Solar and Energy Efficiency Securitization Emerge

Organizations are beginning to securitize solar and energy efficiency loans to allow greater levels of investment. Securitization involves pooling loans to create consolidated securities that investors can purchase. Recently, SolarCity securitized $54.4 million in loans for solar photovoltaic installations. Also, the Green Jobs – Green New York program has achieved a high bond rating for securitized energy efficiency loans.

“I think, ultimately, securitization through the asset-backed market is the only thing we can do to achieve large scale,” said Cisco DeVries, president and CEO of Renewable Funding. He said it is crucial to get the secondary market to scale to reach national and state solar power and energy efficiency goals.

“We’re finally at the tipping point,” DeVries said. “We just have enough to make the leap to make the machinery work to access these large, low-cost sources of capital. We’ll be able to get even cheaper, better capital over time.”

Many stakeholders are working in parallel to develop securitization approaches. Some are combining solar and energy efficiency financing into one package. Others are beginning to securitize solar power and setting up the groundwork to support this practice in the industry. The Green Jobs - Green New York program is focusing solely on energy efficiency.

Surprisingly, developers of solar-only programs and developers of energy efficiency programs have rarely shared information until now. Michael Mendelsohn, a senior financial analyst at National Renewable Energy Laboratory, is working to advance solar securitization and is aware of this situation. He said he plans to compare notes with organizations working on energy efficiency securitization.

As is true with other loan products, both solar power and energy efficiency securitization benefit from high transaction volumes, standardized documents, and compelling performance data. All of these factors will provide the necessary financial structure to give investors confidence in solar and energy efficiency loans as an asset class.

However, there are significant performance measurement differences between solar projects and energy efficiency projects. It is easier to estimate, measure and report the kilowatt-hours produced by a solar project than it is to report the kilowatt-hours saved by an energy efficiency project.

Combining Solar Power and Energy Efficiency Loans

Renewable Funding uses three approaches that can fund both renewables and energy efficiency – bundling unsecured residential financing, aggregating property-assessed clean energy (PACE) loans, and funding on-bill financing through securitization.

First, Renewable Funding works with the Pennsylvania Treasury, the State of Kentucky, and other partners to run the Warehouse for Energy Efficiency Loans (WHEEL) program. The WHEEL program bundles unsecured residential loans. The first securitization is scheduled to take place in mid-2014, DeVries said.

“The capital that we used to finance WHEEL projects is technology- and project-agnostic,” DeVries said. “It’s a traditional loan product. You can get it funded and closed in a day. It can be used almost anywhere in the country. It’s really great to have a loan product that works that way.”

Second, the CaliforniaFIRST program, which DeVries said includes 170 cities and counties, works with Renewable Funding to aggregate its PACE loans. DeVries said he estimates it will be at least one year before the commercial loans are ready for securitization. Residential loan securitization is on the horizon and may take place next year. So far, he said, the program has received 140 applications, over half of which are for solar projects. The remainder of the applications are for energy efficiency and water efficiency projects.

Third, Hawaii has been collaborating with Renewable Funding on its Green Energy Market Securitization program. DeVries said this program is likely to issue $100-150 million in bonds early next year. These bonds may fund both solar power and other clean energy projects.

“I think Hawaii’s model is the most exciting thing I have seen in years,” DeVries said. “They’re taking the kind of low-cost capital that has been used to build power plants and making that same kind of capital available for homeowners and businesses to put on their roofs. The Hawaii model is an exciting and dramatic change.”

DeVries also said he has heard of a financing program that is combining solar power purchase agreements with PACE.

Securitizing Solar Power Independently

During the past month, SolarCity announced it has securitized a $54.4 million pool of loans for solar photovoltaic panel installations. This amount is considered somewhat small by several industry writers, but the event is still noteworthy because it is the first securitization that has been announced. The asset has not been rated yet.

Almost in parallel with SolarCity’s news on securitization, a group called Solar Access to Public Capital (SAPC) just announced a standard solar contract that can be used across the industry.

SAPC is working to facilitate an industry-wide conversation about standard practices as part of the movement toward securitization. Mendelsohn organized SAPC after receiving a grant from the Department of Energy to advance solar securitization.

“We’re trying to build out a standard set of contracts across the solar industry - not with any specific state or program - and really get an understanding of how the rating agencies view the asset class,” Mendelsohn said.

SAPC is now convening stakeholders, building a system performance database for solar energy called oSPARC, developing best practices for solar system installation, and creating four sample structures for rating agencies to review, Mendelsohn said. Although the rating agency reviews will not be published, a report on the results will be available later. Mendelsohn also said a data structure for solar securitization will be publicly available once it is complete.

“The market needs to get comfortable with one technology at a time,” Mendelsohn said. “They like things very standardized and not a lot of risk factors combined. There’s definitely a market demand for yield.”

Securitizing Energy Efficiency Independently

Last summer, the Green Jobs – Green New York program began a securitization program for energy efficiency loans that does not include solar power. The bonds have earned an AAA rating from S&P and an Aaa rating from Moody’s.

New York found an unusual way to guarantee these bonds. Through an arrangement with the New York State Environmental Facilities Corporation, the state is using funds earmarked for environmental purposes to make the bonds competitively appealing to investors.

Jeff Pitkin, treasurer at New York State Energy Research & Development Authority, said in an e-mail that the net interest cost on the bonds will be below one percent. The bonds will also benefit from federal Qualified Energy Conservation Bond subsidies. This loan program is one of the first initiatives started by New York’s new green bank, which opened its doors in January.

Two energy efficiency data and standardization initiatives are now in progress. Lawrence Berkeley National Laboratory is developing an energy efficiency loan data specificiation with standard data fields and definitions. Environmental Defense Fund, Clean Energy Finance Center, and University of Chicago plan to collect, aggregate and publish energy efficiency loan data from sources nationwide.

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