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?

kWh Analytics receives prestigious award from the Department of Energy

kWh Analytics is proud to announce that we are the recipient of a Department of Energy grant under their Technology to Market funding program. This award provides continued validation of the kWh Analytics approach to utilizing industry data as a means to improve the underwriting and risk management of distributed solar portfolios.

A summary of our project award, entitled Solar for the Other 35%, is found below:

About 35% of American citizens hold “non-prime” FICO scores < 680, which restricts their ability to take on a solar lease, power purchase agreement (PPA), or loan that has enabled tens of thousands of other “prime” citizens to go solar. Given the uniquely attractive nature of solar assets, kWh Analytics believes that there is a tremendous opportunity to use data analytics to prove that FICO is merely a contributing factor, rather than the only factor, that influences customer repayment. kWh Analytics will create the solar industry’s largest database of financial payment history for solar leases, PPAs, and loans, similar to what kWh Analytics has already done for solar energy production data under Incubator 8. kWh Analytics will also identify other key sources of data that could impact likelihood of repayment and integrate with those sources where possible. This data set will serve as a crucial pre-requisite for developing a statistically significant, independent understanding of how to safely underwrite solar in a way that also expands the total addressable market. Underwriting ratings and the underlying data can then be licensed to solar firms as a profitable service.

We are excited to be a part of the new cohort of innovative companies pushing the industry forward, and wish to extend congratulations to the other awardees as well! Learn more about all of the awards at the Department of Energy’s Technology to Market website.

 

Three Takeaways on Solar Securitizations from Infocast Capital Markets Conference

Last week, we were invited to participate in the Infocast Solar Capital Markets Conference in New York City. The event was well attended by issuers, underwriters, lenders, and service providers with lots of great discussion about the current and future state of the solar capital markets. We distilled the discussion to three key takeaways from the conference:

 

  1. Bespoke Transactions: Five securitizations have been issued so far; the first two securitizations were Cash Grant deals, and thus did not have the complications of tax-equity. These were followed by two deals that utilized lease pass-through structures, and the latest deal by SolarCity was providing leverage to partnership-flip transactions. Since each structure has unique impacts on the cash flow profile, each deal had to be written nearly independently. The latest SolarCity deal even had multiple tax-recapture insurance policies that had to be customized for each of their underlying partnership-flip deals. In short, these deals took longer and cost more to underwrite than should be expected in the future of the industry. Participants agreed that a simpler capital stack without tax-equity should increase efficiency for future transactions. Securitizations can take 3x longer to close than bank financing in today’s market.
  2. Ratings Agency Perspectives: Each of the ratings agencies commented on how they addressed the lack of historic operating data. A few interesting themes emerged.
    1. First, a distinction was made between a customer’s ability to pay and their willingness to pay. While utility bills could be considered a proxy for ability to pay, it says nothing about the customer’s value proposition. Moody’s commented that there isn’t a proxy for willingness to pay for a solar transaction, and thus meeting the customer’s value proposition of saving money is critical.
    2. Second, while losses from other markets are used as a proxy, solar is unique in that the system is attached to the home. We are in a tight credit environment where only high-quality borrowers are qualifying for solar systems and mortgages. The agencies expect another (looser) credit cycle to reduce the credit requirements for new mortgages, and thus that the credit quality of these portfolios will decline dramatically; Kroll said that they double the loss rates of their proxy portfolios to account for this credit deterioration.
    3. Third, the agencies assume that renegotiations over the course of these transactions and believe that customers will be comparing their transaction against the lesser of prevailing utility rates and new PPA contracts in the future.
  3. Data Transparency Can Lead to Liquidity: It was generally agreed that two types of data can help unlock liquidity in the market. First, the industry just needs to continue operating and seeing how these deals perform; as 20-year contracts, there is an inherent lack of data that shows how consumers will behave over the life of the transaction. The second type of data related to the existing data that has been collected in the industry. The lenders into securitizations specifically indicated that greater data transparency would lead to better liquidity and reduced interest rates, and we are proud that they highlighted kWh Analytics as uniquely positioned to provide this service.

We are excited to see where the securitization market moves and other ways that we can support these transactions with reliable, granular industry benchmarking data. The cumulative solar ABS issued to date is only $660 million, while $180 billion of asset-backed securities were issued in just the last year. The capital markets are poised to grow as deal structures become simpler, solar loans increase in volume, and data is more readily available on how these transactions perform across the industry.

Renewable Energy Asset Management Conference

This week we were pleased to participate in Infocast’s Renewable Energy Asset Management Conference in Carlsbad, CA. Jason Kaminsky, our Vice President of Partnerships, moderated a panel entitled Ownership Strategies for the New Breed of Investors. The panelists included Ty Bowman of Prudential Capital Group, Bill Cannon of Sumitomo, Andrew Kim from Goldman Sachs, Lisa Ryder of KeyBanc Capital Markets, and Mark Williams of PNC Bank.

In what proved to be a rousing discussion, the participants discussed their roles and requirements as investors in renewable energy. A few highlights from the panel include:

  • All panelists agreed that compliance obligations are ratcheting up for investors, and that internal oversight requires timely, accurate, and consistent reports. Compliance comes from all sides, including senior management, internal audit, credit, the OCC, the Fed, etc. One panelist shared that when a partner delivers reports at “5pm on the last day of the quarter”, it makes her job more difficult and lowers the desire to work with those specific partners in the future.
  • Ty Bowman of Prudential reinforced the idea that transparency is critical to the investor-borrower relationship. The investor community wants to help solve problems together with their partners, and investors often have seen things in their other portfolios that can help address problems that a different client may be seeing. Open communication and data sharing are often mutually beneficial.
  • Andrew Kim of Goldman Sachs stated that he doesn’t like the phrase “passive investor” and views his role as one of “active oversight.” This phrase really resonated with us, as it highlights the obligation that investors have to stay close to their investments, even if they’re not the day-to-day managers. Active oversight is one step beyond trust-but-verify, with frequent portfolio surveillance and engagement in the operation of the portfolio.
  • A number of the investors from the utility-scale market shared that commercial and industrial DG scare them from an asset management perspective due to the quantity of projects and the difficulty of underwriting / monitoring performance. The panelists agreed that you need strategic partners for asset management as the quantity of assets in the portfolio grows.

We’d like to thank Infocast for inviting us to participate in the conference. Thanks as well to Mark Williams of PNC, who gave us a shout-out for helping PNC with their asset management obligations through our HelioStats software platform.

Analyzing Solar Rooftop Portfolios

by Jason Kaminsky and Richard Matsui, with kWh Analytics in Oakland

Investors in rooftop solar companies and portfolios, and lenders to the sector, are using big data to draw useful insights and improve their valuation techniques, creating an opportunity for thoughtful developers to differentiate their operations by skillfully demonstrating transparency into the performance of their assets.

Read more

Our CEO’s Observations from ABS Vegas Panel Discussion

This past week, our CEO Richard Matsui joined 6,000 structured finance professionals in Las Vegas to discuss the latest trends in asset backed securities. He spoke on a panel entitled “Solar ABS Panel: Understanding Market Potential” that included Danny Abajian (Director of Structured Finance, Sunrun), Andrew Giudici (Senior Director, Kroll Bond Ratings Agency), and Manish Kapoor (Managing Principal, West Wheelock Capital). It was exciting to see a packed, standing room-only session of more than a hundred professionals on what is usually a slow Tuesday afternoon.

Read more