New Product: Solar Revenue Puts

This article was originally published in Chadbourne & Parke’s October 2016 “Project Finance Newsire”

By Richard Matsui, Jason Kaminsky and Jared Blanton, with kWh Analytics in San Francisco


The solar market needs a revenue put like what is now used to finance merchant gas-fired power plants, except it would cover output rather than price risk.

Such a put would lead to higher advance rates for solar project debt and possibly also tax equity.

The insurance market is the natural venue in which to place this product.


While the multi-year extension of the federal investment tax credit has reduced market risk, solar companies nevertheless continue facing challenges in financing projects and securing cost-effective project debt.

The deterioration of the yield co model and the liquidation of industry giant SunEdison point to a need for a “back-to-basics” approach to securing capital. With these recent crises fresh in investors’ memories, corporate debt is increasingly difficult to raise. Firms are now focused on raising capital against the cash flows of their existing assets, highlighted recently by the $305 million sale of future cash flows SolarCity completed for a 230-megawatt portfolio of residential, commercial and industrial PV projects.

New financial instruments, such as energy hedges, that facilitate increased capital flows would be highly welcomed in this industry context. But new financial instruments require a new depth of understanding about solar risks.

At its most basic level, cash flows in the electricity generation business are a function of two factors: the price of electricity multiplied by the quantity of electricity. This basic equation applies across all electricity sectors. With gas-fired generators, the quantity of electricity produced is controlled by the plant operator. The unknown part of the equation — the risky part — is volatile prices for electricity sold on the wholesale markets.

For solar, the problem is reversed. With zero marginal cost to produce a unit of energy, there is no price risk with a photovoltaic system. Well-structured PPAs ensure that the electricity delivered will be sold at an agreed-upon price to an offtaker with a strong balance sheet such as utilities, big-box retailers, or residential customers with high credit scores. The unknown variable in the equation is the amount of energy produced. In other words, uncertainty in solar production is the real risk.

Uncertainty chiefly comes from two sources: weather and system quality. Cloud cover and other weather patterns are major contributors to inter-annual weather variability, in addition to inclement weather events such as snow and hurricanes. In addition to weather risk, the quality of the photovoltaic system itself is variable due to the choices between hundreds of module manufacturers, dozens of inverter brands, thousands of different contractors, and varying O&M programs. All of these variables create millions of permutations that add uncertainty to the expected energy output of a project.

This volatility, without widely available data to quantify it, is the reason lenders assign conservative coverage ratios for solar projects. Independent engineers provide lenders with projected energy output, but these are only opinions — estimates that are not guaranteed.

Volatility in cash flows is not a new problem. Other asset classes have faced similar financing challenges and have overcome them through independent, industry-wide databases of historical performance. There is an opportunity to combine data with strong balance sheets to create new financial products that transfer risk away from the solar projects and into the hands of well-capitalized specialists like insurance companies; it is not dissimilar to what happened with revenue puts for combined-cycle gas-fired power projects.

Natural Gas Hedges

An instructive example can be found in the experience of gas-fired generators. These generators smoothed out the volatility in the delta between electricity revenue and the cost of inputs through hedges called revenue puts.

An essential primer on the revenue put was covered in the article on page 38 of the November 2015 Project Finance NewsWire by Chadbourne attorneys Robert Eberhardt and Monika Szymanski. As described by the authors, a revenue put operates as insurance against volatile wholesale power prices for power project owners. A revenue put establishes a floor — a minimum revenue amount — for a merchant gas-fired generator. If the revenue from electricity delivered does not meet that floor in a given period of time (typically a year), then the hedge provider pays the difference.

The revenue put became prevalent in the immediate aftermath of electricity market deregulation in the late 1990s when merchant-based projects were being proposed and the price of natural gas subsequently increased. Revenue puts have become an essential component of most project finance deals involving combined-cycle gas-fired power assets.

