In the U.S. financing of solar projects has largely been done through a combination of banks, energy companies and federal funding, but that’s starting to change, according to a new report from the Reznick Group from Bloomberg New Energy Finance. THe report finds that institutional investors, like insurance companies, pension funds and hedge funds are increasingly seeing solar projects as a surer bet. It also found that project bonds and other securities are coming into vogue to finance such projects.
“There is a huge need and demand for private companies, insurance companies, pension funds, etc., to enter into the market—many of who would benefit from the steady cash flows and returns that these assets can provide,” said Rob Sternthal, president, Reznick Capital Markets, a Reznick Group subsidiary.
For instance, last year saw Warren Buffett’s MidAmerican Energy invest in solar for the first time. And at $2.4 billion its purchase of the 550 megawatt Topaz solar project wasn’t cheap. The company also has sold $850 million of the balance of the project in bonds and has more on the horizon.
The solar industry also is looking to securities to help finance solar installation projects. As under a partnership between SolarCity and Walmart. Under that deal Bloomberg considered that SolarCity could securitize the assets and make them available to investors. Such securities could return $117 million over 20 years, according to the report.
“The market will most definitely see securitization in the near future, but securitization financing will most likely be reserved for larger, more established players that have asset management and underwriting expertise as well as a track record in the industry,” Sternthal said. “Securitization also tends to be limited since most investors prefer larger, more liquid securities.”
The nascent solar bonds and securities still have to pass some scrutiny particularly as some market investors may be slowing their future investments and stagnant interest rates. “I do not believe that interest rates can go any lower without securitization and the creation of rated bonds. With many of the European banks scaling back, competition has continued to lessen for smaller scale commercial transactions, as well as for some of the utility-scale deals,” Sternthal said. “It is more probable that banks will need to hold more capital against these types of assets, thereby requiring a higher return to hold them on balance sheet.”
The entrance of more players in the market will help stymie what would otherwise be a shrinking funding pool more. “Additional financial institutions coming into the market would suggest the need for more capital and potentially less—typically, this suggests that returns are high enough to induce new institutions to jump into the market<“ Sternthal said. Adding in more players could ultimately help lower financing, but until then rates will remain where they are, or even raise, he said.