Thursday, June 11, 2015

Innovative Solar Energy Financing Instruments

Investments in solar energy are booming alongside some innovative financing instruments. As explained by President Obama a bit more than a year ago every four minutes, an American home or business goes solar. There are a host of new financial instruments that serve the green economy and starting in 2013 we began to see some innovative approaches to finance in the solar sector.

This includes creative approaches like master limited partnerships (MLP) and real estate investment trusts (REIT) which offer attractive tax treatment. One of the most interesting financing approaches that is growing by leaps and bounds is an institutionalized version of crowdfunding, called "crowdsourcing".

Securitizations are another interesting approach to financing that involves converting an asset into something that is tradable, like a security. Yieldcos are publicly traded companies created specifically around energy operating assets to produce cash flow and income. In 2013 several companies including NRG, Pattern, Transalta, Hannon Armstrong spun off yieldcos with varying levels of renewable energy assets in their portfolios. In 2014 SunEdison announced plans for a yieldco and in June 2015 First Solar and SunPower launched an initial public offering for their own yieldco.

"This trend is transformative for the solar industry" because of how it can unlock so much more value and generate more returns, explained Patrick Jobin, Clean Technology Equity Research analyst with Credit Suisse.

Both securitization and yieldcos increase access to low-cost financing by pooling solar assets into an investment vehicle. They differ in that yieldcos offer dividends that vary with the company's performance while securitizations offer a fixed-income for a set period. Larger projects are good candidates for yieldcos while securitizations typically involve residential solar assets. In between these two is a different class of securitizations, called "collateralized loan obligations," which are more applicable to the commercial sector where less diversity in assets means more risk.

Going forward the attractiveness of these solar financing instruments will be determined by government policy, new metrics to calculate the value potential and standardization that enable comparisons.

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