9 Aug 2011

Securities tied to PPAs could unleash trillions to fund large-scale solar, wind projects

Written by Jim Pierobon

Power purchase agreements, where individuals and organizations can own solar photovoltaic (PV) systems on someone else’s rooftop, have the potential to supply billions, perhaps trillions, of dollars of much-needed capital. The need is growing more acute in the U.S. as the Section 1603 Treasury Grant program is due to expire on December 31, 2011 and U.S. “stimulus”-funded programs at the federal and state levels run out of money.

While costs of solar module and balance-of-system components continue to decline, those ‘savings’ are not likely to bridge the gap to make new commercial and residential solar electric systems cost-effective enough.  Adding to the angst are pressures that governments are under to pull back on myriad incentives to address fiscal shortfalls and concerns about this month’s declines in the stock markets around the world.

A missing ingredient for large-scale projects is a role for commercial banks deploying securitized financing structures. The objective is to gather hundreds of clean energy projects and link them under long-term PPAs. The PPAs’ value is calculated and divided up into securities which are sold to investors seeking predictable returns.  PPAs that are sold could be bundled and securitized. The result could be huge pools of capital.

Qualifying project developers would be able to dip into a capital pool to finance solar rooftop systems. These securities could be split further into tranches and rated based on the project developers’ creditworthiness tied to the tranche. The riskiest tranches would garner the highest rates of return.

Banks, fund managers and credit rating agencies have been talking about this concept since 2007. The model they often refer to is the is the type of mortgage-backed securities market that went unchecked leading up to the 2008 stock market plunge. But while mortgages tied to inflated real estate values and uncreditworthy borrowers can decline, securities tied to the the certain demand for power face a lower risk profile, provided the project developer stays in business.

Solar systems such as this 25 megawatt facility in DeSoto, Florida my be a vanishing breed in the U.S. with the expiration of a key Treasury grant program at year-end 2011. Renewable energy securities could fill the gap. Credit: Florida Power & Light

“As with any asset class it’s really about getting the first (deal) done,” Andrew Giudici, director of corporate ratings at Standard & Poors, told Greenwire recently (subscription required).

So who will dip their toe into this market and lead the way in the U.S.?

A version of this concept executed in 2010 by SunPower in Italy called “Andromeda” got rated by Moody’s and was arranged, apparently without many complications, by BNP Paribas and Societe Generale. The catch: it was backed by Italy’s very generous feed-in-tariff revenue that the U.S. does not and will not have access to.

Some project finance experts see hedge funds beginning to take an interest in renewable energy asset-backed securities along with U.S. investment firms. Where and how long will it take for the first deal to materialize?

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