Alternative Financing for US Solar Energy

By Frishberg, Manny | Research-Technology Management, November-December 2013 | Go to article overview

Alternative Financing for US Solar Energy


Frishberg, Manny, Research-Technology Management


In just the three years since 2010, solar power production in the United States has grown almost fourfold, surpassing the 3,300 megawatt mark, more than enough electricity to light all the homes in New Jersey for a year. But whether this rate of expansion will be able to continue is an open question. At the moment there is simply not enough low-cost capital to fuel the growth needed for renewable energy sources to become a significant share of America's energy mix.

Tax incentives of various kinds have helped the US solar industry, but tax credits can only be claimed if the project owner owes that much in taxes. Tax-equity financing, in which project owners seek investment partners with enough income to benefit from tax credits, has been a major source of funding for solar projects of all sizes, but these investors typically require a 10-15 percent return, driving up the cost of financing solar projects. And the Solar Investment Tax Credit, which allows project owners or investors to recoup up to 30 percent of an eligible project's cost, is due to expire in 2016; given the current state of politics in the nation's capital, few are prepared to bet that it will be renewed. Shayle Kann, vice president of research for Greentech Media, has called the worsening shortage of tax equity funding "the primary bottleneck to growth for US solar."

While the cost of solar photovoltaic (PV) panels that convert sunlight directly into electricity has declined significantly, the initial cost of installing a residential PV system can seem prohibitive, even if the projects are economical in the long run. Moreover, even if the cost of the actual equipment (solar panels, high-efficiency HVAC systems) is low, the high cost of capital can translate into high-cost electricity. As a result, solar project developers are looking at alternative means of financing these projects.

Three new ways of paying the upfront costs associated with not only rooftop solar installations but also larger-scale projects are drawing a lot of attention: solar asset--backed securities (ABS), MLPs and REITs, and crowd-funding. All three have the potential to reduce financing costs and attract capital to the solar sector from a wider base of investors.

While securitization got a black eye from the mortgage crisis of 2007, when questionable mortgages were bundled together and sold as AAA-rated bonds, there is nothing that makes securitized bonds more risky than other types of investments. In fact, securitization is used to finance everything from new car loans and credit card debt to movie theater tickets. Whatever they are based on, ABS pools work the same way: groups of loans are broken into different tranches, or layers, with different credit risks and ratings. The tranche with the highest credit rating and lowest risk is paid off first, then the second highest, and on down the line. ABSs are being looked at as a vehicle to securitize power purchase agreements (PPA), in which the project developer or owner is paid a set amount for the electricity for a period of years, and residential solar leases, two of the most popular ways to finance the cost of the system.

Since ABSs are publicly traded, they can help to reduce the cost of funding and attract institutional investors such as pension funds and insurance companies. Thus far, the industry has been slow to expand securitization to residential rooftop projects, but Credit Suisse has predicted that "solar securitization for residential solar projects will happen," possibly as early as this year.

Master limited partnerships (MLP) and real estate investment trusts (REIT), familiar entities for builders and real estate developers, are also being explored as a means of financing solar PV projects. Shares of MLPs and REITs are traded like regular corporate stocks, but taxes on the profits are levied on the individual investors' payouts rather than on the corporate entity. …

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