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How solar PV financing is about to go mainstream

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Over the past three years, the explosion in solar PV in Australia has been funded almost entirely by the householder. Some $8 billion has been spent on rooftop systems by home owners in Australia, some of it assisted by rebates and feed-in tariffs, and some of it driven by the desire to hedge against rising grid prices.

That investment by Australian households is expected to continue – even as incentives are reduced – but homeowners are likely to be joined by new investors in the solar industry in a move seen critical to lowering the cost of finance and paving the way for more larger scale installations in Australia.

Some of those investors are beginning to emerge. In the US, headlines about solar financing have been stolen by the likes of Warren Buffett and Google, which have made investments in large solar farms. Buffett spent another $2 billion on a big portfolio of solar projects in January, while Google recently invested $200 million in a single installation.

In Australia, the appetite by institutional investors for solar plants is likely to tested by investment bank and infrastructure developer Investec, which has plans for two 50MW solar PV plants in W.A., and is likely to sell both to institutional investors on completion, just as it did with the Collgar wind farm, which at the time was the country’s largest.

Other avenues are also being pursued. Crowd-funding is opening up opportunities for community projects and RenewEconomy knows of at least one major homebuilder in Australia is currently looking at installing solar PV on all new homes – building them into the product as they would a stove and air conditioning, and numerous commercial operators are looking at how to hedge their electricity costs by installing panels on the rooftops of their factories and warehouses.

But by far the most significant development is the evolution of financing instruments to make solar investments more attractive, and move beyond the realm of various green development banks. In the US, the solar leasing phenomenon already accounts for the overwhelming majority of rooftop installations in that country, and has been underwritten by large financing deals from the likes of US Bancorp, Goldman Sachs, and other banks.

This in turn has led to interest in the next stage of financing maturity – securitisation. In Canada, this has evolved in fairly vanilla instruments such as bond issues to help finance renewable projects, including wind energy, solar and hydro electric, but the solar leases are also being securitized and offered to a broader range of investors – in turn raising more funds for those offerings to be broadened.

A recent article in the Financial Times focused on how banks were looking to turn these investments mainstream after overcoming skepticism from an investment community unfamiliar with the technology and cautious about investing in a new asset class.

Russ Burns, the head of esoteric asset finance at Credit Suisse, told the FT that solar assets and related cash flows are very similar to various consumer and commercial assets that have been securitized, and interest in such investors are at their highest levels since  the Global Financial Crisis as investors seek out higher yielding securities.

That, in turn, is leading to what could be an even more profound development, the creation of real estate investment trusts for solar investments.

This is being pursued by several companies in the US, and solar stocks recently went on a surge on rumours that the Internal Revenue Service was about to grant approval for such an instrument.

In a recent Forbes article, Garvin Jabusch, the co-founder and CIO of Green Alpha Advisors in Boulder, said such a move would give investors access to what is currently the best value in solar, the annuity of electric power sales agreements.

“Utility scale solar on a project basis is very attractive because, unlike a coal or other fossil-fuels based plants, once the solar plant is running it produces electricity which can then be sold essentially indefinitely without risk of the price of its fuel increasing (or indeed ever costing anything at all),” Jabusch told Forbes.

A recent Bloomberg article pointed out that REITS were used in $640 billion of US property ventures, and their use in solar installations would significantly reduce their financing costs.

“REITs will significantly reduce the financing cost of solar energy projects and with it, the overall cost of solar electricity,” Felix Mormann, a research fellow at Stanford University Law School’s Steyer-Taylor Center for Energy Policy & Finance, told Bloomberg. “They will bring the solar industry a big step closer to subsidy independence.”

Tim Buckley, investment manager with Australia firm Arkx, said REITs, like the listed property trust market in Australia, has mobilised hundreds of billions in equity and debt capital.

“If the IRS rules in favour, US residential and commercial solar projects could be packaged up as real assets offering long term, low risk cash annuity streams,” he said.

“Tenants get access to lower cost electricity with an inbuilt inflation protection, and investors get access to a clean green low risk earning stream, perfect for income seeking superannuation funds looking for diversification and a better yield than long term US treasury yields.

And he says there could be huge scope for the development of similar solar asset based LPT vehicles in Australia.

