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Honing Solar Financing Tools Can Build the Market

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How can solar financing be improved in the United States? Experts shared their vision for the future at the Green Investing Conference held by the Information Management Network (IMN) on April 27 in New York City. Attendees included energy investors, rating agencies, legal counsel, and other professionals.

The opening panel, “The Green Landscape for Investing: What, When, Where and Why?” addressed both current situations and future goals.

Solar, as an asset class, must move towards increased volume and sophistication, said Benjamin Cohen, CEO of T-REX.

Brian Feit, managing director of investment and portfolio management at New York Green Bank, raised the core questions of the panel. Is the cost of capital for green projects sustainable or fair? What is the pathway to ensure that solar can be treated like any other asset class based on credit fundamentals?

Jigar Shah, president and cofounder of Generate Capital, said there is a shift underway from popular use of solar leases to loans. Leases require regular payments for the use of solar panels throughout the terms of the PPAs. Loans are typically paid off over 7-15 years until the homeowners ultimately own the panels.

Loans can be less sophisticated and require less market volume than leases, Shah said.

Cohen said solar assets have often changed hands. One example he provided was SUNOVA. These exchanges are increasing.

Feit said there is a need to collect and organize performance data from a large number of existing projects. Though the market for green assets seems to be growing, there is a lack of interest from institutional investors due of the lack of data on solar costs and performance.

Cohen said interest from European and Asian could help educate their American counterparts. In the current national market, one of the most well-known options is a green bond.

But Cohen said there needs to be a diversification of products from actual bonds, as there is more investing that needs to be done.

[[{"fid":"3264","view_mode":"default","fields":{"format":"default","field_file_image_alt_text[und][0][value]":"New York City office building","field_file_image_title_text[und][0][value]":""},"type":"media","attributes":{"alt":"New York City office building","height":"289","width":"400","style":"float:right","class":"media-element file-default"}}]]Next, the conversation turned to relationship between green banks and solar developers.

Jeffrey Schub, executive director of the Coalition for Green Capital, said Connecticut Green Bank provides debt to solar developers.

Cohen says this diversification helps divest risk and encourage co-lenders. Green banks may encourage additional financial models to attract investors from across the spectrum.

It is likely that other states, such as states and municipalities like Montgomery County, MD; Washington, DC; Missouri and Colorado will develop green banks similar to those seen in New York and Connecticut, Schub said.

The panelists were optimistic about opportunities for innovation. On the technology side, Charlie Gay, director of solar energy technologies for the United States Department of Energy, said this included improvements to solar panels and inverters as well as advancement of solar thermal heat exchangers.

Beyond solar, Gay said, the grid itself contains huge opportunities for improvement. These changes could include converting transmission lines from AC to DC and strengthening cybersecurity.

Schub said that enhancing communication between different parts of the grid to create dynamic smart grids also represents an opportunity for innovation.

Feit also said microgrids are relevant to solar power and improved resiliency, as evidenced by recent military projects to achieve 14 days of autonomy off-grid.

Shah said innovation is tied directly to investors. Beyond grants and seed funding, it is financial products like solar PPAs that transform the market. The confidence of investors to do credit underwriting is a game-changer as well.

Today’s asset owners and market players must look towards “alternative uses for electrons,” such as community solar and Public Utility Regulation Policy Act (PURPA), to drive investment in utility-scale solar, Shah said. When considering options, there are strengths and limitations to the common options such as a fund or a C-corp. In places where the credit-based framework is not equal to the needs of policy, there is an opportunity for green bonds.

A key need for the solar industry is to determine and develop financial mechanisms that would encourage and promote investments from institutional capital. The panelists had different approaches to solving this need.

One aspect that is often cited as a barrier is data availability and transparency. Cohen said overcoming this challenge will help spur investments. There are about 14 years of data available on PV’s costs and performance, but this is not considered enough for many investors to view solar as a securitization-oriented asset.

Shah said securitization deals to date exist only because some investors were willing to take risks. In addition, solar does not have an asset class rating, so it continues to be difficult to reach private investors.

The discussion wrapped up with a look at current and future policy.

PACE regulations are currently under federal scrutiny and may be expected to change in the near future.

Given the current $3.5 billion in solar loans, Cohen said that any defaults on PACE will be corrected by the market.

Shah said he sees this as a “test of the industry” that will show whether investing in solar power and energy efficiency will be seen as the path forward. Solar is more upfront investment than efficiency is, though consumers are more interested in solar. In comparison, energy efficiency  has a lower upfront investment, seems more secure for bankers, and historically has had low penetration rates.

Overall, the solar industry continues to grow. Feit said he sees storage as a huge technological opportunity to grow the market. Shah and Schub said they are more excited about financial innovations to come. This includes increased securitization of solar loans and classification of solar as a liquid asset versus one that is dependent on subsidies. 

Note: Jeffrey Schub is on the advisory board of Clean Energy Finance Forum.

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