Demystifying Solar Risk Management: A Primer for Sponsors and Financiers

Webinar recording available from SEIA.

Join us for a roundtable discussion focused on the newly released Best Practices in Solar Risk Management report, co-authored by SEIA and kWh Analytics.

Recognizing the unique needs of both sponsors and investors, a panel of industry experts will:

  • Discuss what happens within the bank environment to manage risk after an investment has been made
  • Outline the industry standard best practices of leading investors such as U.S. Bank
  • Demystify solar risk management and discuss how sponsors can become their bankers’ preferred clients

Financiers will learn best practices to guide the growth of their solar investment practice.

Sponsors will learn about the bank’s risk management perspective, why reporting obligations are so important, and gain insight into questions such as how U.S. Bank, a leading tax equity investor, underwrites and monitors the operational performance of their investments.

Building on the Best Practices in Solar Risk Management report, the goals of this webinar are to improve transparency for all stakeholders and ultimately create a more efficient industry.

Moderator

Keith Martin, Co-head of Projects, Norton Rose Fulbright

Panelists

Jason Kaminsky, Chief Operating Officer, kWh Analytics

Mike Mendelsohn, Senior Director of Project Finance and Capital Markets, SEIA

Ed Rossier, Director of Project Management, Renewable Energy Investments, U.S. Bank

kWh Analytics Presents on Opportunities to Improve Solar Data Using DOE’s Orange Button

Originally posted on Solar Power World.

At a Stanford University solar conference focused on bringing together universities, industry, and the U.S. government, kWh Analytics Data Scientist Adam Shinn introduced upcoming industry-wide advances made possible through cross-sector collaborations.

“One of the biggest challenges facing our industry right now is the soft cost of solar,” said Shinn, pointing to a graph from the 2016 report by the Lawrence Berkeley National Laboratory. “The decreases in hardware costs over the years are represented in a significantly reduced cost of solar. Now soft costs—including installation, maintenance, overhead, and financing—comprise the majority of the total installed price of solar.” The problem of solar’s disproportionately high soft costs stems from an industry-wide problem: the absence of quality, standardized, aggregated data.

Enter Orange Button, a program of the U.S. Department of Energy SunShot Initiative. Orange Button supports the creation and adoption of industry-led open data standards for seamless data exchange across the solar value chain. The Orange Button project is an ideal example of collaboration across multiple segments: government agencies, the private sector, non-profits, and industry consortia.

Orange Button awardees and DuraMAT Workshop presenters SunSpec Alliance, kWh Analytics, and the National Renewable Energy Laboratory (NREL) are each contributing their particular strengths towards this shared goal of standardizing the way solar data is collected and exchanged.

SunSpec Alliance, a trade alliance of more than 100 solar and storage distributed energy industry participants, is taking the lead on formulating the data taxonomies. kWh Analytics, a solar data analytics company with the industry’s largest independent database on solar asset performance, is supporting the adoption of the data standards through development of a data format translation software tool. NREL, the only federal laboratory dedicated to renewable energy and energy efficiency research and development, is developing tools to establish a marketplace for standardized solar datasets.

Two major solar industry associations—the Solar Energy Industries Association and the Smart Electric Power Alliance—are also active Orange Button participants.

If the solar industry adopts a unified data standard, it would revolutionize the way solar is financed, reduce market inefficiencies, and lower soft costs and the overall cost of solar for consumers. As the industry matures and the problems become more complex, early examples of cross-sector collaboration will drive industry improvements and help establish the basis for future innovative partnerships.

Solar Refinancing: When Asset Management Steals the Show

Originally posted on Renewable Energy World.

We all know that asset management is in many respects the under-loved function within a solar company. Solar asset management involves the ongoing management of financial, commercial, and administrative tasks necessary to ensure the optimal financial performance of a solar PV plant or portfolio of plants. From an executive-level perspective, it’s easier to invest in developing a new solar project, buy an early-stage project, or invest in a project finance team to try to get better financing terms (as these functions are understood to drive value) than it is to invest in asset management.

In most businesses, revenue is the clearest driver of profitability. So, it’s an easy decision for executives to invest in their sales activities. Similarly, in solar, acquisitions and project finance are commonly prioritized, whereas asset management is oftentimes an afterthought.

However, there is at least one point (often multiple points) in every asset’s 25- to 30-year life when asset management steps into the limelight: the refinancing of a solar project.

What is refinancing? Refinancing is when you take an existing, operating asset and then get a new loan from your bank—ideally with better terms, since the project has been de-risked.

Taking a step back to understand financing: Banks have appetite for solar investments, but loans are carefully structured to avoid even the smallest risk of default. Consequently, banks size deals to the asset’s downside and assign conservative terms on loans. This conservatism results in an inefficient pricing of risk—banks apply about a 25 percent haircut for commercial and utility-scale solar projects, and a nearly 35 percent haircut for residential portfolios — known as debt service coverage ratios).

Today, the single-biggest cost of a solar project is actually an invisible one: the cost of capital. In this context, refinancing is particularly valuable because it presents an opportunity to reduce that single-biggest cost. What magnitude of savings can be gained from refinancing? According to Ahana Renewable’s Director of Asset Management Philip Williams, “savings could be up to a couple percentage points better than the original terms,” which translates to tens of millions of dollars of value on a large portfolio.

While the total installed price of solar has continued to decline, non-module costs now comprise the majority of the total installed price of solar. Since 2010, reductions in inverter and racking costs represent a smaller share, roughly 20 percent, of the decline in total non-module costs. The sizeable remainder can thus be attributed largely to declines in various soft costs. Credit: Lawrence Berkeley National Laboratory.

Asset management is critical for refinancing. Williams noted, “when refinancing solar assets, a lender is about to shine a light on every dark corner of your portfolio. So, from the very start, you actually need to think years ahead, to consider what software systems you need, what first-class preventative maintenance you want your O&M to perform, how this information will flow into your existing data infrastructure, etc.”

It’s true: To justify better terms, you need to prove to the bank why this is a better asset. You need to have strong documentation of your warrantees, the energy production data must be centrally managed, you have to make sure you have good O&M records of how you’ve taken care of this plant, and so forth. Assets can only be refinanced if they are proven to be higher-quality assets than they were last assessed several years ago.

Furthermore, new opportunities have recently emerged for assets with good asset management. For example, my company offers an insurance product that guarantees up to 95 percent of a project’s estimated energy production, which reduces the “haircut” that a lender would normally assign. But if an asset is falling apart, no lender or insurance carrier will be willing to touch it.

Save

Save

Save

kWh Analytics & NREL Collaboration Wins Award at 2017 PV Reliability Workshop

“Rate of Degradation Tools: Open-Source Degradation Analysis Toolbox,” a joint collaboration between kWh Analytics and NREL, was recognized as one of the Top 3 posters in its session at the 2017 PV Reliability Workshop. To download full poster, click on the image below.

Open invitations for people who are interested in using or contributing to this software are available in this public repository: https://github.com/kwhanalytics/rdtools.

Coverage of this poster can be found on Solar Power World.

shinn_pvrw_2017

Save

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.

 

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.

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

kWh Analytics featured speaker at ABS East 2014

kWh Analytics CEO Richard Matsui joined 3,000 structured finance professionals in Miami to discuss the nascent solar asset class. With the continuation of the low interest rate environment, the investment community was eager to learn about this new investment opportunity–but were also equally wary of the risks inherent in this new frontier.