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.