“As an example, it would not take too much financial engineering for the extremely successful Wesfarmer’s listed commercial property vehicle, BWP Trust (a 24% owned associate), to extend its mandate from owning A grade retail property sites.

“With an existing tenant in the form of Bunnings in place under a long term lease agreement, a huge warehouse roofing surface ideal for large scale solar installations, and 310 warehouses across Australia and NZ, Bunnings would make an ideal partner for a commercial property based solar LPT.

However, Buckley said the key obstacles remained those that are currently hindering the growth of the commercial market – the rules that hinder the cost effectiveness of ‘inside the meter’ self-generation for commercial customers – “another legacy of the Australian electricity oligopoly that is a hidden subsidy to the fossil fuel sector,” he said.

“We at Arkx are confident that the uptake of solar in the US will continue to boom, soon to potentially rival the 13 GW of wind projects commissioned in the US in 2012 alone. The energy sector transformation is happening, whether Australia’s fossil fuel interests want to believe it or not!”

 

 

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  • David

    Once the financiers get their teeth into small scale solar installations the cost will go up and the installation rate down.
    Why is it that domestic solar in the USA costs twice what it costs in Germany and nearly twice what it costs here?
    “In the US, the solar leasing phenomenon already accounts for the overwhelming majority of rooftop installations”
    I suspect that has something to do with it.

    • Giles Parkinson

      You can be sure that USA costs were twice the cost of germany before the solar leasing people got to it. This explains a fair bit why it is so …. http://cleantechnica.com/2013/02/17/why-german-solar-is-so-much-cheaper-than-u-s-solar-updated-study/

      • David

        Actually Giles, I had read that piece. They only identify about half of the discrepancy and of that, roughly half is “customer acquisition” related. I would contend that the undefined half of the discrepancy is most likely financing related. After all, financial groups will not enter into arrangements where they do not get their pound of flesh. The effective return to domestic owners is not that great that the pound of flesh will leave anything much left on the bone.

        • Giles Parkinson

          Well, I’d agree that with solar leasing you are leaving half of the gains with the people providing the finance, and the best option for a home owner would probably be through their mortgage. But i think the point of the article is that once you get more of these financing instruments in, they will inevitably reduce the cost of capital for larger projects, and for those without a mortgage to tap in to.

  • http://www.energyforthepeople.net Tosh

    Leasing is an expensive way to get solar done on rooftops. Nothing can beat mortgage finance for a home-owner. Even a commercial loan gives you a better rate than a lease – we have reverse engineered lease products, its like paying 18%.

    Hard to see the value for a commercial building owner buying their solar power off a long-winded financial supply chain. Best to finance and install themselves.

    http://www.energyforthepeople.net

  • concerned

    A company I do work for, and being a major player in Australia, has been installing PV and solar hot water for over three years, on all new homes.
    It actually does not cost anything thanks to the generous contribution of the taxpayer. We import, top-quality PV (Suntech) from China directly without going through the middle man, and the net cost to the homebuyer is nil.
    In addition we have sourced a top-quality solar hot water system from Turkey, which unlike a well-known Australian brand actually works in winter.
    Off the subject slightly, there is a lot of rubbish PV being imported into Australia from China, which will end in tears in a few years when it fails. The problem will be massive.

    • Giles Parkinson

      Concerned, for once i have to say i agree with everything you just said! The cheap imports will be a major problem.

  • http://www.servicecentral.com.au/solar/ Service Central

    Surprised to read that Australians have already spent $8 Billion on solar panels. That is a significant investment, just think the entire NBN is said to cost $32 Billion and many more years to create. With the continued progress of the adoption of solar by Australians, the investment could even end up topping the total cost of the NBN.

    My wonder the banks want to get their hands on this.

    That said, the Canadian approach of bundling these finance deals together and reselling them as bonds sounds very familiar. Isn’t that the approach the financiers were taking with mortgages that lead to the Global Financial Crisis? When will they learn?

  • Dave Johnson

    Some of us make our capital investments using something called “cash” – as in “cash is king”.

    Borrowing money, from any source, is for amateurs.

    You are just giving the bulk of the profits to the lender, and getting nothing in return.

    In other words, you are working for free, which, by definition, makes you a slave.

    I’ll pass, thank-you.