The U.S. solar industry is an $11.5 billion market with over 360,000 systems in place . 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 . 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 . 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 .
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 .
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.
After a big boom in early stage investments and a green policies kick-off a few years ago, the cleantech industry has been through the struggles that always come with a young and maturing industry. Where are we standing now?
Unavoidable growing pains
Back in 2008, VC funds for cleantech were blossoming; some of them arguing that it would be the next internet boom. Politics started to raise their awareness about climate changes and environmental issues. Europe had led the way with the first feed-in tariffs for renewables and even a cap and trade market for CO2 in 2005. The US introduced Renewable Energy Standards in 30 states, and created ARPA-E as the new government agency to support innovation in the energy industry.
However, overproduction of solar cells and panels, combined with rapidly falling prices for that and other reasons, led to the demise of numerous solar startups. Meanwhile, many European countries, facing a financial crisis, stepped back and reduced their support for cleantech. The early growing pains that face all industries as they mature also showed up. That included some innovators going bankrupt or struggling to make it to their teenage years. Iconic cleantech companies such as Fisker, Better Place, and A123 went bankrupt; a lot of other startups had poor exits as they were struggling raising new funds.
Now VCs are defiant and most of the main teams are being dismantled as their cleantech portfolio did not perform well enough. Was that to be expected? Actually, VCs historically targeted rapidly growing markets in order to ensure high returns in a few years, whereas the energy industry bets on 20+years returns. There has obviously been a mismatch. Also, a lot of investors and entrepreneurs — new to the energy industry — underestimated the barriers of entry for this market, as well as the resistance of utilities.
However, a few VCs did well and are still in the game. Today, most of them are either targeting this new “cleanweb” segment, which is more likely to be capital-light with a rapid return by focusing on apps and softwares. Others are partnering with corporates to ensure a more sustainable investment and facilitating industry alliances for the ventures.
The cleantech coming of age
Funding a hardware cleantech company is currently very difficult, if not impossible. However, we still need those technologies to evolve and mature, as they will be the pillar of the next infrastructures. Cleanweb, new business models, and financing are key and definitely necessary to mainstream those innovations, but let’s not forget our final goal by focusing too much on the means….
I believe that the solar industry has never been better than it is today. It is true that a lot of people are struggling, we have seen the number of module manufacturers dramatically dropping over the last two years, and now the pressure is put on other types of hardware from the balance of system, such as inverters. But the price drop has been so strong and the emergence of new business models so impactful that PV is becoming mainstream. The market has been maturing into a more sustainable industry, and it will keep growing but likely with a trend towards verticalization.
Also, storage is going to see a huge change this year. A lot of companies have been working on their technologies for years now, and the market is finally getting ready, one step at a time. Timing is always critical for innovations: now as energy demand keeps increasing despite limited and decreasing capacities, storage starts making sense even at a higher price. California once again pioneered by introducing the AB 2514 bill that makes storage capacities mandatory for the state IOUs (PG&E, SCE, SDG&E). Is storage on the same path as solar was a few years ago?
I will just add a few words on the energy efficiency industry, this low-hanging fruit that companies have been trying to grab for some years now. Despite huge potential, energy efficiency is still looking for the right model. The concept of monetizing negawatts needs a lot of structure: policies, regulations, standardized measure, and verification processes. Some promising technologies for consumption disaggregation and new financing structures could dramatically change the picture with the right business models.
The energy industry is re-shaping itself as it faces new challenges. The emerging segments of this market have definitely been going through difficulties to reach technology viability and find the right business model. This market is a tough one, where you need heavy investment and strong will to upgrade infrastructures and modify a legacy system which has been running for decades. But we are finally witnessing the development of those technologies at large scale, creating new economies. Beyond solar, the grid is finally starting to change with storage, energy efficiency and consumer-oriented services.
About the Author: As an engineer, Maud dedicated her efforts towards the energy market. She hails from the oil & gas industry, and started her career working in electricity markets. As an analyst on a power trading desk, she studied the market mechanisms that can develop new demand-response models. She has been scouting new technologies such as renewables, storage or energy efficiency for a large power utility in Silicon Valley before joining a solar start-up.
Renewables are making headway in Europe and bringing a low-carbon electricity system to the forefront. Renewables were 69 percent of new capacity added in 2012 in Europe and 49 percent in the United States.
Not surprisingly, this threatens utilities unwilling to let go of outmoded business models and fossil-fuel generation.
Laments for Europe’s money-losing electric utilities were featured in an October 2013 cover story in the Economist. It said Europe’s top 20 energy utilities have lost over half their 2008 value, or a half-billion Euros—more than Europe’s banks lost.
Many utilities therefore want renewable competition slowed or stopped. Indeed, some European giants, like Germany’s E.ON and RWE, are in real trouble, and five of Europe’s top ten utilities have suffered credit downgrades.
