Introduction to the ‘Business side’ of Solar: Securitization

by Guest Contributor Travis Lowder.

Originally published on NREL.

The U.S. solar industry is an $11.5 billion market with over 360,000 systems in place [1]. Since 2008, solar capacity additions have exhibited a compound annual growth rate of over 50%, with strong gains anticipated in the coming years.

As the industry grows, it is exploring alternative financing options outside of its traditional funding sources (namely debt, tax equity, and cash equity). Securitization—the process of structuring an illiquid asset into a liquid and tradable one (i.e., a security)—represents an emerging opportunity for the distributed solar market in particular. Access to the capital markets through security issuance can assist the solar market in achieving greater liquidity among investors and an advantageous cost of capital relative to traditional funding sources (namely debt, tax equity, and sponsor equity). Liquidity and lower financing rates have both proven somewhat elusive given solar’s current reliance on project financing and tax equity structures.

A new report from the National Renewable Energy Laboratory, The Potential of Securitization in Solar PV Finance, explores this capital market finance option for PV assets. The report provides a general overview of the securitization process (see Figure 1), the actors involved, the benefits (and risks), and the rationale for pursuing this kind of funding strategy.

The report also offers a high-level analysis of the volumes of solar deployment that could be supported given a single securities offering [2]. It posits that a single $100 million securitization transaction (not accounting for fees, overcollateralization, and other structuring/transactional costs) could potentially support 72 MW of residential solar assets, or 100 MW of commercial, or 133 MW of large commercial and industrial (C&I) projects [2]. See Table 1.

Solar projects will likely be pooled into different types of securities based on several factors, including: project size; the type of cash flows securitized; and the entity that will issue the securities. The report broadly identifies three classes of securities that, upon preliminary analysis, would be applicable to the solar industry: asset-backed securities (ABS), collateralized loan obligations (CLOs), and project bonds. ABS instruments are typically used in the securitization of cash flows in the consumer finance sector (e.g., credit cards, auto loans, and student loans); CLOs are securitizations of loan payments and are commonly used to alleviate banks’ balance sheets; and project bonds are debt instruments that have been issued against project-level cash flows [2].

While there are several nuances that would determine which instrument would be applicable in a given solar project or portfolio of projects (such as a tax equity fund for residential assets), the report offers the following general classification:

  • ABS securitizations will be widely applicable to the residential solar sector, as the metrics for evaluating these instruments (e.g., FICO scores) are similar to those for evaluating the credit quality of residential solar assets.
  • CLO securitizations will be more applicable to the commercial sector. This is because the cash-flow pools will require fewer underlying systems to reach the same dollar volume as a residential. Fewer systems mean fewer offtakers, which in turn mean less portfolio diversity. And, without a diversity of offtakers behind the cash flows in the pool, there is greater focus on the creditworthiness of each offtaker. Typically, CLOs are the appropriate securitization structure to manage this kind of corporate risk.
  • Project bonds are debt securities issued against project-level cash flows and have been used to finance utility-scale projects. A bond obligation can look similar to a non-recourse loan on a balance sheet, though it has the distinct advantage of tapping into funding sources outside of the commercial lending market and at larger sums. In the last two years, project bonds have been issued to finance both the construction (MidAmerican’s Topaz and Solar Star projects) and takeout (NextEra’s St. Clair) of large-scale solar projects [2].

Looking Forward

Institutional investors, such as pension and insurance funds, will typically allocate about 5% of their assets for “alternative investments,” such as a renewable energy project investment. Courting these entities will therefore require solar to transcend the “alternative” category and offer itself as a bankable, standardized, and transparent investment product. Institutional investors allocate as much as 40% of their assets to these types of investments, which, by some estimates, could amount to some $37 trillion at the outset of 2014 [3,4].

Even if the PV industry posts half of the annual growth rate that it has from 2008 – 2013, this would amount to about 20 GW of capacity additions by the time the 30% investment tax credit expires in 2017. At an average of $3/W across market segments, 20 GW of solar PV represents $60 billion worth of assets, a third to a half of which would likely have securitizable cash streams flowing through them. A $20 –30 billion base of long-dated assets, made liquid through securitization and investment grade through continued understanding of the credit risk, would be a strong draw for many of the investors in that conventional category.

