New financing method could secure the solar industry’s future
The process starts by defining exactly what investors are buying when they purchase a solar-based security. They are buying into the revenue stream generated by a group of solar power plants. These plants can range in size from a 1 kW plant on the roof of a single-family home to a megawatt-sized plant that feeds directly into a utility company's distribution network.
The revenue is generated via contracts the plant operators sign with the individuals who will consume the energy generated by the plant. These contracts, called power purchase agreements, or PPAs, usually are long-term agreements, obligating the consuming party to make monthly payments for 10 to 20 years.
Such long-term revenue streams clearly are attractive to investors; however, they still typically want some assurance that the stream won't be interrupted either by nonpayment on the consumers' part or because of failure of the power plants.
To provide that assurance, SunSpec created the Open Solar Performance and Reliability Clearinghouse (oSPARC) database. Tansy describes it as an actuarial database that takes daily reports from solar power plants scattered around across the country and gleans the data for key indicators about their performance. That information can then be used to give potential investors clues about the level of risk they are taking by investing in certain types of solar plants.
"These types of databases are common across all sorts of asset classes that are securitized," Tansy said, "from student loans to home mortgages and timeshares. The method of setting valuations for all of these assets is the same. What makes solar somewhat different is that it's an operational asset. It generates value by what it puts out, whereas most of the other assets are more passive."
Regardless of the asset class, investors rely on actuarial databases to provide signals about the level of risk associated with their investment.
SunSpec gets plant operators to contribute to its database by giving them information they can use to benchmark their own plants' performance against their peers. The operators agree to this because once the data goes into the database it is anonymized, meaning it cannot be identified as coming from a specific plant.
When plant operators go into the database, they can ask to see performance data on plants with the same characteristics as their own, and that gives them an idea of how well their plant is performing. Tansy says that insight is important to plant operators, who, like investors, are anxious to have some concrete numbers about how their businesses are performing.
"Currently, the solar business is a good business, with relatively high profit margins. So, most companies feel like they're doing well," Tansy said. "But they don't know, on a national basis, if they're over performing, underperforming, or leaving money on the table. This benchmarking gives them that type of information."
Operators wishing to contribute to the oSPARC database tap in via a secure Internet-based connection, typically a virtual private network. They rely on a data model developed by SunSpec to tell them what specific information to enter. The data is then transferred, in XML format, to the database, which is hosted on the Amazon Web Services cloud.
When it's time to make an asset sale, the parties selling the associated securities, typically an investment bank, can also use a secure link to tap into the database and run queries on the performance of assets similar to those they wish to package in a deal. They can then pass that information to potential investors who will use it to make a decision about purchasing the securities.
The first deal
This entire process played out this past November, when Solar City, a San Mateo, Calif.-based company that sells solar systems to residential and commercial customers, conducted the first solar-backed securities sale. That $54-million transaction involved the bundling of roughly 8,000 power purchase contracts spread out across the 14 states in which Solar City does business.
In addition to being an industry first, the Solar City deal illustrated how securitization can lower the cost of financing solar projects. Solar City, which is recognized as a leader in the solar industry, typically had been paying investors 6.5% to borrow funds to finance its projects. Using the securitization method, and offering the data about the underlying assets from the oSparc database, Solar City was able to raise the $54 million by offering investors a 4.5% interest rate.
"If you can decrease the cost of borrowing by two percentage points, that can translate to a 50-cent per Watt reduction in the cost to build a solar plant," Tansy noted. That also should lead to lower cost for power consumers, which could entice more of them to choose solar.
Attend a solar securitization seminar
Want to learn more about how securitization can advance the solar market? Attend a full-day seminar sponsored by Moxa and the SunSpec Alliance.
The Solar Securitization & Grid Control Symposium will take place April 22, 2014, at Moxa's Brea, Calif. headquarters.
Speakers will include industry leaders from Wells Fargo Bank , the National Energy Renewable Laboratory, and SoCal Edison, with presentations on products and solutions from SunSpec Alliance members.
- Sidney Hill, Jr., is a CFE Media contributing content specialist. Send comments to firstname.lastname@example.org. Edited for the CFE Media Industrial Energy Management section in April as a Digital Edition Exclusive.
- A limited number of financing sources has slowed the growth of solar power plant development.
- The solar industry is coalescing around the idea of bundling power purchase agreements into financial instruments that can be sold to investors, much like corporate bonds. This is a means of raising capital for new plant development.
- The SunSpec Alliance, the primary developer of technical standards for the solar industry is now working to standardize the solar securitization process.
In a pilot project, Solar City, a leading developer of solar systems, shaved two percentage points off its borrowing costs by issuing securities backed by power purchase agreements. That could translate into a 50-cent-per-watt reduction in the cost of producing energy.
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