Applying a similar hedge to solar, wrapping not the price of electricity but rather the expected power production of a project, would substantially lower the cost of capital by allowing lenders to increase project leverage.

Because this concept is not new, a project developer today can go to any number of financial institutions and negotiate a production hedge. But because that hedge provider does not possess a strong understanding of solar production risk, it will require prohibitively expensive premiums, if it agrees to take on the risk at all. What is needed in combination with a balance-sheet provider is quality industry-wide performance data that allows for actuarial analysis and deep understanding of the risk.

Increasing Leverage

The liquidity challenges facing the solar industry create fresh urgency for equity investors to raise greater amounts of cheaper debt. The uncertain outlook for corporate credit has forced developers to be more creative in securing project finance.

The challenge is to change the status quo of conservative underwriting to allow for more debt to be safely placed within a project finance transaction. For developers, leveraging project deals frees up equity that can be more optimally deployed toward other business objectives. The more leverage they can stack on project deals, the better.

Coverage ratios in today’s market are typically in the 1.3x to 1.4x range, providing debt for roughly 75% of the projected cash flow of a project. These coverage ratios fall in this range because that is what lenders are comfortable providing given their understanding of the risk presented by solar projects or portfolios of projects. At their core, coverage ratios address perceived volatility in cash flows.

Solar assets today have lower advance rates than aircraft leases, student and auto loans, mortgages, and even credit cards.

Part of the perceived risk is the long-term nature of solar assets. The most comparable of these asset classes might be mortgages: it is a long-term cash flow secured by an asset. Mortgage-backed securities, incidentally, have advance rates of 99%, largely because there is an independent third party with a vast depository of historical performance data on US mortgages that allows for data-driven predictive risk modeling.

The prevailing approach to underwriting loans in solar forces developers to commit pricey sponsor equity to fill the remaining project capital requirements. A floor on energy production, backed by a strong balance sheet provided by the global insurance market, would transfer production risk away from the project finance transaction and result in lower coverage ratios and increased project leverage.

The global insurance market has been used before to secure capital in the solar market. Lenders have reduced exposure to investment tax credit recapture with an insurance product specifically tailored to this market. Recapture insurance unlocked new value in solar project finance by enabling securitizations. Similarly, a production floor would increase leverage and lower equity contributions, reducing the overall cost of capital for solar projects.

The solar industry has seen that strong balance sheets can lead to better terms on debt. Transactions have been completed where diverse corporate balance sheets can wrap solar production risk to achieve a lower cost of capital. The challenge today is how to price the risk effectively for a disinterested third party in a way that creates value for both project sponsor and lender. Traditionally in the insurance market, historical data and actuarial analysis provide the means to correctly price risk.

Insurance Market

A credible production guarantee that captures the drivers of volatility — including weather, equipment performance, O&M practices, etc. — is an effective means of risk transfer that makes the cash-flow profile of solar projects much more predictable.

As has been demonstrated by recapture insurance, having specialty insurers in solar project finance can add value to these structured transactions. For solar, attracting this kind of balance sheet, likely in the form of the global reinsurance market, requires a missing ingredient: data. In order for a provider to feel confident that it understands the risk being transferred to its balance sheet, it needs an actuarial analysis informed by historical, industry-wide production data.

The benefits of such a financial transaction are clear for both asset owners and project lenders.

For lenders, the reduction in volatility takes away the need for conservatism in loan structuring. Having a credible third-party backstop would enable lenders to reduce their risk and extend more capital in each deal.

For asset owners, the benefit of increased leverage means a lower proportion of project capital from sponsor equity and subsequently a lower cost of capital. For the solar industry more broadly, simplified underwriting analysis would attract more investors into the space, potentially reducing the cost of capital even further as more lenders enter the market.

We have observed that as other asset-based markets have matured, they have been able to secure more debt because the variability of those assets was accurately quantified by robust data analysis. Solar is still seen as highly uncertain, thus the high cost of capital today. Simplifying the investment thesis by allocating risk to entities that understand it best is a necessary step in solar’s progression toward a more established asset class.