References

[1] Renewable Energy Finance, Solar Securitization: A Status Report (Fact Sheet). (2013). Golden, CO: National Renewable Energy Laboratory. Accessed January 31, 2014: http://www.nrel.gov/docs/fy14osti/60553.pdf.

[2] Lowder, T.; Mendelsohn, M. (2013). The Potential of Securitization in Solar PV Finance. Golden, CO: National Renewable Energy Laboratory. Accessed January 23, 2014: http://www.nrel.gov/docs/fy14osti/60230.pdf.

[3] Turner, G.; et al. (2013). Profiling the Risks in Solar and Wind: A Case for New Risk Management Approaches in the Renewable Energy Sector. Swiss Re and Bloomberg New Energy Finance. Accessed January 23, 2014: http://media.swissre.com/documents/Profiling-the-risks-in-solar-and-windv2.pdf.

[4] TheCityUK. (September 2013). Fund Management 2013. TheCityUK. Accessed January 23, 2014: http://www.thecityuk.com/research/our-work/reports-list/fund-management-2013/.

This article, Solar Securitization Intro, is syndicated from Clean Technica and is posted here with permission.

NREL Says Wind Energy Boosts Grid Reliability

by Silvio Marcacci

We’ve all heard the warnings about how intermittent renewables could “crash” the grid if for instance all of a sudden the wind stops blowing and grid operators are left in the lurch for power when they need it. But what if wind turbines actually improve grid reliability?

May sound far-fetched to some people, but that’s exactly what the U.S. Department of Energy’s National Renewable Energy Laboratory (NREL) reports in the new study Active Power Controls from Wind Power: Bridging the Gaps.

Previous studies have focused on wind energy forecasting as the key to balancing wind’s availability and the power grid’s demand, but this new hypothesis could vastly expand the relationship between wind turbines and the grid.

Wind farm in the snow. Image via CleanTechnica
The U.S. Department of Energy, National Renewable Energy Laboratory (NREL) says that wind power helps grid stability. Netherlans wind farm in the snow image via CleanTechnica. Image by T.W. van Urk on Shutterstock.
How Does Wind Perform With The Grid?

NREL undertook the study with the Electric Power Research Institute, an organization comprised of more than 1,000 members (most of whom are electric utilities) and the University of Colorado, so renewable energy naysayers will be hard pressed to dismiss this study as an environmentalist pipe dream.

Analysts studied multiple power system simulations, control simulations, and field tests at NREL’s National Wind Technology Center to determine how if wind could provide ancillary services in wholesale electricity markets, how wind farms affect system frequency in the Western U.S. grid system, and if using wind farms to actively provide power control to the grid affects turbine performance and structural integrity.

And the outcome of all these studies? Wind energy can not only support the grid by ramping power output up and down to enhance system reliability, but that using wind farms to provide active power control is economically beneficial, all with negligible damage to the turbines themselves.

Wind Energy, Making The Grid Stronger and Cheaper

These are potentially game-changing findings. “The study’s key takeaway is that wind energy can act in an equal or superior manner to conventional generation when providing active power control, supporting the system frequency response, and improving reliability,” said Erik Ela, NREL analyst.

Active power control helps grid operators balance system demand with generation at various times throughout the day, helping prevent power flow above or below the ideal grid frequency and involuntary load shedding – preventing both potential blackouts and turbine damage.

Making America’s grid more flexible and integrating renewables is an important imperative. Without long-overdue transmission system investments, grid operators are often forced to use high-cost (and typically fossil fuel) “peaker” power plants when demand surges or baseload power plants go offline.

Intermittency Mitigated By Recent Developments

The traditional issue facing wind energy in this context is that it can’t be “turned on” by grid operators whenever they need it. Unless the wind is blowing, turbines can’t generate electricity.

But wind has shown its chops in helping keep the lights on as extreme weather has hit the U.S. in recent memory – just consider the fact that wind energy was credited with preventing blackouts in Texas and parts of the Midwest when the polar vortex spiked power demand and forced some power plants offline.

NREL’s report also notes that almost all grid operators across the U.S., as well as many power systems outside the areas covered by regional grids, are using wind farms in dispatch procedures to manage transmission congestion at five-minute intervals – meaning it’s now a generation resource to be dispatched (for free) when needed.

“Utilities and independent system operators are all seeking strategies to better integrate wind and other variable generation into their electric systems,” said Ela. “Few have considered using wind power to support power system reliability.”

