Solar Energy Finance Association emerges on the scene
What is hindering the availability of public capital and financing options for distributed solar? To some in structured finance, it seems like a great fit: Solar assets produce reliable cash flows, backed by the good credit of customers.
Those leases can be pooled and traded as liquid capital. In order to profit from this great opportunity for solar growth, investors and consumers demand standards and consistency from the industry.
The new industry group Solar Energy Finance Association is one of several leaders shepherding in an era of solar standards. SEFA is the only association that focuses on solar distributed generation (DG) finance. Its flagship initiative involves overseeing the standard lease and power purchase agreement (PPA) contract documents developed by the Solar Access to Public Capital (SAPC) working group.
The association, originally formed in late 2013, is en route to becoming a major game-changer in the path to unleashing distributed solar finance.
“Our mission is to bring the solar industry up to a level where capital markets will say ‘yes,’” said SEFA president Mary Rottman.
What is SEFA?
SEFA grew out of SAPC, a three-year initiative to increase the availability of capital to the solar industry, funded by the United States Department of Energy and led by National Renewable Energy Laboratory (NREL).
Rottman said the association was formed to “harness the goodwill generated in SAPC” and facilitate private-sector growth as a membership organization in a way that a public entity such as NREL cannot.
The association consists of around 36 members and represents a majority of players in the market in terms of number of installations, according to Rottman. Founding members include SolarCity, SunRun and Clean Power Finance.
Rottman came to the solar industry in 2007 from a career in structured finance. She is owner and principal of Rottman-Associates, a financial consulting firm in San Francisco and a subcontractor to NREL.
One of NREL’s mandates is to facilitate solar securitization. SAPC has led that charge. In the past two years, the group has published guidelines, written technical reports, worked with rating agencies and fostered a network of public finance and solar stakeholders. SEFA will advance several initiatives developed by SAPC, including administering the standard contracts.
According to the NREL “Potential of Securitization in Solar PV Finance” (PDF) report published in December 2013, securitization of solar assets and access to financing from capital markets could help to sustain the solar industry when the investment tax credit drops from 30 percent to 10 percent the end of 2016. An estimated $1.34 billion of potentially securitizable solar assets were installed in 2012 alone.
A primary project of SAPC has been talking to rating agencies about what concerns its stakeholders about solar. SEFA was created in part to help facilitate some of this engagement with the rating entities.
Capital markets work with mature businesses that have a track record of success, Rottman said. The solar industry still operates much more like a startup industry — although SAPC and SEFA argue it is actually a developed technology and market.
“Utilities can borrow. They have the credit. It’s the DG market that needs access to capital. We knew it could not successfully tap institutional money without acting in the way a sophisticated industry behaves,” Rottman said.
What are SEFA’s resources?
The standard residential lease contracts and residential and commercial PPA agreements developed by SAPC and administered by SEFA are available publicly and are already in use by the association’s members and non-members.
Why do standard contracts matter? From an investor’s point of view, standardization provides consistency for the industry. The uniform documents minimize due diligence costs and uncertainty for all parties — customers, companies, regulators and investors. For customers and investors doing solar deals, standardization leads to simplicity. Solar companies can focus on their critical issues instead of creating and revising financing contracts.
“It’s not the contract that is going to sell the system,” Rottman said. “It’s the quality of the business — how you treat your customers, what you offer to your customers and how you offer it.”
Rottman said the documents also provide value by preventing unnecessary lawsuits, particularly as solar companies do not have much legal expertise. By using the vetted standard contracts, individual solar companies can increase confidence in the industry as a whole.
All of the major DG installers and facilitators in SEFA have adopted the standard contracts, according to Rottman. But she says it will take a while to integrate across the businesses. SEFA is not officially tracking the use of the contracts.
Rottman said SEFA may develop a certification program in the future. An independent organization would serve as the certifier.
The contracts are not the only standardization effort in the solar industry. SAPC and Solar Quality Initiative released best practice guidelines for installation (PDF) and operations and maintenance (O&M) (PDF) in March. The Sunspec Alliance advances information standards for solar and energy storage. The TruSolar working group, consisting of 15 market leaders, developed credit-screening standards for commercial and industrial solar projects.
Complementary to the standardization efforts is SEFA’s consumer protection initiative. For members, SEFA provides a summary of important laws and regulations to greater enable understanding and compliance on the part of solar companies. For solar consumers, the property owners and lessees, SEFA provides guidelines for evaluating solar contractors. SEFA actively has been working to communicate with federal regulators who oversee consumer rights and benefits with a goal of informing regulators of the practices inside the solar industry.
“We want to get ahead of the wave so we’re self-monitoring as opposed to having issues persist too long and a regulatory body needing to step in,” Rottman said. When a sector is innovating, “the focus is usually on growth and not on compliance,” yet according to SEFA, the solar industry is trying to do both.
What is next?
SEFA is working with NREL to create a standard solar loan template to join the existing PPA and lease agreements. As costs have dropped, entities less reliant on tax equity and with access to cheap capital have begun to offer solar loans that compete with leases and PPAs. This means there will be more host ownership and less third-party ownership of solar systems.
A Lawrence Berkeley National Laboratory report published in June chronicles the reorientation of solar programs in response to solar loans, which it calls “the second wave of financial innovation in the PV residential sector.”
In the commercial arena, SEFA is creating standard RFP and procurement contracts, particularly for the MUSH market (municipal and state governments, universities and colleges, K-12 schools, and hospitals). Other future projects could include best practices for energy storage, O&M or solar thermal technology.
They might also include other variations on the PV contracts and other concept ideas from their membership for better financing the residential and commercial markets.
The current focus of SEFA is on facilitating financing and providing additional capital for the distributed PV solar market, but eventually it will expand to other forms of renewable energy, Rottman said.
Globally, countries are taking notice of the financing strategies and innovation in the United States. While solar is more widely adopted in other parts of the world than it is here, other countries are interested in the tax monetization model used here. Rottman reports seeing a real interest from Europe in United States solar financing practices. At conferences, SEFA leaders are getting asked about how they are making headway with projects and accessing capital.
Rottman said China has an initiative similar to SAPC. It is focused on creating standardized approaches and best practices. SAPC collaborates with the China group.
Technical standards for solar are already global. The principles and practices established here in the United States for contracts, compliance and consumer protection could be transferrable globally as well, Rottman said.