First came SolarCity’s $500 tax equity fund with Goldman Sachs in May. Then came Sunrun’s $630 million tax equity fund with JPMorgan and US Bank in June. In less than two months over one billion dollars poured into the solar industry, the majority of which will be used to finance third-party owned residential solar systems. What would have seemed like a large fund, say $50 million four years ago, is now not even worth the time of the big, inveterate tax equity financiers, such as US Bank. As the market matures and this becomes the new norm we must wonder about what it means for the future of solar.
Mo Money Mo Solar
Undeniably these investments are good for the solar industry, especially as it starts to come from historically absent yet rich and tax burdened institutions like JPMorgan. The more confortable these types of institutions become with solar investing, the better it will be for everybody in and around the solar industry. Furthermore, these new deals are being closed with an eye on opening up solar leases and PPAs to less credit worthy customers, meaning investors are realizing the low rates of default on electricity payments. Connecticut’s Solar Lease Program, which was launched in 2008, consisted of 855 solar leases and had FICOs scores as low as 640 experienced a default rate of 0.2%, (2 out of 855). Solar financing companies that once would not accept any customer with a credit score below 700 are now dropping the bar as low as 600, which increases the potential customer base by 25% to 30%.
Mo Money Mo Lawyers
When Goldman Sachs and JPMorgan close large tax equity deals with solar companies it not only attracts the eyes of other investing institutions but also reaffirms the tax equity structuring process. I wish it were as easy as having Elon Musk ask Lloyd Blankfein for $500 million and tell him he could get a 15% ROI, but unfortunately that’s not how it works. Having been involved in tax equity structuring I can tell you first hand how complicated it is; it involves large lawyer fees, lots of negotiation and pages and pages of contracts. The more this process is defined, the less it will cost to get these funds set up in the first place, which will ultimately translate into cheaper solar for the customers.
Mo Money Less Players
Although these deals are by in large great for the solar industry, the one negative side effect they may have is that they are setting the bar for entrance into the solar financing world very high. As mentioned before, these deals are extremely expensive and time consuming to structure so investors that are willing to spend the time and money need to know that it is worth their effort and that the developer can reach whatever sales targets they are setting. How many residential deals do you have to sell to use $1.3 billion in tax equity financing? If the average residential system costs $30,000 and you assume, for simplicity, that the investment tax credit and depreciation will give you a $10,000 tax credit value, then you will need to sell 130,000 systems to get investors their return. Not many companies can do that.
Bottom line is its great to see this type of money flowing into the solar industry, I just hope the rest of us can keep pace.