New financing method could secure the solar industry’s future

Bundling solar assets into marketable securities promises to lower project financing costs, leading to cheaper power and faster industry growth. See related links.
By Sidney Hill, Jr. April 22, 2014

Performance data: Actual data from working solar plants, like this one at the Brea, Calif., headquarters of Moxa, an automation equipment supplier, feeds the Open Solar Performance and Reliability Clearinghouse database supporting a new movement to securiSince 2009, the SunSpec Alliance has been helping solar power make the transition from "alternative energy" to a steady source of fuel for the electric power grid.

The alliance’s initial goal was developing standards to make it easier for solar plant equipment from different manufacturers to work together, thus smoothing the path for wider production and distribution of solar power.

Now, with nearly a dozen equipment-related standards in place-and widely adopted across the industry-the alliance has expanded its mission to include boosting another area that’s critical to bringing solar energy into the mainstream: the financing of solar power plants.

"Financing and customer acquisition represent the two highest costs associated with solar power development," said Tom Tansy, chairman of the SunSpec Alliance, which counts more than 60 companies engaged in some aspect of solar power development among its membership. "There’s a lot of inefficiency that can be removed from the financing process."

Not surprisingly, the SunSpec Alliance advocates streamlining the solar plant financing process by creating a standard method for carrying out such transactions. The specific approach SunSpec supports involves packaging the assets that solar plants represent into financial instruments that can be sold to investors on the open market much like corporate bonds.

So far, only one deal of this type has been completed, but much of the industry appears to be coalescing around the concept, which in finance circles is known as securitization.

Solar power developers like the idea for two reasons:

  • It promises to greatly expand the potential sources of capital for building solar power plants.
  • It would significantly reduce the cost of acquiring capital, which should in turn lead to cheaper power and more customers.

However, Tansy argues that neither of those scenarios can play out without a set of standards governing the securitization process, which is why SunSpec was asked to play role.

The idea for securitizing solar power assets originated with the National Renewable Energy Laboratory (NREL), a Golden, Colo.-based arm of the U.S. Dept. of Energy. NERL is spearheading the DOE’s Sunshot Initiative, a program with a goal of having solar power meet 14% of the country’s electricity needs by 2030, which would be a dramatic increase from 1% in 2012.

Attacking high capital costs

Performance data: Actual data from working solar plants, like this one at the Brea, Calif., headquarters of Moxa, an automation equipment supplier, feeds the Open Solar Performance and Reliability Clearinghouse database supporting a new movement to securiMost energy market projections indicate the solar power industry would have to sustain an annual growth rate of 25% through 2030 to achieve the Sunshot Initiative’s target. With that in mind, NERL convened a working group with more than 100 members from the solar power, legal, and financial sectors to develop ideas for spurring investment in solar energy. This group launched a project called Solar Access Public Capital (SAPC), which ultimately began the movement toward turning solar power assets into marketable securities.

The movement is needed, according to Tansy, because there are not many places for solar developers to turn to for capital, and when they do find willing investors, the price of obtaining that capital tends to be high.

Selling federal tax credits has been a popular method of attracting investors to solar projects. Under such arrangements, the solar developer allows the investor use the tax credit associated with the solar project, which under existing provisions is 30%, and also agrees to pay the investor a certain percentage of the plant’s revenues in exchange for bankrolling the venture.

These transactions are considered risky, largely because solar power plants don’t have a long history of generating profits, which is why there are not many people willing to take on such investments.

"There are roughly 20 major parties that participate in this type of solar financing," Tansy said in a recent interview. "There isn’t much transparency to the process, but the investors that participate are willing to do so because the [return on the money invested] is rather high."

Tansy’s comment about a lack of transparency refers to the dearth of information about the financial performance of solar power plants, and a central goal of the SAPC project is to remedy that solution. That’s how the SunSpec Alliance got involved in the movement.

"We were asked to participate because we have published all of these information standards related to solar," Tansy explained. "For example, we have standards that describe logically how inverters, meters, and other devices should fit in and interact in solar plants."

If industry players were willing to following SunSpec’s lead on how devices from various manufacturers should interact within solar plants, the reasoning was developers and investors might agree to take its suggestions on a process for financing plants.

Defining standards

Data access: Both plant operators and investors benefit from use of the oSPARC database. Operators can use it to benchmark their plants’ performance while investors can use it to assess the risk of investing in a group of plants. Courtesy: National RenewaThe process starts by defining exactly what investors are buying when they purchase a solar-based security. They are buying into the revenue stream generated by a group of solar power plants. These plants can range in size from a 1 kW plant on the roof of a single-family home to a megawatt-sized plant that feeds directly into a utility company’s distribution network.

