Re-imagining US solar financing, a report commissioned by Reznick Group

Executive Summary

US solar projects have historically been bankrolled by some combination of energy sector players, banks, and the federal government, but the landscape is rapidly changing. New business models are emerging with an emphasis on third-party financing. New investors, including institutional players, are entering. And new financing vehicles such as project bonds and other securities are being assembled to tap the broader capital markets. This report, commissioned by Reznick Group and undertaken by Bloomberg New Energy Finance, describes the ongoing evolution of US solar financing: where the market is today, where it is heading, and what’s behind this important transition.

The key findings are as follows:

● Maintaining US solar deployment growth will require substantially more investment. Asset financing for US photovoltaic (PV) projects has grown by a compound annual growth rate of 58% since 2004 and surged to a record $21.1bn in 2011, fuelled by the one-year extension of the Department of Treasury cash grant programme. But funding the next nine years of growth (2012-20) for US PV deployment will require about $6.9bn annually on average.

● Traditional players are taking a smaller role. Regulations, primarily in the EU, are curtailing banks from providing long-term debt as easily as previously. In the US, the Department of Energy loan guarantee programme’s expiry has meant less direct federal government support.

● New models are emerging. Distributed generation is driving innovation and creating new models for solar deployment. Few homeowners can afford the upfront cost of a solar system, giving rise to third-party financing models, which allow them to ‘go solar’ with little or no money down. These models also give investors a diversified opportunity to back solar.

● New investors are taking interest. Institutional players such as insurance companies and pension funds seek stable, long-lived assets to match long-term liabilities; some utilities may seek solar portfolios to offset revenue loss from distributed generation. On the development side, infrastructure funds could achieve targeted returns by bringing these projects to fruition.

● New vehicles are taking shape. Such structures aim to make solar project investments more liquid by allowing developers to tap the capital markets. Options include project bonds, solar real estate investment trusts (S-REITs), public solar ownership funds (‘yieldcos’), and others.

● The cost of capital will fall. Solar equipment prices have dropped by more than half since the start of 2011 but financing costs matter too. New financing vehicles and new investors across the solar project lifecycle – development, construction, commissioning, and then long-term operation of assets – will cause the costs of equity, debt, and even tax equity to migrate down.

● This is happening now. Institutional investors have bought solar bonds; publicly listed renewable asset funds exist; solar portfolios are poised for securitisation; and pension funds have shown willingness to buy and own renewable assets.

● Policy could accelerate change. Surveyed investors seek stronger SREC programmes, new standards, more flexible tax credits, and sanctioned high-liquidity vehicles such as S-REITs.

Please download the full report for more detailed analysis.

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