Wind energy has become one of the fastest-growing sources of electricity in America, and it’s a critical source of generation if we’re going to decarbonize our economy and slow climate change. With NREL’s report, perhaps grid operators will start to see wind energy as an energy system imperative, not just an environmental imperative.

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This article, Forget Intermittency: NREL Says Wind Energy Can Boost Grid Reliability, is syndicated from Clean Technica and is posted here with permission.

About the Author

Silvio Marcacci Silvio Marcacci Silvio is Principal at Marcacci Communications, a full-service clean energy and climate-focused public relations company based in Washington, D.C.

‘Soft Costs’ Now the Largest Cost of U.S. Solar Installations

by Joshua S Hill.

U.S. Department of  Energy (DoE)  National Renewable Energy Laboratory (NREL) cost of solar chart.
U.S. Department of Energy (DoE) National Renewable Energy Laboratory (NREL) cost of solar chart.

Two reports published by the US Energy Department’s National Renewable Energy Laboratory (NREL) show that soft costs — such as financing and other non-hardware costs — now make up the largest section of solar installation costs, coming in at 64% of the total price for residential solar energy systems.

The two reports – ”Benchmarking Non-Hardware Balance-of-System (Soft) Costs for U.S. Photovoltaic Systems, Using a Bottom-up Approach and Installer Survey – Second Edition” and ”Financing, Overhead, and Profit: An In-depth Discussion of Costs Associated with Third-party Financing of Residential and Commercial Photovoltaic Systems” — combine to show just how soft costs are becoming an increasingly more important part of solar installations.

“The two new reports, along with previous reports, provide a comprehensive look at the full cost of installing solar, while delineating and quantifying the various contributors to that final cost,” NREL analyst Barry Friedman said.

The first report showed that in the first half of 2012 soft costs represented the majority of all costs — 64% of the total price for a residential system, up from 50% as identified in a previous report conducted in 2012, and similarly high percentages for small and larger commercial installations.

Residential soft cost categories for the first (2010 data) and second (2012 data) editions of the benchmarking study. For the first edition of the benchmarking study, 2010 “all other soft costs” had not been differentiated. For the second edition, we quantified five sub-categories within this broader category.

The second report focused on the five sub-categories identified in the previous report only as ‘other soft costs’ — namely, transaction costs, indirect corporate costs, installer/developer profit, supply chain costs, and sales tax.

This article, NREL: Soft Costs Now Largest Piece Of Solar Installation Costs, is syndicated from Clean Technica and is posted here with permission.

About the Author

Joshua S. HillJoshua S Hill I’m a Christian, a nerd, a geek, a liberal left-winger, and believe that we’re pretty quickly directing planet-Earth into hell in a handbasket! I work as Associate Editor for the Important Media Network and write for CleanTechnica and Planetsave. I also write for Fantasy Book Review (.co.uk), Amazing Stories, the Stabley Times and Medium.   I love words with a passion, both creating them and reading them.

U.S. Fossil Fuels Losing to Wind and Solar Power

by Giles Parkinson.

Wind turbines
Fossil Fuels, Coal, Oil, and Natural Gas, are losing the electrical generation battle to Solar and Wind Power.

Originally published on RenewEconomy

The price of new power purchase agreements for wind farms and new solar projects in the US continue to defy all expectations, making some energy experts wonder why anyone would contemplate a new fossil-fuel plant.

A new report by UBS analysts in the US has crossed our desk. It is basically a write-up from a webinar hosted by UBS and Declan Flanagan, head of local renewable energy group Lincoln Energy, but  it provides some fascinating insight of what is happening in that market.

The first notable conclusion is the declining cost of wind energy. Contracts in Texas, which accounts for around one quarter of all US installations, are regularly below $30/MWH, and some are at $25/MWh. Even with a tax incentive, this still put wind well below $50/MWh.

Why is this happening? New equipment is lifting capacity factors by 5 percentage points, and Texas’ excellent wind conditions mean that wind farms are getting capacity factors in the high 40s or low 50’s (per cent). Nearly half of this occurs during peak load, defying most characterizations of wind as essentially an off-peak power source.

What does this mean? Greentech Media recently quoted Stephen Byrd, Morgan Stanley’s Head of North American Equity Research for Power & Utilities and Clean Energy, speaking at the Columbia Energy Symposium in late November.

