Before investing in a solar project, it’s critical to know where the money is coming from to finance it. As the solar industry matures and becomes increasingly complex, so does its financing models.
What financing is around the corner in 2014? And how does the impending reduction of the ITC factor into the industry’s stability moving forward?
Nathan Homan, co-founder and principal at Wiser Capital, whose aim is to bring new funding into the solar market, is betting the initial public offering (IPO) of SolarCity is the latest solar financing innovation.
“SolarCity brought the first offering of an overcollateralized pool of residential solar leases to market in November,” Homan says. “The outlook is good for securitization to bring liquidity to pools of solar projects.”
Tuan Pham, president and CEO of PowerFin Partners, an Austin, Texas-based solar investment and development firm, says while public companies have great potential to fund the solar market long-term, there are hurdles they will have to overcome.
“The understanding of YieldCos and their ability to achieve their growth target is not yet well developed in the United States,” Pham says. “Don’t get me wrong: Any vehicle that accurately reflects cash flows from solar projects is beneficial for the industry and investors.
“But a successful YieldCo needs a strong sponsor with a demonstrated ability to underwrite solar projects and a willingness to provide transparency into their pipeline of contracted projects,” he adds.
For perhaps the first time in its young history, solar industry financing isn’t just limited to industry-specific members. David Field, CEO of OneRoof Energy, says traditional solar funders should look out for all the competitors now jumping into the “solar” market.
“Ironically, the newest players in ‘solar’ financing aren’t actually in solar,” Field says. “The battle for home energy is in full swing, and all types of actors are entering the stage: power storage, efficiency, home automation, vehicle-to-grid and intelligent thermostats.
“That said, because we are establishing 20 to 25-year relationships with homeowners, we still believe that solar is the ‘killer app’ for winning the home energy battle,” he adds. “No other service can claim that type of relationship with the homeowner.”
With the JOBS act starting to make an impact, the industry is seeing more institutional-style crowd-sourcing options coming to market, as well as other non-traditional solar funding mechanisms.
“We can also expect to see a shift in financing models with the pending tax credit expiration in the next couple of years,” Field says. “Homeowners may witness a combination of lease financing and traditional forms of lending.”
Homan says the biggest potential growth for distributed generation (DG) is involvement by larger community banks and regional banks, who have great opportunities to participate with asset-based credit facilities secured by the cash flow from pools of DG commercial power-purchase agreements (PPAs).
“When the banks get confidence in serving this asset class and their regulators get comfortable with the associated risks, the banking industry can be a formidable player in the smaller commercial project finance market,” Homan says.
Both Homan and Field believe the impending reduction of the ITC in 2016 will have little or no effect on the financial health of the solar industry moving forward.
“The 10% investment tax credit that is set to replace 30% in 2017 will be sufficient to make solar economically viable in several states,” Homan says. “The driving factors will be the cost of electricity provided by the local utility companies and the available incentives in the local markets.”
Field says solar’s mainstream nature is an indication that it can compete on economic fundamentals and beat fossil fuels.
“Solar can compete on its own,” Field says. “Whether the ITC (or some approximation of it) is extended or not, the reality is that hard and soft costs for solar are on a rapid decline, and we will not only survive, but thrive, with or without the ITC.”