Fed Rate Increase: Tilting scale back to fossils? Maybe not.

Bloomberg New Energy Finance chief editor Angus McCrone had a sobering piece last week on the potential impact on renewable energy financial investments in the event of an increase in interest rates by central banks. And with news this morning that jobless claims hit a near 40-year low, the probability of a rate hike seems substantially higher than it did even yesterday.  Higher interest rates from central banks, especially the Fed, would necessarily lead to higher cost debt for solar and other renewable project financings. It is a stark reminder how market and political uncertainties, well beyond the scope of solar’s ability to influence them, can have serious implications for investors and asset owners alike.

McCrone demonstrates the point with an assumed 2% increase in the all-in cost of debt:

Let’s look at the impact higher interest rates would make, compared to the H1 2016 LCOE estimates. If all-in costs of debt were to rise by 200 basis points, this would raise the LCOE of a U.S. solar project by $7, to $94 per megawatt-hour, assuming it was financed pre-construction with a debt-equity ratio of 70:30 and a 20-year loan… And by the way, if you think a 200-basis-point rise in debt costs sounds extreme, and therefore very unlikely, I would point out that this would only return all-in borrowing costs in northern Europe to where they were in 2012.

These estimated increases in LCOE, of 9 percent or so, would not kill renewable energy stone dead –far from it. But they would tilt the balance back towards coal and gas (and biomass), where the upfront capex is a smaller fraction of lifetime costs and where operating-stage expenses, notably the purchase of the fossil fuel feedstock, are a far bigger part.

I don’t have any particular insight on whether or not a 200 basis point increase in the near future is a real possibility.  But given uncertainties in the market — particularly uncertainty surrounding the November U.S. presidential election — combined with an improving economic outlook, it doesn’t seem at all out of line.

What if there is an opportunity to shield against a 200 basis point increase?  In a rising interest rate environment, all investors (both debt and equity) will try to maintain their rate premium above the risk-free rate, and therefore all forms of capital get more expensive. The scenario above assumes that a 70:30 Debt-to-Equity (D/E) ratio is a fixed assumption — but what if we could raise the D/E ratio to something closer to 85:15 or even 90:10?   Although the cost of debt is higher, it would be offsetting substantially more expensive equity.  Increasingly leveraged projects, even under increased interest rates for lenders, would still be preferable.

By our calculations, the LCOE of a project can actually be reduced — even with more expensive debt — simply by challenging the leverage assumption.

But how do we get lenders to lever up projects?  The common view is that low advance rates are “just the way it is.” Lenders have appetite for solar risk, but they size to their downside and consequently assign very conservative coverage ratios for debt.

This is a challenge we’ve been working on at kWh Analytics. You may have heard last month that we raised a $5 million Series A. That part of the news got a lot of the headlines and we were obviously very excited about it. But also part of that announcement was the launch of a new production guarantee that we are now offering solar asset owner and lenders.

There are guarantees and warranties available to the average solar finance professional, usually offered by the EPC firm or the equipment manufacturers. What makes ours different, and more competitive than current offerings, is that it combines the industry’s most comprehensive database of historic project performance (that’s the kWh Analytics part) with the A-rated balance sheets of the global reinsurance market.  We contribute a hefty dose of actuarial analysis to underpin the underwriting to enable a lender to wrap all of the disparate risks of a solar project into a single energy output figure.

Our re-insurance partners are so confident in the actuarial analysis that our data allows, that they are able to competitively guarantee up to 95% of the output of a solar project or portfolio of projects. For a lender evaluating how to think about the risk of a solar project, the equation is now much simpler.  By transferring most of the production risk of projects to the global reinsurance market, lenders can confidently deploy more debt than the current 70:30 ratio up to as high as 95% and still be confident that their investment will be secure.

