Missing the Solar Boat

Missing the Solar Boat

12.1.09 John Salomone, Managing Director, Structured Finance International, LLC

The Lack of Available Financing Is Stifling Solar's Growth

Green this and Green that is all the rage in non-financial circles and when you include government Green noise to the cacophony it becomes almost deafening and the most talked about Green anything is Solar. When sorting through the noise understand that there are two parts to Solar -- Solar in the Generation mix (Wholesale Solar) and Solar in the Use/Distribution mix (Retail Solar).

The same problem exists for both -- Financing.

Retail Solar which includes residential and commercial solar installation and use, despite federal, state and local government subsidies has an installed cost that still requires a financing time horizon that extends beyond standard bank loan terms and can only be financed for in new construction under the commercial or residential mortgage.

Wholesale Solar, also including all government market-bending subsidies and credits, has an installed cost that can only be financed with long-term power purchase agreements with terms stretching out to 20 years. And unless you are deaf, dumb and blind you have to know that 20-year financing is only available to the highest credit quality and well established companies and is not available to 3 guys with a good idea, even if the idea is GREEN.

Wholesale and Retail Solar panel financing is also plagued by an issue that falls way below the radar -- Collateral Value. The solar panels on your house or on the roof of a local business have no collateral value to anyone, even if they are is removed. This is caused by 2 problems: one is the cost of removal and the other is that there is no secondary market for used solar panels. Therefore, any financing for residential or small business solar panel purchases is treated as unsecured financing, which makes the unobtainable financing even more unobtainable.

The "no collateral value" issue plagues the Wholesale Solar industry in a slightly different but equally devastating way. The pile of endlessly complicated contracts required to finance power purchase agreements under a project finance structure generally do not provide for the smooth and seamless substitution or replacement of a defaulting party. Or more simply stated, the number of qualified companies that can qualify for power purchase agreement financing is so limited that the pace of Wholesale Solar installations is limited more by lack of available financing that any other factor.

The solution is simple -- make financing for Retail Solar and Wholesale Solar readily available.

How to make financing available for Retail Solar and Wholesale Solar is a bit more difficult -- though not impossible.

And in this instance, as with most seemingly intractable problems, that last place to find an answer that actually works is the government, any government.

The first place to look is the currently out of favor combination of private equity, money managers, investment and commercial banks. Surprisingly, until they filed for bankruptcy we could have looked to CIT; for the answer lies in commercial finance.

The disappearing skillset referred to as commercial finance combines all the finance and finance related skills of consumer finance, corporate finance, legal, accounting and tax into its own portion of the finance market.

A commercial finance approach would combine solar related cash flow with structured contractual obligations to create a credit worthy entity or package that would support the financing of the installed cost of the solar panels. Though the specific financing solution elements of Wholesale Solar are quite different from Retail Solar the commercial finance principles that lie at the foundation of each solution are the same.

With a commercial finance philosophy and knowledge base in the middle of a room with funding capable institutions the two paths for the financing solution become crystal clear.

Working backwards, the investment banks can create liquidity for the finance contracts funded by the combination of private equity and money managers, when those finance contracts are supported with rational levels of debt provided by the commercial banks. The commercial banks role also includes the origination function, since as soon as they announce that financing is available, their direct and indirect marketing power will begin to match solar demand with the newly created solar finance supply.

The problem is not Green demand, the problem is Green financing and the new combination and application of existing and proven financing techniques will provide a real solution.

Washington, stay away from this idea so we can make it work.

COMMENTS:

Harry Valentine
12.2.09 The absence of government financing for solar-electric projects essentially forces entrepreneurs to develop low-cost solar-electric technologies. This is certainly quite possible in certain climatic regions such as a dessert where solar-thermal salt ponds may be built along an ocean coast. That technology will deliver the conversion efficiency of low-cost solar PV technology and at lower cost.

Solar photovoltaic technology encounters the problem of thermal fatigue where performance (efficiency) declines over time. Eventually the technology has to be replaced and the expired technology often becomes e-waste. Progress is being made to reduce thermal fatigue in photovoltaic technology . . . some manufacturers have a long way to go in this regard. Solar PV has merit in cities where solar PV windows may be installed in office towers and PV siding may be installed on to the walls of the same builds.

Malcolm Rawlingson
12.2.09 The reason finance for solar ventures is not easy to get is that without Government intervention solar electric energy is not viable economically. While it is true that the capital costs of solar installations is coming down it is still far from economic viability. In comparison to other energy sources it simply cannot fill all of the energy needs of say a typical house without other capital investment which of course increases its capital cost. It is a simple fact that most western economies are in geographic areas where the Sun does not shine much and in all economies the Sun does not shine at night. Therefore to make the device useful storage is necessary OR some other form of energy is used when the Sun cannot be used. So the prospective solar electric installer is faced with putting in a solar electric array AND battery storage. Or a solar electric array AND grid supply or solar electric array AND some other energy source. In other words double or more of the capital cost for the same units of energy. It therefore is simple economics at work that prevents any wise investor from putting up capital when the rate of return is likely going to be negative. And of course while lowering the price of solar collectors is admirable it is the price of the energy storage which is the critical factor because only then will it be possible to store electricity produced in the day time for use at night. Without some major break through in energy storage solar electric energy is going to be very limited in use and only by enthusiasts willing to waste their money...or spend it on a hobby whichever way you want to look at it. But for the mainstream it is a non-starter.