In a major milestone for solar financing, SolarCity closed last week on the sale of $54.4 million in bonds backed by a bundle of customer contracts.
The largest U.S. residential solar developer also says it is considering selling up to $200 million early next year, with additional sales possible every quarter.
SolarCity is on the cusp of regularly converting the revenue streams from future lease and power purchase agreement payments for upfront cash to expand its rapidly growing business. The increased access to the capital markets may also lower the cost to install rooftop systems, which will make SolarCity more competitive.
Sounds great if you're SolarCity; not so good if you're a utility or generator.
Rooftop solar is taking off
In the U.S., installed grid-connected distributed photovoltaic capacity increased by 36% in 2012 from the year before to about 4,350 MW, according to an October report from the Interstate Renewable Energy Council. Nearly 95,000 distributed PV systems were installed last year, with about two-thirds of them being added in California, Arizona, New Jersey and Nevada.
Much of the growth is coming from solar developers that use lease and power purchase agreement business models, like SolarCity. Third-party financed residential installations make up more than half of new capacity in California, Arizona, Colorado and Massachusetts, according to GTM Research. And the business model is gaining market share in states like Connecticut, New Jersey, New York and Texas.
Utilities are already taking notice of growing rooftop deployment nationwide. Arizona Public Service, the utility at the center of recent heated battle over rooftop solar in Arizona, told analysts during its parent company's last earnings conference that rooftop solar is lowering its electric sales by about 0.5%.
SolarCity undercuts retail prices
SolarCity's business is soaring. The company had about 82,200 customers at the end of September, up from about 48,420 at the start of the year, according to the company's quarterly report filed earlier this month with the Securities and Exchange Commission. The company has deployed 464 MW, up from 239 MW at the beginning of the year. SolarCity expects to install another 475 MW to 525 MW next year.
SolarCity's strategy is simple: it prices its energy below the customer's retail rate.
This is where SolarCity's securitized bond offering is so important. Not only does it give the leading third-party solar financing company upfront cash, securitizing rooftop solar contracts could reduce the levelized cost of energy by 10% to 30%, according to a report the National Renewable Energy Laboratory issued earlier this year. Lower costs will expand the appeal of rooftop solar.
Standard & Poor's Ratings Services gave SolarCity's debt offering an investment grade rating at “BBB+.” The bonds have a 4.8% interest rate. The bond is based on the bundling of about 5,000 PV systems. At last count, SolarCity had more than 82,200 customers so the potential for more securitized bond offerings appears strong.
The contracts that were bundled for the bond had an average price of 15 cents/kWh with an average 2% escalator, according to S&P. Residential customers accounted for 71% of the contract pool.
Other solar developers will likely follow in SolarCity's footsteps on its successful securitization.
Rapid growth expected
S&P expects distributed generation to “continue to grow rapidly” over the next three years, the ratings agency said in its pre-sale analysis of the SolarCity offering.
Solar prices have plummeted to $5/W on average, down from about $8.5/W a decade ago, S&P said. “While we cannot cite any particular technology in the immediate development pipeline, we believe that enhanced technology may give the industry a boost by reducing costs,” S&P said.
But risks remain
While PV costs are coming down, and may come down further if securitization spreads, as seems likely, there are major risks for solar developers.
Drivers for growth have included favorable tax credit, state rebates and net metering policies, according to S&P. But the federal investment tax credit for solar is set to fall from 30% to 10% in 2017. Meanwhile, net metering has “caused tension between the PV developer industry and the utilities,” the ratings agency said.
APS spent millions trying to convince Arizona regulators to slap a major fee on customers with rooftop systems. The Edison Electric Institute, the trade group for investor-owned utilities, believes rooftop solar is the largest near-term threat to the utility model, according to a report released earlier this year.
SolarCity has acknowledged the possible risks if net metering policies are changed. “If the current net metering caps in California, or other jurisdictions, are reached, or if the amounts of credit that customers receive for net metering are significantly reduced, future customers will be unable to recognize the current cost savings associated with net metering,” SolarCity said in its SEC report. “We substantially rely on net metering when we establish competitive pricing for our prospective customers. The absence of net metering for new customers would greatly limit demand for our solar energy systems.”