financing options outside of its traditional funding sources (namely debt, tax equity, and cash equity). Securitization—the process of structuring an illiquid asset into a liquid and tradable one (i.e., a security)—represents an emerging opportunity for the distributed solar market in particular. Access to the capital markets through security issuance can assist the solar market in achieving greater liquidity among investors and an advantageous cost of capital relative to traditional funding sources (namely debt, tax equity, and sponsor equity). Liquidity and lower financing rates have both proven somewhat elusive given solar's current reliance on project financing and tax equity structures.
A new report from the National Renewable Energy Laboratory, The Potential of Securitization in Solar PV Finance, explores this capital market finance option for PV assets. The report provides a general overview of the securitization process (see Figure 1), the actors involved, the benefits (and risks), and the rationale for pursuing this kind of funding strategy.
The report also offers a high-level analysis of the volumes of solar deployment that could be supported given a single securities offering . It posits that a single $100 million securitization transaction (not accounting for fees, overcollateralization, and other structuring/transactional costs) could potentially support 72 MW of residential solar assets, or 100 MW of commercial, or 133 MW of large commercial and industrial (C&I) projects . See Table 1.
|Residential||Small Commercial||Large C&I|
|Assumed System Size||5 kW||100 kW||1 MW|
|Assumed Installed Costs ($/watt)||5.5||4||3|
|Assumed System Cost (size x installed cost)||$27,500||$400,000||$3,000,000|
|System Cost Financed Through Securitization Debt (assumed 25%)||$6,825||$100,000||$750,000|
|Approximate Number of Systems backing the $1 Million Securitization Transaction||14,545||1,000||133|
|Approximate Total MW Financed in the Securitization Transaction (25% of each system)||72||100||133|
Solar projects will likely be pooled into different types of securities based on several factors, including: project size; the type of cash flows securitized; and the entity that will issue the securities. The report broadly identifies three classes of securities that, upon preliminary analysis, would be applicable to the solar industry: asset-backed securities (ABS), collateralized loan obligations (CLOs), and project bonds. ABS instruments are typically used in the securitization of cash flows in the consumer finance sector (e.g., credit cards, auto loans, and student loans); CLOs are securitizations of loan payments and are commonly used to alleviate banks' balance sheets; and project bonds are debt instruments that have been issued against project-level cash flows .
While there are several nuances that would determine which instrument would be applicable in a given solar project or portfolio of projects (such as a tax equity fund for residential assets), the report offers the following general classification:
- ABS securitizations will be widely applicable to the residential solar sector, as the metrics for evaluating these instruments (e.g., FICO scores) are similar to those for evaluating the credit quality of residential solar assets.
- CLO securitizations will be more applicable to the commercial sector. This is because the cash-flow pools will require fewer underlying systems to reach the same dollar volume as a residential. Fewer systems mean fewer offtakers, which in turn mean less portfolio diversity. And, without a diversity of offtakers behind the cash flows in the pool, there is greater focus on the creditworthiness of each offtaker. Typically, CLOs are the appropriate securitization structure to manage this kind of corporate risk.
- Project bonds are debt securities issued against project-level cash flows and have been used to finance utility-scale projects. A bond obligation can look similar to a non-recourse loan on a balance sheet, though it has the distinct advantage of tapping into funding sources outside of the commercial lending market and at larger sums. In the last two years, project bonds have been issued to finance both the construction (MidAmerican's Topaz and Solar Star projects) and takeout (NextEra's St. Clair) of large-scale solar projects .
Institutional investors, such as pension and insurance funds, will typically allocate about 5% of their assets for "alternative investments," such as a renewable energy project investment. Courting these entities will therefore require solar to transcend the "alternative" category and offer itself as a bankable, standardized, and transparent investment product. Institutional investors allocate as much as 40% of their assets to these types of investments, which, by some estimates, could amount to some $37 trillion at the outset of 2014 [3,4].
Even if the PV industry posts half of the annual growth rate that it has from 2008 – 2013, this would amount to about 20 GW of capacity additions by the time the 30% investment tax credit expires in 2017. At an average of $3/W across market segments, 20 GW of solar PV represents $60 billion worth of assets, a third to a half of which would likely have securitizable cash streams flowing through them. A $20 –30 billion base of long-dated assets, made liquid through securitization and investment grade through continued understanding of the credit risk, would be a strong draw for many of the investors in that conventional category.
 Renewable Energy Finance, Solar Securitization: A Status Report (Fact Sheet). (2013). Golden, CO: National Renewable Energy Laboratory. Accessed January 31, 2014: http://www.nrel.gov/docs/fy14osti/60553.pdf.
 Lowder, T.; Mendelsohn, M. (2013). The Potential of Securitization in Solar PV Finance. Golden, CO: National Renewable Energy Laboratory. Accessed January 23, 2014: http://www.nrel.gov/docs/fy14osti/60230.pdf.
 Turner, G.; et al. (2013). Profiling the Risks in Solar and Wind: A Case for New Risk Management Approaches in the Renewable Energy Sector. Swiss Re and Bloomberg New Energy Finance. Accessed January 23, 2014: http://media.swissre.com/documents/Profiling-the-risks-in-solar-and-windv2.pdf.
 TheCityUK. (September 2013). Fund Management 2013. TheCityUK. Accessed January 23, 2014: https://www.thecityuk.com/research?url=/research/our-work/reports-list/fund-management-2013/.