In recent years, we’ve witnessed the rapid erosion of many traditional barriers to solar adoption. Almost daily, there are new, sunny reports and forecasts regarding solar’s plummeting costs. But as the industry makes huge strides in areas of R&D and soft costs, and as the price of panels falls off the charts, it’s the recent boom in innovative solar financing that many believe will deliver the solar market into its next chapter.
Following on this idea, energy value chain experts DNV GL have just released a position paper looking at new frontiers in solar finance. “Bright Ideas: Global Trends in Solar Finance” identifies and analyzes four “mega trends” in solar finance:
Third-party ownership and securitization constitutes the majority of residential solar financing right now, so it’s no surprise that the report focuses on SolarCity as its use case. The popularity of SolarCity’s power purchase agreements (PPAs), where homeowners lease their roof in exchange for electricity at a fixed cost, has allowed the market-leader to issue securities backed by this enormous (and growing) solar portfolio. SolarCity has more recently thrown its hat into both the crowdfunding and solar loan markets as well, but those recent announcements didn’t seem to make the Bright Ideas report by press time.
New Equity Offerings, Corporate Structures and Bonds leverage the predictable cash flows from solar assets, and have been a recurring phenomenon among solar firms in the past year. The relative cost and complexity of yield cos and similar vehicles has relegated them to utility-scale projects for now, but Bright Ideas suggests that could change soon. The report looks at the successful-to-a-fault Yield Co IPO of NRG and two others, as well as investment trusts and partnerships. The section wraps up with a deep-dive into German-born green bonds, the issuance of which could potentially cap $40 billion by the end of 2014.
New Routes to Market are certain to attract interest as long as feed-in tariffs (FITs) continue to subside and costs of electricity/diesel rise. Bright Ideas looks at some of the most innovative and successful electricity off-take structures, namely direct power sales (PPAs), derivatives-based off-take agreements (“synthetic PPAs”), and the relatively risky hedging of merchant generators (merchant power plants).
The Future of Solar Finance, the fourth and final bright idea, focuses on the up-and-coming model of crowdfunding in solar. Consistent with other reports, Bright Ideas portrays crowdfunding as the new kid on the block, noting its limited contribution of capital raised and a (perceived) lack of protection for investors. Interestingly, the report’s crowdfunding case study focuses not on a major, investor-ready platform like Mosaic, but on United Photovoltaics Group, a China-based company that makes use of the public zhongchou.com (akin to Kickstarter in China).
The solar market is enjoying — and will continue to enjoy — a huge boost in capital resulting from the innovative and successful investment vehicles that Bright Ideas highlights. But as financiers continue to tinker with proven models and concoct new recipes in search of higher yields, DNV GL’s report dutifully reminds us of the inherent risk of any investment.
What’s crucial to keep in mind, says DNV, is that “investors’ returns are only as good as the solar assets that underpin them.” We don’t need to look back too far to remember what happens when the smartest guys the room become too “innovative” for the markets they serve.