This would, assuming central banks do raise rates as posited by McCrone, mean that project developers are still paying a higher price for debt than under current conditions. But equity contributions would still be substantially more expensive. By replacing the equity contribution with more debt, the net result would still be positive for project financiers. And solar will remain more competitive than coal and gas.


Adding Value to Secondary Market Solar Transactions: A Case Study

The degradation rate of a solar project is a major assumption in developing the financial projections for a project. kWh Analytics was hired to perform an analytical study of a 200 MW+ portfolio to determine what levels of degradation can be identified by using actual, field performance data. To test the degradation rates, kWh utilized a research methodology developed by the National Renewable Energy Lab (NREL), and applied a modified technique to the subject portfolio, leveraging established principles into market-based applications. Download the link to read more about the details of the case study.

kWh featured speakers at Intersolar North America

This week the kWh Analytics team attended the Intersolar North America Conference, the world’s leading exhibition series for the solar industry and its partners. Along with other industry professionals, Richard Matsui (CEO) and Jason Kaminsky (VP of Partnerships) were honored to be speakers at multiple conference sessions, covering topics such as the bankability of solar and the “billion dollar opportunity” in solar asset management.

In this post, we wanted to share our thoughts on how data can both enable bankability and also be the foundation of a huge opportunity, by looking at how data has helped shape other industries. Although we have seen data be a key enabler in almost all major asset classes — everything from commercial mortgages to student loans and aircrafts — we focus in this post on two very different but high-growth segments of the market: residential mortgages and credit derivatives.

Data accumulation and percolation are fundamental to the success of any asset class. If we consider the mortgage market in the 1980’s, we see a data-leveraging opportunity that emerged then that is similar to the one we have today with solar. Like solar, mortgages were considered an esoteric investment class when they first came onto the scene, which created an opportunity for the company CoreLogic (then called LoanPerformance) to fill in the gaps in information and provide intelligence to investors. Their solution was focused on two key elements: trends in housing values and trends in financial performance of the mortgage contracts. Their gradual construction and distribution of an extensive database on the mortgage industry became one of the catalysts to growth in the mortgage debt market. Today, CoreLogic has data on more than 99% of the mortgages in the US and is a publicly traded company with $1.4 billion in annual revenue. As for the mortgage market? It is now a trusted industry with more than $14 trillion in debt outstanding.

Similarly, in the early 2000’s the credit derivatives market was small but promising. Credit derivatives are essentially insurance products for corporate credit in which a lender can transfer the default risk of a loan to a third party. This product was poised to become a big player in the financial ecosystem, however, its potential for growth was inhibited by the lack of independent data and transparency at the time. Founded in 2003, the company Markit took advantage of this position. The major inhibitor to growth in the early days was the inability to answer a very simple question: how do you price this new product? Markit’s first product, a pricing database to provide transparency into the pricing of transactions in the market, helped bring new investors into the segment. Secondly, they undertook the systematization of unique ID’s for credit derivatives in order to improve reference data on trades. With this project underway and an industry database established, the natural progression was the addition of key complementary databases. These were products and services that fit the market and helped either bring in more capital or improve transaction efficiency. Because of the development of these databases, the market for credit derivatives grew ten-fold in 3 years. Markit went public in 2014, and just recently merged with IHS to form what is now a $13 billion company.

So what do these stories say about the solar market? At kWh Analytics, we believe that the establishment of industry-wide databases can induce tremendous growth in the solar market, just as it has done for the mortgage and credit derivative markets. Currently, growth in the industry is hindered by the high cost of capital and the lack of information needed to improve investment decision making. While our current focus is on risk management for investors – the unique solar pain point that we can address – we understand the power that the data can bring to improve underwriting decisions and improve market efficiency. Similar to CoreLogic, we focus on analyzing and understanding both the physical asset and the performance of the financial contracts. Solar is unique in that there is risk carried in electrical performance, as well as payment performance. This makes it even more important to use data to help investors get a clearer picture into operational and financial risk, so that they can gain more confidence in the solar market. And with an industry database, complementary products and services that will either improve liquidity or improve transaction efficiency are sure to follow.

