Real Estate and CMBS industries offer valuable lessons to the Solar industry, with opportunities for investment vehicles to make a comeback.

Achieving the lowest cost of capital has proved advantageous for a number of major industries – from the home mortgage sector to commercial loans and now to solar. While any industry has its standard fixed costs, such as material and construction costs, energy producers today live in a capital intensive business.

However, attaining capital at the lowest cost possible provides a significant competitive advantage when funding projects. This is true of real estate too, and in short, low-cost capital is essential for financing any asset class – regardless of the industry.
Given the recent mishaps of major industries, such as the fall out of home mortgage securitizations back in 2008 and solar’s yieldco meltdown of 2016, the viability of these investment financing vehicles has been in serious question. However, the vehicle types themselves matter less. In just the last three years, solar has reached a height that has taken other industries forty years to reach, with low-cost capital being a major key to success. U.S. solar players got caught up in this exponential growth phase and, in the process, missed out on the key practices required to maintain the trust of institutional investors. Let’s look at what happened.

A number of mishaps contributed to Solar’s yieldco meltdown. Poor project pipelines with lack of visibility, failure to maintain compliance, inability to identify and mitigate risks, inaccurate reporting and lack of data are items of the laundry list that led to the yieldco downfall. The most infamous example is the solar giant, Sun Edison. The former Wall Street darling of the solar industry recently filed for bankruptcy, with their yieldco, Terraform Power, falling out of favor.

Now whether this was due to lack of diligence or lack of industry experience that comes with age, the same requirements still apply when financing any asset class—regardless of whether an industry is four or forty years old. While investors have reason to be cautious towards solar yieldcos and other investment vehicles, faith can and will be, restored. This is because the inherent structure of these vehicles is not at fault, but rather, their operations are to blame. Better data management, transparency of risk and solid adherence to compliance and reporting are needed to help solar once again regain its footing.

Having standardized methods of recording data, reporting information and maintaining compliance is crucial when trying to get investors to invest in not only solar, but in any asset class. Solar yieldcos today fall under the same regulatory framework passed by Congress as commercial mortgage backed securities do following the 2008 mortgage fall out crisis. However, solar is more complex than residential and commercial mortgages, and faces more challenges, more intricate documentation, financial engineering and variability in power output. Regardless of this increased complexity, to attract the same investor type, the solar industry has to act by the same rules. In order for solar financing vehicles to regain investor trust, there are critical lessons that they must put into action.

 

Project data from Mercatus’ platform indicates that average IRR increased in the second half of 2015 from the first half of 2015 in the U.S. Northeast and West, reflecting more conservative overall pipeline growth and higher hurdle rates.

US - After Tax IRR

 

Mitigating risks through accurate measurement, good compliance and transparent documentation begins at the conception of a project plan and needs to be maintained throughout the end of its life, which could span longer than 30 years. Solar developers and asset owners will need to stay organized throughout the full lifecycle of the asset in order to provide a clear view of the outcome requirements.

 

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As the solar industry works towards becoming more responsible in creating standardized methods of data collection and management, investor faith will be restored, and even strengthened. Without this confidence, it is difficult to recognize that solar indeed has all the components of being a successful capital market product, with solid, long term contracted cash flows. Once solar securitization products regain investment and become more prevalent, they will be instrumental in meeting the massive demand for solar financing. So with the return of data integrity, investors will be able to fully realize solar’s potential for high returns- higher than those even in real estate.

 

The total addressable market (TAM) in the U.S. reached 25 GW in 2015 and is forecasted to exceed 96 GW by 2020, with over half of this capacity in the utility-scale segment. 

TAM by segment