So have some U.S. utilities—most recently Jersey Central Power & Light and Potomac Electric Power Co. – from the likes of Fitch, Moody’s, Standard & Poor’s, Credit Suisse, and others.
Should old, long- and often still-subsidized oligopolies be bailed out or shielded from competition when they bet against innovation and lose?
Those big European utilities were supposed, but failed, to prepare for renewables by reinvesting their hundreds of billions of Euros’ windfall from billing customers for the first decade’s tradable carbon emission credits they’d been given for free. Now they’re griping that disruptive technologies are upending their old models—just as innovators had warned them for the past few decades.
Disruptive technologies are meant to upset the status quo to bring worthwhile change. Should we have rejected mobile phones because they threatened to displace landline phones? Didn’t digital cameras make film cameras largely obsolete? Shouldn’t print newspapers have to invent new business models to confront the rise of the Internet?
Of course utility companies that refuse to let go of an archaic system are losing investors’ money. To be sure, some market reforms, like a well-designed, technology-neutral electric capacity market, could be worthwhile.
But botched investment strategy should not be rewarded. Nor should shareholders be surprised that utility stocks no longer perform like bonds when twenty-first-century technology and speed collide with twentieth- and nineteenth-century institutions, rules, and cultures.
Fortunately, those shareholders were already compensated for accepting well-known risks like new technologies, new environmental rules, and other regulatory and policy shifts—and they needn’t be paid twice.
Renewables Aren’t The Only Challenges To Incumbents
As the Economist acknowledges, those utilities’ financial crisis is due not only to renewables, which are often scapegoated for trends they reinforced but didn’t cause.
Overinvestment in fossil-fueled generation would have weakened utilities’ finances anyway as the global economic slowdown damped electricity demand growth and the efficiency revolution began to reverse it—on both sides of the Atlantic. U.S. weather-adjusted electricity use per dollar of GDP fell 3.4 percent in 2012 alone. In many regions, efficiency is outpacing service growth, shrinking utilities’ revenues.
U.S. shale gas has also displaced much coal-fired generation (though efficiency displaced nearly twice as much in 2012). Unsold American coal flooded European markets, temporarily displacing higher-priced gas.
Meanwhile, solar power took the utilities’ profitable afternoon-peak market and slashed its price premium.
And since Germany, among others, gave renewables both full grid access and dispatch priority (logically, because they’re cheaper to run than any fueled generator), low loads coinciding with high renewable supplies sometimes make wholesale markets clear at negative prices.
This further distresses utilities that must pay to keep their inflexible old plants running—much as they’d prefer to shift all the costs of adaptation to their new competitors. Their distress will rise as renewables keep getting cheaper and as old contracts to sell electricity at well above today’s prices expire.
Renewables Are Advantageous
The Economist article stated, “The growth of renewable energy is undermining established utilities and replacing them with something less reliable and much more expensive.” Undermining stubborn established utilities? Yes, to achieve important public benefits. But shifting to less reliable and much more expensive generators? Hardly.
Well-stoked fears of grid instability and unreliability due to renewable power are as widespread as evidence for them is unfindable. In the Central European grid, where pervasive electricity trading helps operators choreograph the ever-shifting mix of renewable and nonrenewable supplies, German electricity (23 percent renewable in 2012) and Denmark (41 percent) are the most reliable in Europe—about ten times better than in the United States (whose 2012 electricity was 6.6 percent hydro and 5.3 percent other renewables). Even on the edge of the European grid, Spain (48 percent in the first half of 2013) and Portugal (70 percent) kept their lights on just fine. This experience might help the puzzled Economist writer who claimed, “No one really knows what will happen when renewables reach 35 percent of the [German] market, as government policy requires in 2020.” Answer: probably nothing except lower emissions and lower prices.
The “much more expensive” claim, too, evaporates on scrutiny. In the U.S., new Midwestern windpower now sells at a 25-year fixed nominal price (thus a declining real price) as low as $22/MWh, and new Western solar power at below $70, both net of subsidies generally less than nonrenewables get. In many states, wind and solar beat efficient new gas-fired power plants. In countries like Brazil and Chile, unsubsidized wind and solar power routinely win power auctions. In Europe too, they have a strong business case; cloudy Germany has installed 35 GW of photovoltaics but hasn’t subsidized them since 2004. The Economist agrees that German solar power now costs less than residential tariffs (which are half taxes), and less than the feed-in tariff it still receives (because it still costs more than wholesale prices)—so solar power could keep growing even without the tariff.
“Much more expensive” is a more apt description for much nonrenewable generation, especially as the misdesigned European carbon market gets repaired so emissions are no longer nearly free. Exhibit A is the Hinkley Point nuclear plant that the British government wants 84-percent-state-owned Électricité de France to build, supposedly with part-Chinese financing, to generate 7 percent of U.K. electricity. To get ÉDF to agree, the British government had to offer a 35-year inflation-adjusted fixed power price twice today’s wholesale market level, plus a 65-percent loan guarantee, plus other concessions, many still secret.