“Compare that to the variable cost of a gas plant at $30 per megawatt-hour. The all-in cost to justify the construction of a new gas plant would be above $60 per megawatt-hour.” So who would build gas?

Not as many people. Citigroup recently reported that some peaking gas plants were already being replaced by solar PV plants.

Why is this so? The UBS research note says that in Colorado, local utility Xcl has just announced new contracts for solar PV plants below 6c/kWh ($60/MWh). This, UBS said, was the lowest reported solar pricing it had seen in the US, although it confirms a recent survey by the National renewable Energy Laboratory, which found pricing in that range and with no inflation kicker, meaning that the solar plants would be producing for an effective $40/MWh by the end of their contracts.

That would match even depreciated fossil fuel plants. The variable costs of gas fired plants are likely to be at least $30/MWh, and that does not include their capital costs.

This article, US Fossil Fuels Losing Out To Wind And Solar, is syndicated from Clean Technica and is posted here with permission.

About the Author

Giles ParkinsonGiles Parkinson is the founding editor of RenewEconomy.com.au, an Australian-based website that provides news and analysis on cleantech, carbon, and climate issues. Giles is based in Sydney and is watching the (slow, but quickening) transformation of Australia’s energy grid with great interest.

Natcore Will Make Black Silicon Solar Cells Cheaper

by Tina Casey.

Natcore Technology solar cells
Prices for renewable energy in 2013 continue to fall. Natcore Technologies creates new wafers at lower cost which will help to lower renewable energy costs in the near future.

The solar company Natcore Technologies is set to take a huge bite out of the cost of producing solar cells while reducing the amount of manufacturing-related hazardous effluents. The key is a new low temperature laser process that Natcore plans to introduce, which will eliminate the need for a high temperature diffusion furnace.

Natcore has been working with the National Renewable Energy Laboratory and other partners to perfect its black silicon technology. Just around this time last year it announced that it completed the design of a complete low-cost black silicon solar cell production system at its New York facility, resulting in the potential for a 23.5 percent cut production costs according to an independent study cited by Natcore.

The Road To Super Cheap Black Silicon Wafers

The laser system could result in even greater savings.

In conventional solar cell manufacturing, materials are added to the surface of the cell (a process called doping) by melting them on in a furnace, which involves a considerable amount of waste heat. Typically, the furnace reaches temperatures of up to 900 degrees centigrade.

In contrast, laser doping focuses all of its energy on localized points. It takes less than a millisecond, wasting far less energy and minimizing the risk of damaging the solar cell.

According to Natcore officials, the process will also eliminate hazardous materials used in the conventional production process, including silane and phosphorous oxychloride.

Natcore isn’t saying what laser it is using, but it has identified a company that it is working with to custom-make a system for their R&D facility.

Don’t Forget Black Metals!

Black silicon refers to silicon wafers etched with billions of nano-sized holes per square inch. That creates a new level of efficiency, as described by NREL:

The holes and silicon walls are smaller than the light wavelengths hitting them, so the light doesn’t recognize any sudden change in density at the surface and, thus, don’t reflect back into the atmosphere as wasted energy. The researchers controlled the nanoshapes and the chemical composition of the surface to reach record solar cell efficiencies for this ‘black silicon’ material.

The wafer is not actually colored black, but the nanoholes make it appear darker. It’s worth noting, by the way, that Natcore has some competition in this area, for example from Germany’s Fraunhofer-Gesellschaft institute.

Meanwhile, researchers at Lawrence Livermore National Laboratory have been working on a “black metals” process that deploys the plasmonic effect to harvest energy from a greater span of the solar spectrum.

The basic concept is similar to black silicon, but instead of using nanoholes, the structures in black metal are pillar-like nanofilaments.

Projects like these demonstrate that solar tech has yet to find its bottom cost, as efficiencies continue to rise and production costs fall.

As for the “soft costs” of a solar installation including labor and third-party financing, those are also being addressed by new Department of Energy initiatives such as the Most Affordable Rooftop Solar Prize.

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This article, Natcore Aims To Make Black Silicon Solar Cells Even Cheaper, is syndicated from Clean Technica and is posted here with permission.

About the Author

Tina CaseyTina Casey Tina Casey specializes in military and corporate sustainability, advanced technology, emerging materials, biofuels, and water and wastewater issues. Tina’s articles are reposted frequently on Reuters, Scientific American, and many other sites. You can also follow her on Twitter @TinaMCasey and Google+.