Our solar finance blogger, John Joshi, kicks off 2012 where he left off at the end of last year, continuing his analysis of the challenges and opportunities in the US solar industry, looking especially at securitization.
Over the last few months we’ve had investors and other participants in the renewable sector and specifically the solar sector inquire about the prospects for the sector and securitization. In part one; we covered the outlook and challenges for the solar sector. In part two of the article we address some of the key issues and challenges for the sector for securitization. In future articles we will explore project finance and securitization as well commercial opportunities for solar.
1) What is the role of securitization in the solar market?
Securitization can provide for greater liquidity for the sector by providing public money to the sector. A lot of sustainable investment capital can also come into the sector – upwards of $50 trillion dollars is represented by the UN PRI signatories who manage sustainable investment capital. Securitization also allows investors to be involved in various parts of the capital structure for risk and tenor. The sector would also benefit from reduced cost of capital and greater availability of capital.
2) What are the largest obstacles to securitization in the solar industry?
Standardized structures would certainly help. Standardized leases and PPA are also a key to analyzing the underlying collateral in a portfolio basis. There is also a lack of availability of underlying collateral compatibility with securitization structures. Additionally adequate warehouse lines for developers / leasing companies will be critical. Only a few services have the experience currently to services the leases and PPA. For wider acceptance of solar deals, a key issue is educating the investor base on real risks and perceived risks for renewable structures. Third-party analytics would certainly help investors – i.e. if a deal could be modeled in Bloomberg or other 3rd party analytics systems. Any analytics system would have to tie in performance attributes of underlying technologies as well financial modeling and projections.
3) What are the greatest opportunities and challenges for the future of solar?
We are at the early stages of the renewable revolution and for solar adoption. At best there are 150k installations in the US vs. 45 million rooftops that can accommodate solar. For long term growth of the sector access to public pools of capital is going to be a key driver for the growth of the sector. We need Federal and State policies that can bridge the gap where the sector can compete without policy or subsidy support and we are getting close. Over the next few years we should see a more robust public market that can provide capital to the sector and with continued cost reduction and efficiency increases – the Moore law of solar and Renewables we expect to see greater penetration of solar. With increased experience with the technology the bankability of the sector has increased and we expect the public markets will embrace this as an important asset class.
As the solar sector becomes more cost competitive with the traditional energy sectors, capital market solutions and securitization can provide the solutions and capital to bring significant amount of long-term capital to the sector and provide a lower cost of capital and increased liquidity.
[Editor’s Note: A version of this article was originally published in AOL Energy. John Joshi is a managing director at CapitalFusion Partners LLC, an advisory firm focused on renewable energy and infrastructure projects. He also runs the Carbon Finance & Securitization group on LinkedIn. Mr. Joshi can be reached at: email@example.com.]