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.

04/22/2014


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.


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