Investors turning to solar securitisations for green growth
Article 5 minute read

Investors turning to solar securitisations for green growth

22 March 2018

Investors around the world are chasing the sun and looking to solar securitisations as a sustainability-friendly method of growing their portfolio.

The renewable energy, energy efficiency and low-emission vehicles securitisation market continues to grow globally with more issuers and investors jumping into the asset class. While some look to Property Assessed Clean Energy (PACE) and green bonds, arguably solar energy is the more familiar face of this growing market. And we’re not just talking about investing in residential solar panels - there’s a whole world of possibility with solar securitisation.

The state of the solar market

Countries and regions across the globe have big plans when it comes to tackling climate change. In Europe and Asia big solar projects are being developed and there is a call and need for securitisation as part of these projects.

In the US, contracts for residential roof-top solar installations were one of the two asset classes that pioneered ‘green’ securitisation. Deals around residential solar have been increasing over the years, although we saw a slight decline in 2016 when the biggest issuer in the market, SolarCity, was bought by Tesla and stopped issuing securitisations. When a consumer wants to install solar panels, they will take out a personal loan to finance them, or alternatively go through a PACE program or Power-Purchase Agreement (PPA). The residential market is still hugely attractive: we saw Mosaic close its second term of securitised residential solar loans – $307 million in bonds – at the end of 2017.

Europe lags behind the US in this market, though. Most countries have set goals to ensure most households  become energy self-sufficient, mainly through the use of solar panels, selling any surplus via the grid. However this is still far-off for Europe, and so securitisation ticket sizes remain small. European investors do dip their toes in the wider solar securitisation market, however, by buying into issuance in the US.

Over in Asia we find a solar market in development, ramping up big solar projects across the region. China, India and Pakistan are the region’s top solar power producers, and all solar plants in the top 10, measured on total solar power production in Megawatt (MW), are based in these three countries. Countries like the Philippines, Vietnam and Singapore have developed big solar plants as well and these countries have ambitious renewable energy plans so more projects are in the pipeline.

We are seeing some encouraging moves regarding roof-top solar securitisation. In Australia, for example, both a mixed consumer and an SME green tranche, backed by solar rooftop loans, have been launched as part of two wider ABS issues.

South America’s renewable energy program has resulted in several wind and solar projects. Today, most of the region’s renewable energy projects are financed by international organisations, banks or development banks such as the Inter-American Development Bank (IDB) or Charity Aid Foundation (CAF). This gives projects a certain amount of security, making investors more likely to jump on board. The cherry on top for many of these projects is that demand for energy from the state energy company is oversubscribed, meaning they must look elsewhere to buy additional power and giving the projects certainty of cash inflow.

The market is not without challenges

Although large independent power producers and utilities have invested heavily in wind, solar, geothermal and other sources of renewable energy, the financing is not yet coming through Asset Backed Securities (ABS) to a meaningful extent. This could be because there is no real incentive to finance big scale projects through green securitisations, especially with interest rates at record lows, and also because ABS investors are hesitant to invest in single, large renewable energy assets.

To date, these challenges have not yet affected the growth of the sector, and indeed the market as a whole will grow again this year compared to recent history. However, it could grow even more – and at an even faster rate – if the securitisation market could be made more attractive to green investors. If there were more assets to securitise, this market could make a real impact on the global stage.

Not only is there a rising interest from consumers in the US and Europe to fit their roofs with solar systems, and subsequently fuelling the loans associated with this, but also investors seem keen to invest in these loans once securitised. Remember the Mosaic deal? It gathered interest in investor orders of more than $1.7 billion.

Tesla, of course, is in the mix here. They’ve announced plans to securitise around $340 million in PPAs and leases into a solar bond, giving the market a nice boost at the beginning of the year. Will that company’s success encourage more to look to solar securitisation?

Leading the field

TMF Group has been involved with green securitisation/ABS since the sector was established. We’ve run point on a number of big ticket PACE deals in the US and on numerous wind and solar projects originating from Africa to Asia and Latin America.

Get in touch to learn more about this asset class, corresponding structures and solutions for administering transactions and solving oversight challenges.

Written by

Andrew Steck

Vice President - Business Development CMS

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