The revenue is generated via contracts the plant operators sign with the individuals who will consume the energy generated by the plant. These contracts, called power purchase agreements, or PPAs, usually are long-term agreements, obligating the consuming party to make monthly payments for 10 to 20 years.

Such long-term revenue streams clearly are attractive to investors; however, they still typically want some assurance that the stream won’t be interrupted either by nonpayment on the consumers’ part or because of failure of the power plants.

To provide that assurance, SunSpec created the Open Solar Performance and Reliability Clearinghouse (oSPARC) database. Tansy describes it as an actuarial database that takes daily reports from solar power plants scattered around across the country and gleans the data for key indicators about their performance. That information can then be used to give potential investors clues about the level of risk they are taking by investing in certain types of solar plants.

"These types of databases are common across all sorts of asset classes that are securitized," Tansy said, "from student loans to home mortgages and timeshares. The method of setting valuations for all of these assets is the same. What makes solar somewhat different is that it’s an operational asset. It generates value by what it puts out, whereas most of the other assets are more passive."

Regardless of the asset class, investors rely on actuarial databases to provide signals about the level of risk associated with their investment.

SunSpec gets plant operators to contribute to its database by giving them information they can use to benchmark their own plants’ performance against their peers. The operators agree to this because once the data goes into the database it is anonymized, meaning it cannot be identified as coming from a specific plant.

When plant operators go into the database, they can ask to see performance data on plants with the same characteristics as their own, and that gives them an idea of how well their plant is performing. Tansy says that insight is important to plant operators, who, like investors, are anxious to have some concrete numbers about how their businesses are performing.

"Currently, the solar business is a good business, with relatively high profit margins. So, most companies feel like they’re doing well," Tansy said. "But they don’t know, on a national basis, if they’re over performing, underperforming, or leaving money on the table. This benchmarking gives them that type of information."

Operators wishing to contribute to the oSPARC database tap in via a secure Internet-based connection, typically a virtual private network. They rely on a data model developed by SunSpec to tell them what specific information to enter. The data is then transferred, in XML format, to the database, which is hosted on the Amazon Web Services cloud.

When it’s time to make an asset sale, the parties selling the associated securities, typically an investment bank, can also use a secure link to tap into the database and run queries on the performance of assets similar to those they wish to package in a deal. They can then pass that information to potential investors who will use it to make a decision about purchasing the securities.

The first deal

This entire process played out this past November, when Solar City, a San Mateo, Calif.-based company that sells solar systems to residential and commercial customers, conducted the first solar-backed securities sale. That $54-million transaction involved the bundling of roughly 8,000 power purchase contracts spread out across the 14 states in which Solar City does business.

In addition to being an industry first, the Solar City deal illustrated how securitization can lower the cost of financing solar projects. Solar City, which is recognized as a leader in the solar industry, typically had been paying investors 6.5% to borrow funds to finance its projects. Using the securitization method, and offering the data about the underlying assets from the oSparc database, Solar City was able to raise the $54 million by offering investors a 4.5% interest rate.

"If you can decrease the cost of borrowing by two percentage points, that can translate to a 50-cent per Watt reduction in the cost to build a solar plant," Tansy noted. That also should lead to lower cost for power consumers, which could entice more of them to choose solar.

Attend a solar securitization seminar

Want to learn more about how securitization can advance the solar market? Attend a full-day seminar sponsored by Moxa and the SunSpec Alliance.

The Solar Securitization & Grid Control Symposium will take place April 22, 2014, at Moxa’s Brea, Calif. headquarters.

Speakers will include industry leaders from Wells Fargo Bank , the National Energy Renewable Laboratory, and SoCal Edison, with presentations on products and solutions from SunSpec Alliance members.

To register, visit http://www.eventbrite.com/e/sunspec-alliance-solar-securitization-grid-control-symposium-tickets-9517865191 

– Sidney Hill, Jr., is a CFE Media contributing content specialist. Send comments to controleng@cfemedia.comEdited for the CFE Media Industrial Energy Management section in April as a Digital Edition Exclusive. 

Key concepts

  1. A limited number of financing sources has slowed the growth of solar power plant development.
  2. The solar industry is coalescing around the idea of bundling power purchase agreements into financial instruments that can be sold to investors, much like corporate bonds. This is a means of raising capital for new plant development.
  3. The SunSpec Alliance, the primary developer of technical standards for the solar industry is now working to standardize the solar securitization process.

Consider this:

In a pilot project, Solar City, a leading developer of solar systems, shaved two percentage points off its borrowing costs by issuing securities backed by power purchase agreements. That could translate into a 50-cent-per-watt reduction in the cost of producing energy.

– See related IEM stories below.