Even if this extravagance survives EU scrutiny as “illegal state aid,” the project may not win private construction financing. Investors may reason that nuclear electricity costing seven times the unsubsidized Midwestern-U.S. windpower price (the U.K. has Europe’s best wind resources) or 3–4 times the unsubsidized western-U.S. solar price, both falling, is so ridiculous that a subsequent U.K. government could wriggle out of the deal, putting private capital at risk—or simply that forcing the market to absorb so much extraordinarily costly electricity could prove unworkable. If the British government let all options compete at transparent prices, it could find such cheap efficiency, demand response, renewables, and cogeneration that this year alone in America, five old operating nuclear plants have been terminated as uneconomic just to run, even though their high capital cost was paid off long ago. New reactors’ capital costs are so prohibitive that eight years of 100-plus-percent construction subsidies have failed to make them privately financeable, and nine proposed new units were also terminated this year.
Calls for more nuclear power have largely abated in Europe, where flagship nuclear projects in Finland and France are at least twofold over their budgeted cost and time. Nuclear diehards still pull most policy levers in France, but its national utility isn’t charging enough to cover its nuclear repair costs, is about a trillion Euros underfunded for decommissioning its aging reactor fleet, can’t afford to replace it, and needs to consider what to do instead. Hint: renewables leader Germany, moving off nuclear and beyond coal, is the only consistent net exporter of electricity to three-fourths-nuclear-powered France.
Renewables Are Winning
Utilities’ dwindling profitability is the flip side of renewables’ benefits to customers. As renewables burgeoned, Germany’s wholesale electricity prices fell nearly 60 percent in the past five years. This enriched many German industries—thousands of which also shifted billions of Euros’ annual costs to German households via tripled exemptions from paying grid fees and renewable surcharges. (Only 15 percent of the German renewables surcharge is actually households’ share of premium prices for renewables, mostly for old contracts at higher prices; the other 85 percent reflects falling wholesale prices and industrial exemptions.) But the wholesale price drops are reaching most German households too in 2014, stabilizing their bills.
Moreover, German citizens can choose to microinvest as little as $600 in renewables, locking in a stable and attractive return for 20 years. Most German renewable capacity—investments largely spurned by big utilities—was bought instead by citizens, communities, or cooperatives. And Germany’s 382,000+ new renewable jobs, welfare relief, corporate and export earnings, tax revenues, and wholesale price drops yield not just long-term but current macroeconomic net benefits to the national economy.
The Need For New Business Models
Rather than lament that traditional utilities aren’t the low-risk investments they once seemed, and asking how we can protect their profits, we should be seeking to help progressive utilities and disruptive upstarts shape a new electricity system powered increasingly by clean, distributed renewables, doing exactly what they were meant to do: provide reliable, resilient, safe, clean power at moderate prices. That is the way the world market is trending.
Not only Germany but also in two more of the world’s top four economies—China and Japan, as well as India—non-hydro renewables now outproduce nuclear power. In 2012, China’s windfarms outproduced its nuclear plants (the world’s most aggressive program), and coal plants were run less: China added more generation from non-hydro renewables than from nuclear plus fossil sources. In the first ten months of 2013, 54 percent of China’s capacity additions were renewable (a third of those non-hydro). The coal-fired fraction of China’s electricity could drop by two percentage points in 2013 alone. Globally, in each of the years 2011, 2012, and probably 2013, renewables won a quarter-trillion dollars of private investment and added over 80 billion watts of capacity. Solar additions are now overtaking windpowers, scaling even faster than cellphones.
To adapt to these epochal shifts in both supply and demand, electricity providers everywhere, not just in Europe, need new business, revenue, and regulatory models, being developed in efforts like RMI’s e-Lab industry forum. For example, buildings using zero net electricity (an increasingly widespread practice) pay zero net revenue to utilities selling electricity by the kWh. That requires a different revenue model—perhaps like the Fort Collins (Colorado) municipal utilities’ proposed new approach, where the utility can provide a range of services and investments on the customer side of the meter, helping the customer navigate efficiency and distributed generation investments while providing low-cost finance and on-bill repayment. This e-Lab-aided innovation may offer a sound and scalable path beyond net metering, which breaks at scale.
An 80-percent-renewable, half-distributed, nearly decarbonized, highly resilient U.S. grid could cost virtually the same as business as usual, but could best manage its risks—security, technology, finance, climate, health, fuel, and water—and, uniquely, prevent cascading blackouts. Such transformative benefits justify transitional growing pains—not protection for incumbents already paid to accept the known competitive risks they got wrong.