The potential for growth in the solar market is great, and the opportunity for data to improve liquidity and reduce the cost of capital is immense. As with the mortgage and credit derivative market, establishing an industry-wide database will transform the market and help investors and key stakeholders realize the bankability of this asset.


An Open Letter to Big Oil

Dear sirs:

With all the recent news about the oil slump, it’s OK to admit times are tough. The biggest immediate challenge is the price per barrel is down – here in California, gasoline costs as much today as it did when I first started driving. I recently filled up at Costco for an unprecedented $1.85 per gallon!

But oil faces much more long-term challenges as well, that don’t just affect the US markets. There’s been an increasing movement to evaluate your industry against the backdrop of climate change. The Church of England and New York’s state pension fund, who collectively own $1bn of Exxon stock, pushed through a shareholder resolution to assess the impact of climate change policy on your business. The New York attorney general has launched investigation into Exxon Mobil about hiding climate change science. The Paris Climate Change agreement, COP21, is being signed today, on Earth Day 2016.

Times are tough in solar, too. Our solar stocks are getting hammered. SunEdison just filed for bankruptcy. The Guggenheim Solar ETF is down 20% year-to-date. But the fundamentals of solar are strong – perhaps stronger than they’ve ever been – with the extension of the Investment Tax Credit and our industry’s continued ability to drive costs out of the system. Our stocks are down because we got a little overzealous with our financial structuring: just like the oil business, cheap capital is our lifeblood and the difference between success and failure, and we are learning the hard way that YieldCos may not be the solution for which we hoped. SunEdison simply overextended themselves and layered on too much debt. It wasn’t financially sustainable, and the market responded.

Unfortunately, the oil industry isn’t financially sustainable either. Citibank estimates that up to $52 trillion worth of oil and gas may be ‘carbon stranded’ through 2050, meaning that the oil and gas must be left in the ground to meet our climate goals – a material risk to an industry whose main business is to find, extract, refine, ship, and sell oil and gas. And the market is responding to these facts, too: it’s hard to miss the $3.4 trillion dollars that is being divested from fossil fuel stocks.

We often lash out at each other, pointing fingers at who gets more subsidies than the other, but I think that we actually need each other. Our solar industry is going through growing pains, with high levels of volatility, too-cute financial structures, and heady management teams. We’re still defining our market and how we fit into the existing utility ecosystem. Your stocks are up this year, but are facing long-term headwinds, climate change being first and foremost. We’re dealing with short-term pain while you are facing long-term threats.

Our worlds are quite similar: we both build long-term power assets, have to navigate the power markets, need large amounts of cheap capital, require innovation, and operate globally. The customers of our product are converging — in both the power plant business and within our transportation infrastructure.

Shell, BP, Exxon — it’s your innovation that helped get the solar industry off the ground in the first place, including some of the first solar modules (such as in the photo above). You all but divested of the business, but I think it’s time to reconsider. You desperately need to diversify your business, tell a positive climate change story to your investors, and hedge against stranded assets. More than half of the new power capacity added to the US last year were from renewables. Imagine how much influence you could have if you sat with us at the table when negotiating against utilities on net-metering policy or worked with Congress on a comprehensive energy strategy.

On the other hand, we need cheap capital, huge amounts of tax-equity, and experienced management teams. We envy your 2.7% debt rates and billions in tax payments each year. Your global operational expertise and long-term business planning would be an asset to us.

My belief is that the challenge is more one of culture than logic. In my brief stint as an employee at Chevron, I was told that working in the renewables division was a “CLM” – a “career limiting move” – since the management team consisted purely of oil and gas executives. Culture can be changed, and it starts at the top.

