NREL-Led Efforts Help Bring Financing to Solar Projects
NREL is helping remove barriers that prevent pension and mutual funds from investing in solar power.
From examining the source of costs and estimating specific project costs, to helping large institutional investors direct their funds into solar projects, NREL works on many aspects of solar financing.
Global investment in solar power reached nearly $150 billion in 2014, a record achievement that included $14.8 billion invested in the United States. But public financing, such as stocks and bonds, represents a relatively small percentage of that investment: Only $8.3 billion in public funds were invested in solar power globally, with the United States dominating that total with $5.9 billion in public market investment. Although the 2014 investment levels were at an all-time high with an increase of 73% globally and 76% in the United States from the year before, they pale relative to the roughly $73 trillion in public investments held by central banks, pension funds, and sovereign funds around the globe. So how can we get more public investment in solar power?
"There's a large pool of money that does not invest in renewable energy assets because the investors are not confident on how well the assets perform in the field, and there's no easy way to trade in and out of security positions," said NREL Senior Financial Analyst Michael Mendelsohn.
To help connect that pool of money with the solar projects that need low-cost financing, NREL is coordinating the Solar Access to Public Capital (SAPC) working group, which consists of 425 members representing many of the leading solar developers, investment banks, rating agencies, engineering firms, and accounting firms in the United States, as well as some data and analytics firms, all working together to facilitate wide-scale investment in solar assets.
"The basic idea is that, through contract standardization and the use of best practices for solar power system installation, operations, and maintenance—as well as good-quality data on asset performance—we can allow the cash flows from solar projects to be pooled into tradable liquid securities and give investors the tools to conduct the due diligence and analysis necessary to build confidence in how these investments will perform," said Mendelsohn.
Just as mortgages and auto loans are pooled into securities that are easily bought and sold, with a price set by the market, solar project loans could also be pooled into such liquid securities.
"There's really no wide-scale investment mechanism for solar power that's easily traded," said Mendelsohn. "This builds the foundation, at least, for these liquid securities to be formed."
Building a Support Structure for Solar Loans
While working to build such wide-scale investment mechanisms, NREL is also helping to open lending opportunities for individual solar projects, in part by helping the banking industry understand solar technologies and their performance. NREL began addressing this issue through the Banking on Solar working group, which pulled together 100 leading banks, credit unions, regulators, state green banks, developers, and analytical firms to build consensus on appropriate underwriting principals and develop a support structure for solar loans. Banking on Solar is now a subcommittee of the SAPC working group, which is funded by the U.S. Department of Energy's Sunshot Initiative under its Advanced Financing to Achieve Sunshot program.
The main stumbling block for solar loans is assessing the risk of the investment, so the SAPC working group also focuses on lowering that risk by developing best practices in system installation and maintenance, constructing performance datasets to understand and mitigate any production risks, and engaging rating agencies to facilitate secondary market sales or securitization of solar loans.
NREL engineers also get down and dirty with specific solar projects, analyzing proposed projects for their capital costs, operating costs, power production, and overall economic performance, as well as any risks involved, to help investors assess the projects. Again, this is a case of lowering the perceived risk for investors to help the projects gain financing.
NREL's work on assessing solar projects and lowering the risk of solar loans should make solar projects easier to finance. Furthermore, pulling together a large number of solar loans will provide an easily traded, liquid investment vehicle for pension funds, mutual funds, and other investors. Across the entire spectrum—from individual projects to tradable liquid securities—NREL is working to channel investments into solar projects, helping drive down costs and increase deployment of solar power throughout the United States and the world.
—Written by Kevin Eber