Clinging to and investing in antiquated business models should be neither rewarded nor celebrated. After all, it’s not as if their authors didn’t know big changes were coming. Ordering new coal plants in the face of renewable mandates and emerging carbon trading is akin to buying up carriage-makers just as automobiles began to relieve London’s horse-manure crisis.
How Much Are Solar Panels? Wrong Question. How Much Can Solar Panels Save You?
OK, it’s true, How Much Are Solar Panels? can be a useful question. But, really, this question is largely of minimal importance today. Either through $0 down loans or 3rd-party-ownership models that let you lease a solar power system instead of buying one, most residents and businesses with a decent roof or ground space for solar panels should have an opportunity to go solar without buying the entire solar panel system up front.
The real question — the real ways in which ‘going solar’ affects your finances — is how much it saves you and how soon, or when, it starts to save you money.
I’ve recently created the short infographic below to highlight the 20-year savings from going solar in some of the most populous states in the country, as well as in Hawaii, which has the greatest average savings per project.
These numbers were included in a cool solar power infographic I shared last week. However, the map displaying these numbers was number 3 of 4. I’ve gone ahead and pulled out this key map and will insert it below so that you can see savings in your specific state if you don’t live in one of the four most populous states or Hawaii.
These savings are tremendous. Even the national average (again, in 2011, when solar panels were much more expensive) is above $20,000! How much are solar panels… going to save me? That’s the question to ask. (Of course, you can request a quote on Cost of Solar to get a savings estimate and even a follow-up site visit for a more exact estimate, and it will also give you an estimate of how much solar panels for your house or business will cost.)
Zachary Shahan is the director of CleanTechnica, the most popular cleantech-focused website in the world, and Planetsave, a world-leading green and science news site. He has been covering green news of various sorts since 2008, and he has been especially focused on solar energy, electric vehicles, and wind energy for the past four years or so. Aside from his work on CleanTechnica and Planetsave, he’s the Network Manager for their parent organization – Important Media – and he’s the Owner/Founder of Solar Love, EV Obsession, and Bikocity. To connect with Zach on some of your favorite social networks, go to ZacharyShahan.com and click on the relevant buttons.
Former head of US largest utility says regulations and business models will not change quick enough to save traditional utilities in face of solar.
Jim Rogers, the recently retired head of Duke Energy, the biggest utility in the US, has had some interesting things to say about the fate of the traditional utility, particularly with the proliferation of rooftop solar.
In an interview with Energy Biz Magazine, Rogers says there is no doubt that utilities are under fire from new technologies such as rooftop solar, and are in danger of losing customers to new players.
Indeed, if he were entering the industry now, that’s where he would want to be – in rooftop solar, attacking the market rather than defending it.
“The utility industry has been like the proverbial frog that’s been put in a pot of cold water, and the heat’s been turned up,” he said in the interview.
“And it’s been turned up slowly. The many challenges ahead are going to fundamentally change this industry.”
“Leaders in this industry in the future are going to have to run to the problems that they see on the horizon, embrace the problems, and then try to convert the problems and challenges they see into opportunities to create value for their customers as well as their investors.”
This is not the first time he has said such a thing, though not quite as dramatically. Last year, Rogers warned that “the progress in solar and storage means that customers may simply use the grid as a back-up some time in the future.”
Asked later in the interview what approach he would take if he were entering the industry now, Rogers initially replied that he would like to come back as David Crane, the CEO of NRG – the largest privately owned generator in the US – who has been extolling the virtue of solar and the transition that would likely create, and warning that customers were likely to disconnect from the grid if utilities did not evolve quickly enough
“Maybe I should take that back,” Rogers added. “I would come into the industry as someone who is an attacker, not a defender. I’d want the solar on the rooftop. I’d want to run that.”
“I’d want the ability to deploy new technologies that lead to productivity gains to the use of electricity in homes and businesses. I would go after the monopoly that I see weakened over the last 25 years.”
“My goal would be to take customers away from utilities as fast as I could, because I think they’re vulnerable. Regulations will not be changed fast enough to protect them. The business model will not be changed fast enough.”
Rogers said all utilities should be making decisions based on the assumption that there will – some day – be a price on carbon.
“Our industry needs to lead on environmental issues. We need to lead on productivity gains in the use of electricity. That’s a critical way for us to continue to reinvent ourselves as an industry.”
Nuclear supporters may be cheered by his outlook for nuclear, which he said would be centred almost entirely around China, and the development of Chinese technology, including modular reactors.
“They will lead the world in the building and operating of new nuclear plants over the next 30 years.”
“They will develop the supply chain and build nuclear plants in a modular fashion. We will have to change our rules and regulations and how we think about the Chinese. They’re going to bring us the nuclear technology to replace our existing plants at a lower cost and build new ones faster than we can.”
Giles 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.