So, what to make of all of this? Well, the fundamentals are better than ever, but our stocks are down. Solar assets are cheap out of bankruptcy, after all. You have billions on the balance sheet and a need to rebrand your business. Now is the time for you to get back into solar and invest now in a hedge to your oil and gas business.

As such, we call on each oil major to appoint a Head of Renewable Energy that reports to the CEO and commit 10% of their capital expenditures budget to renewables in 2017. For the top three oil companies (Exxon, Chevron and Valero), that’s roughly $5 billion for 2017, a meaningful contributor to the renewables project finance market.

kWh Selected for Department of Energy’s Orange Button℠ Initiative

We are honored to announce that kWh Analytics has been selected by the U.S. Department of Energy SunShot Initiative to participate in the Orange Button℠ initiative. This industry-led collaboration is aligned with kWh’s broader mission to establish clear data standards, provide transparency for the solar industry, and broaden access to renewable energy. A portion of Orange Button’s $4 million grant will help kWh Analytics implement data driven solutions and boost solar bankability. Other Orange Button grant recipients include the SunSpec Alliance, SGIP, and the National Renewable Energy Laboratory (NREL).

Similar to how the “Green Button” initiative reduced costs by standardizing data from electric utilities, the Orange Button initiative seeks to reduce solar costs by improving access to and quality of data across the project life cycle. By establishing standards in which rapid data exchange can move across the value chain, leading energy companies can drive out inefficiencies in the market, establish greater transparency, and support stakeholders in making smarter investment decisions.

The U.S. Department of Energy SunShot Initiative has supported and launched these “Button” initiatives to establish a collaborative national effort, under a unified brand, to drive innovation and cost-competitiveness within the solar market. Orange Button aims to accomplish these initiatives through engagement, standards development, and data exchanges. To support this effort, kWh Analytics is bridging the gap between solar firms by developing the critical infrastructure needed to facilitate transmission of solar-related data between developers, investors, and other key stakeholders.

Founded in 2012 by longtime solar veteran Richard Matsui, kWh Analytics seeks to support the growth of solar utilization through increased transparency and reduction of soft financing costs. “Lack of data standards has been a key factor in holding the industry back from its true potential,” said Matsui, CEO of kWh Analytics. “At kWh Analytics, we are proud to be part of a team that is leading the industry towards greater efficiency. This initiative is an extension of our company’s core vision of bringing down the cost of capital for solar assets and establishing greater cost-competitiveness throughout the industry.” Emphasizing the need for data-driven transparency in unveiling the true performance of solar assets, kWh serves to transform the ways in which investors identify opportunities and accurately price risk in this exciting new asset class.

About kWh Analytics

kWh Analytics is the industry leader in risk management software for solar energy investments. Their flagship software product, HelioStats, manages project-level data from more than 50,000 solar power projects in the United States, creating the industry’s largest independent database of solar asset performance.  kWh Analytics strengthens the solar industry by increasing transparency, improving investment decision-making, and enabling efficient risk management.

About the SunShot Initiative

The U.S. Department of Energy SunShot Initiative is a collaborative national effort that aggressively drives innovation to make solar energy fully cost-competitive with traditional energy sources before the end of the decade. Through SunShot, the Energy Department supports efforts by private companies, universities, and national laboratories to drive down the cost of solar electricity to $0.06 per kilowatt-hour. Learn more at

Can Data Rescue Solar Stocks? Google Is Leading the Way

Published originally on GreenTech Media by Jason Kaminsky

Imagine, for a moment, that you are an investor and somebody is in your office pitching you on magical beanstalks. The magical beanstalk industry is growing, and you have been asked to invest in a plot of land that will be developed into a magical beanstalk farm.

