The opportunities and challenges of solar securitization

In the USA the new developing sector of individual solar panel securitization is creating great opportunities for solar panels installers and investors but also prosing new types of risks that stakeholders have to understand and evaluate, and that make the future of solar securitization less certain.

The article below is largely a summary of the research article from the MIT that you can find at this address: https://energy.mit.edu/wp-content/uploads/2016/07/MITEI-WP-2016-05.pdf

The purpose of this summary is to participate in the dissemination of the research results and I strongly recommand that you read the original paper.

Opportunities created by solar panel securitization

Solar panel securitization provides capital to solar providers

  • Diversify the sources of funding for an industry that requires intensive financing,
  • Bankruptcy protection for solar providers that can isolate their debtors from their balance sheet,
  • Longer term financing decreases the financing costs and leads to a more profitable financial model for rooftop solar panels.

Solar panel securitization provides a good opportunity for investors

  • ABS bond tranches issued have a maturity that matches the need of most long term institutional investors (15 years to 20 years),
  • This asset class has cash flow linked to the energy produced by the sun which is not very risky, and in addition it is virtually uncorrelated to other asset classes like debt and equity which makes it particularly interesting in terms of portfolio diversification,
  • It provides means to invest in SRI (Socially responsible investing), which is a requirement of certain portfolios and funds.

Challenges posed by solar panel securitization

Securitization has so far failed to support the number of solar panels installed

  • The gain in profitability for the solar panel provider has not yet been converted into decreased prices and a competitive advantage,
  • The availability of individual solar panels has not (yet) been facilitated by the securitization technique.

Solar panel securitization has created new financial risks for issuers and investors

  • Solar securitization is exposing investors to new types of risks. Indeed the rate on ABS is composed of a swap rate plus a corporate credit spread of the next lower rating (for an A tranche, the BBB corporate credit spread is used), plus a floating spread that represents a new type of risk.
  • The issuer is also exposed to risks that he wasn’t traditionally exposed to.
    • The required return on solar panels is then linked to the corporate credit spread, which is broadly linked to the economic conditions. A change in the economic outlook can then have an impact on Solar ABS performance and increase the financing costs of solar panel installers.
    • The required return on Solar ABS is also linked to the swap rate which broadly depends on the policy rates that are decided by central banks. This represents another source of financing risk for the issuers.

Solar panel securitization is suffering from technology risk

  • The unusually long time frame of the solar panel securitization makes it very sensitive to the risk that the assets become obsolete before the end of the lease, in 20 years. This is not the case with car leases that last usually around 36 months.
  • In case of default of the owner of the solar panel, the installed solar panel has close to no residual value as it is bespoke for the house and usually obsolete compared to current technology.
  • It may be complicated for an incumbent home owner to transfer the solar lease to the new home owner, especially if the solar panels are obsolete.

Solar panel securitization is very dependent from regulatory risks

  • Utility rates are a key factor of profitability for the rooftop solar panels, especially because the contracted prices of the solar panel electricity to the homeowner are below the utility rate. If the utility rate falls below the contracted rate, the homeowners could try to cancel the lease and future payments.
  • Net metering is a US state-level policy that allows households to resell electricity to the network at the prevailing tariff rate. This is a key element in the value proposition of the rooftop solar panel and any change in this policy could harm the business model of rooftop solar panels. The present value of a rooftop solar lease therefore directly depends on this policy.
  • Investment Tax Credit (ITC) accounting and tax equity are a complex topic that is decided at federal level and can have a tremendous impact on the profitability of the solar lease.
Matthieu Liatard
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