The residential solar industry is entering new boundary waters with a subtle sploosh. Earlier this month, SolarCity announced that it planned to offer $54.4 million in securities through a private placement. Doesn’t sound too exciting? It is. It could help usher new, lower-cost sources of capital to help reduce the cost of residential solar and is another step towards allowing the U.S. public to invest in solar funds just like they would in a bond or security.
“It's fair to say that distributed solar has just reached the scale where it can access larger pools of once-unavailable, lower-cost capital,” said GTM Research Senior Editor Eric Wesoff in a post. “It's another piece of the equation where solar is cutting cost and going mainstream.”
Traditionally, people have had to finance home solar power projects out of pocket or through a loan, like a home improvement loan. But in the past few years, third-party ownership (TPO) through power-purchase agreements (PPAs) or solar leases have become a popular option for financing solar without having to pay $10,000 or more for a solar array up-front. These TPO offerings were largely funded by tax-equity financing that takes advantage of federal tax benefits through banks or other lenders that created funds ranging into the hundreds of millions. But that’s a limited market with limited capital available. The capital that was and is available carried shorter-term repayment periods at higher rates of return—particularly when investors were wary of TPO companies.
Offering securities, however, is an entirely different game. Securities or bonds allow for the company offering the investment more of an opportunity to set the rate of return. “Securitizing solar system payments is a lot like securitizing mortgages, something the banking industry has done with great success,” said The Motley Fool’s Travis Hoium. “It helps lower the cost of capital and with systems like residential and commercial solar it will pass off some of the cost of the asset while keeping much of the upside. For example, SolarCity doesn't give up potential future cash flow from a lease renewal or performance above the contracted payments,” he added. It also gives the investors a predictable cash flow for the term of the investment.
In the case of the SolarCity offering, the company announced Nov. 13 that the notes were for sale and it would pay investors an annual 4.8 percent interest rate, maturing by Dec. 21, 2026. The notes are being offered through SolarCity subsidiary SolarCity LMC Series I, LLC and sale is set to close on Nov. 21.
However they’re not being offered to the general public. In a release SolarCity specified that it was a private offering and only available to qualifying institutional buyers and purchasers qualified under the Investment Company Act. This means companies and organizations like insurance companies and others that want a long-term, stable investment with predictable returns.
“The notes will be secured by, and payable solely from the cash flow generated by a pool of photovoltaic systems and related leases and power purchase agreements and ancillary rights and agreements that will be owned by SolarCity LMC Series I, LLC,” the company said. “These notes will represent obligations solely of SolarCity LMC Series I, LLC, and will not be insured or guaranteed by SolarCity Corporation or any other affiliate thereof, or by any other person or entity.”
This is potentially “a bigger deal than a solar REIT or MLP [i.e., a solar real estate investment trust or master-limited partnership],” Shayle Kann, GTM Research’s vice president of research told Wesoff. He added that it was no surprise that SolarCity was the first to offer securities and that other companies like Sunrun could soon join in. The bonds also received a positive BBB rating from Standard & Poor’s, which could help open the floodgates of this type of financing for solar, Kann said.
Hoium agreed that other companies could soon turn to securitization to fund pools that support residential and commercial solar. “I'd expect SunPower to begin using securitization in the next few years to finance residential and commercial projects as well,” he said. If companies like Clean Power Finance are able to create similar financing options it could help a wider range of solar installers offer consumers even better rates on rooftop solar.
Other companies have already created solar bonds or security-like mechanisms. But these were for commercial or utility-scale projects. When Warren Buffett’s MidAmerican Energy Holdings made its first solar project buys it offered bonds, including a $1 billion bond offering to support the 579 megawatt Solar Star Project in California. Mosaic has also used crowd sourcing to allow people to investment more directly in solar projects.
However, the success of offering like SolarCity’s could pave the way for more securities and ultimately help lower the price of solar and eventually make it easier for people to invest in solar even it they’re buying into securities or bonds rather than a solar array itself.