This all sounds great, but you’re new to magical beanstalks, and as an investor you need to weigh risk versus opportunity. How many of the plants die each year? Which species of magical beanstalk is the most reliable? What happens to your investment if the USDA changes its rules? Farmers claim that the investment is safe, but you’re getting spooked, and the important data — the data for your underwriting model, such as annual yields, geographic variance, death rates — just isn’t being shared. You wonder: Are they hiding something?

Solar theories and truisms

Of course, this story is an allegory for the solar industry. To the outside world, we are the growers of magical beanstalks — we literally generate value from the sun — and still the new kid on the block in the finance world. Just look at how we are classified: solar falls within the “esoterics” category for securitizations right next to rail cars, cell towers, and drug royalties.

As an industry, it’s our job to make investors comfortable with solar. There are truisms in the consumer finance market about how different loans perform; for example, even if homeowners default on a mortgage, they may still pay their auto lease because they need the car to get to work. We haven’t developed truisms for solar, so we push a lot of theories on how these investments will perform.

For residential solar, the investment opportunity is a hybrid of consumer finance and project finance. Most of the time, a consumer lender needs to understand consumer behavior, and maybe a bit about the asset they’re financing. Solar investors need to understand not only how the equipment will perform and the regulatory environment in which these projects operate, but also how consumers will behave given different performance and savings profiles. We believe that this savings element is so unique to solar that it may be the most important indicator of delinquencies and default.

When faced with uncertainty, data is a pathway to understanding and acceptance. Without data, we see investors either avoid the market entirely or severely “haircut” the cash flows needed to meet their return. For example, the average advance rate for solar securitizations is 75 percent, compared to 92 percent for autos and 99 percent for mortgages. Data opacity also results in conservative assumptions: Kroll assumes 0.75 percent annual degradation and stress-tests cash flows at a 1.2 percent degradation rate.

To finance the projected addition of 69 gigawatts of solar in the U.S. by 2022, it is our responsibility as an industry to effectively leverage the data that does exist.

Thought leaders at organizations like Google, PNC Bank and Sunlight Financial are working to effectively use their data for risk management and gain competitive knowledge from the industry’s largest independent database of solar data.

Access to metrics

Other industries use data to develop and secure investor confidence. In the home mortgage industry, a firm called CoreLogic retains an industry-wide database covering 99.8 percent of the mortgage market. A variety of industry stakeholders use these databases to better understand how mortgages perform across a broad spectrum of scenarios. In the early 2000s, CoreLogic provided insight into this market when investors were having difficulty understanding the risk of prepayments, and this allowed the mortgage business to grow. After the recent mortgage crisis, investors are today focused on the risk of delinquency and default, and they leverage industry data to inform their credit models. As a result, mortgages remain a trillion-dollar market.

Experian replicated this model for consumer credit. Trepp does this for commercial mortgages. Even the nascent peer-to-peer lending industry has a firm, Orchard Platform. The evolution of an independent, vertical-specific industry database is an inevitable step in the maturation of any asset class.

We see the need for this role in the solar market. To enter the market, investors need to have transparency into how large pools of solar projects are performing under different conditions, and to evaluate the “solar farmer” compared to an industry standard. Importantly, this data can be used without giving up a competitive advantage; once getting comfortable with the market as a whole, investors are still going to seek out the best brands, the most efficient developers, and the highest quality servicers. By way of comparison, Wells Fargo is one of the world’s largest mortgage originators, and it also collaborates closely with CoreLogic in the sharing and use of mortgage data.

But today, the solar industry doesn’t use our data effectively. It’s nearly impossible for an investor to find real industry data to include in underwriting models or to become more comfortable with the market.

With support from the U.S. Department of Energy SunShot Initiative, KWh Analytics created an industry-wide solar project database including nearly 70,000 operating solar projects. The company gathers data on how these assets perform both technically and financially, and quantifies these results on an anonymized basis for the benefit of solar stakeholders.

Data to the rescue

We know from history that independent data aggregation can move an industry forward. It has the power to educate, the credibility of independence, and the benefit of volume. It can allow existing investors to better manage their exposure and bring new investors into the market.

