So what’s the big deal? SolarCity is looking to raise US$54 million, having already notched up US$396 million last month. The difference is that this US$54 million is secured against a pot of power purchase agreements, leases and other contracts associated with a batch of its solar projects.
The finance term is securitisation. In real terms it means solar projects, including residential, have come of age. Solar City’s shares hit an all time high shortly after the announcement and while the consequences of lower cost capital are doubtless great or the company, what does the first securitisation of solar assets mean for the US industry?
Shayle Kann, VP research at GTM spoke to PV Tech about what the deal means for the already burgeoning industry in the US.
Why does the SolarCity deal matter?
In the grand scheme of things this is important as a precedent setter, it’s not important in and of itself but it is the beginning of something that is going to become very important.
System prices for solar in the US have a number of places where they are higher than they need to be. Soft cost is one of them and part of that is financing costs. They have been pretty high for solar projects in the US and they can make a pretty big difference in the overall economics of a system.
For a long time there has been talk of somebody lowering the cost of financing by securitising a portfolio of solar assets that trade in public markets ultimately with a much lower cost of capital. SolarCity is the first to officially propose a securitisation of distributed solar assets in the US. Its only US$54 million, its not going to break the market itself, but if it is successful and is followed by more securitisation then it becomes important.
How do you think the cost saving could translate into a cost per Watt saving?
I don’t know that I could guess that; off hand the reduction in cost of capital is maybe 300 basis points, how that translates to dollar per watt I don’t know off hand.
Will this only be open to the largest installers, could smaller firms exploit it?
I think at least to start, you have to have a relatively large portfolio. Ultimately that could change but in the beginning, especially if we are talking about the residential assets, there are about three perhaps four players, SolarCity plus Sunrun, SunPower and maybe Vivant Solar as well.
Could the improved terms encourage foreign firms to try the US market?
I think that would be a tall order. If you’re a foreign company looking at the US solar market you have a long way to go to get up to the scale of SunRun, SolarCity and SunPower. If anything it could make it harder to enter. The companies able to do this early will have an advantage, not in perpetuity but for a while.
Is this just for the residential market or could it help the commercial market too?
We don’t know if this portfolio that is being securitised is residential or commercial it could be either, SolarCity has both kinds of assets. In the last few months there has been talk of securitisation of both, in separate portfolios, but it is entirely possible that this happens in both segments in the future.
What will be the overall effect on the US solar industry?
I think it will just open the market up wider. The important thing about the US solar market is that it is not a national market, it never has been and it still isn’t today. We have a few states dominating and not necessarily because of their fundamental endemic factors that make them more attractive to solar. Often they are the ones that have offered incentive programmes to make solar economic.
The long-term potential of the US solar market is enormous compared to this tiny base. There are a number of reasons for this but one of them is that there are a lot of places in the US that have literally no solar installed.
Everything the market can do to drive down installation prices, whether it's component prices or financing costs, opens up little pieces of the market. Financing costs is one but not the only place where you can make a meaningful difference in opening up those markets.
Which marginal areas might this open?
There are a lot of place where it could happen all at once. I think a good example is Texas. It has an enormous potential market and to date a very small installed base.
How important is it for the ratings agencies to assign a rating to these portfolios?
I think it is very important. Your average institutional investor is not savvy enough to do a very thorough risk assessment on this portfolio, nor do they have the desire to do so, especially with the entire portfolio being an aggregate of US$54 million. This is not a huge investment relative to the investments these organisations make. They will rely on the ratings agencies to tell them how risky it is for better or for worse. I think the ratings that the agencies give this portfolio and those that follow on, will dictate the cost of this capital and how big an impact securitisation has on the solar market.
How important could it be compared to other key factors like the net metering debate?
There are levers being turned in various directions all of which can have a big effect on the market individually and in aggregate will make or break it. This is one of them. Net metering is the second, the cost of components is a third and incentives and market structure is the fourth. This is on a par with those. The cost of capital has been a thorn in the side of the US solar market since its inception and by all accounts securitisation has the potential to have an impact on that. It’s a big deal.