The future of solar financing

This article originally appeared on GigaOM Pro, GigaOM’s premium subscription research service.

Over the past few years it’s become obvious to all involved in selling both residential and commercial rooftop solar systems that customers will balk at the hefty upfront costs of purchasing, installing, and maintaining a solar panel system. Into the fray have stepped companies offering financing solutions, ranging from power purchase agreements at fixed rate electricity prices to 20-year leases.

The question I’ve mulled over in my head has been whether the solar installation game is likely to become vertically integrated with installation and financing under one roof. SolarCity has gone this route, handling both financing and installation, and its success will be tightly linked to its cost of capital. Effectively, how cheap can it get money in order to help its customers finance their systems?

solar panelIn a previous column examining First Solar’s small re-entry into manufacturing panels for the residential market in Japan, I’ve even wondered whether there’s room for a complete vertical integrator that could do panel manufacturing, installation, and financing.

On the other end of this equation is Clean Power Finance, which is expressly built around connecting financiers like Google and Morgan Stanley with regional solar installers so that these installers can offer financing options for customers. Investors now have a conduit for funneling money into rooftop solar investments.

“We’re running an online marketplace,” said Clean Power Finance CEO Nat Kreamer. “We’ve got people on one side of the marketplace who are out there everyday using that software to sell to consumers, to design and build systems. On the other side you have companies offering PPA, leases, loan products to the people out there selling. We’re running a business to business marketplace.”

Loving solar a little too much

Loving solar

Kreamer and I had a lengthy conversation recently about challenges and opportunities in renewable energy financing. He clearly believes that the market is getting large enough to have companies offering specific services at key points in the value chain.

He noted that investors are getting “high single digits to low single teens” rates of return on their solar investments. But perhaps more importantly, he’s focused on building a platform that will allow his investors to specify the degree of consumer credit risk they will take, the types of solar systems or panels they’ll finance, and ultimately the rate of return.

The introduction of risk-based pricing into solar financing could be an additional innovation driving Wall Street further into funneling money into renewable energy.

When I pressed Kreamer on whether he thought we might see solar contracts packaged as securities, he said, “There are a lot of really smart people on Wall Street working on turning portfolios of solar systems into asset backed securities. You can break the investment into two parts. I have a tax return, meaning I get the investment tax credit and the deprecation. And then I’ve got this flow of consumer cash flow.”

I concur that there are some attractive aspects of solar-backed securities, notably that it’s actually easier not to pay your mortgage than not to pay for electricity. Also, if we’ve learned anything from the mortgage crisis, it’s that underwriters will be under pressure to glean accurate credit pictures of borrowers.

Solar Costs Dropped 30% Over Last DecadeAnd with sophisticated risk-based pricing, returns can be correlated with credit risk. Finally, because solar systems are so new in terms of financing products, investors will get a premium for being the first to purchase these products.

So why couldn’t one large company still handle installations as well as financing? It could and SolarCity is doing just that. In fact, many of the largest automakers have their own captive financing groups in house to handle leases for car customers.

But at the same time if a company like Clean Power Finance can build strong relationships with investors and become known as the most efficient and sophisticated method for providing safe returns, correlated to risk, there’s a strong argument that the company will provide additional and necessary value in the market.

Clean Power Finance is taking investors at an initial commitment of $50 million with a willingness to do around $250 million, and running just under a billion in financing through its platform each year. As solar installation rates grow, the company is gunning to capture an increasingly large part of the financing capital flowing into solar. And to solidify itself as the conduit of choice for investors moving capital into rooftop solar investments.