Solar stocks are being hammered in large part due to liquidity challenges, even as the companies in the space are fighting to rebuild our energy infrastructure. We need to use all of the tools at our disposal to increase the availability of capital. A robust and transparent use of data is a necessary solution in our toolkit.

Nevada isn’t alone: California’s retroactive solar legislation

By: Jason Kaminsky


While everyone is talking about Nevada’s recent battles on net metering, few are discussing California’s impending electricity rate reform. Unlike net metering, shifting electricity rate structures are inherently retroactive, and will have a significant impact on the solar savings of all solar homeowners in California. Quantifying this risk factor is an important analysis for investors in distributed solar portfolios.

For those of us in the solar industry, the recent overhaul in Nevada has been a story to watch. While there was a moment when it seemed like the entire industry revolted, NV Energy and the Nevada PUC are beginning to back down from their position- at least as it pertains to what is considered by many the most offensive piece of the legislation, which is that it punitively taxes existing solar customers retroactively. (If you need additional background, the New York Times wrote a great overview article yesterday titled “Nevada’s Solar Bait-and-Switch.”).

If we turn to California for a moment, the state with the largest population of residential solar customers, most of the news coverage of late has been related to NEM 2.0 and how this will enable a stable base from which to grow the solar market in the state. (For more context here, we find the dry facts the easiest to understand – and thus refer the interested reader to yesterday’s summary by law firm WSGR.)

With that as context, there was plenty of coverage of CA Rate Reform when it was approved last July, but it seems worthwhile to loop back to those discussions since, to some extent, rate reform is a policy that is being applied retroactively (but not discussed as such.) Yes, it’s complicated, and yes, it retains the full net-metering credit, but it still has the unique distinction of impacting customers under NEM 1.0 — and thus the majority of California solar customers that have been financed to date. At the very highest level, this changes the economics for all customers of SDG&E, PG&E, and SCE in a few ways:

  1. A flattening of the rate tiers through 2019, with the top marginal rates dropping by about a quarter. We covered this in an article for Chadbourne in July.
  2. 2-10% of the largest electricity consumers will pay a “super user” surcharge
  3. A minimum bill of $10 per month
  4. A mandatory shift to time-of-use rates in 2019 (with the opportunity to opt-out)

As a result of the ruling, economics for customers have changed as recently as Jan 1 of this year; the very biggest “super uses”may actually see improved economics from their solar system, while the majority will see reductions in their marginal utility rates until 2019 (and thus eroded solar economics). Customers offsetting most of their load will realize a bigger utility bill as a result of the minimum bill; PG&E explains on their website that solar customers offsetting all of their bill will see $66 / yr in additional expenses, a result of the increase in minimum bill to $10/mo from $4.50/mo. Unfortunately most homeowners won’t even realize this until they get their annual true-up in a year.

Thus, the embedded risk of an operating portfolio is not only a function of where that system is located and when it was built, but also what percentage of the customer’s load it offsets and a host of other variables.

Unfortunately, the CPUC also set the tone that fixed surcharges will be on the table for future rate proceedings, which are expected to impact NEM 1.0 customers as well if and when they are approved.

Most solar investors acknowledge that exogenous factors – including policy and utility rates – are outside of the control of their solar industry business partners, but assume that changes in homeowner economics will impact delinquencies and defaults. These risks can be managed if they can be measured, and judicious investors will need to adapt their underwriting and portfolio surveillance capabilities to address the nuances of the solar markets. Standard portfolio surveillance practices (for example, by monitoring the trustee reports to evaluate cash flows) and underwriting tools are inadequate for solar, and will be replaced by advanced analytics that allow for earlier evaluation about the risk-return of distributed solar portfolios. Solar production and homeowner economics will be known well in advance of customer non-payment; why wait for it to be a problem before you quantify the level of the risk?