As financing strategies in the residential solar market proliferate, one approach that’s been flying under the radar could be a significant source of low-cost capital for small to medium-size solar service providers: debt financing secured by pools of installed projects.

A change in the underlying risk calculation is making this possible. Until recently, commercial banks would have considered it unthinkable to make loans to solar developers based on long-term homeowner debt that’s not secured by real estate. But banks have realized that homeowners can make long-term payments -- and they are especially likely to pay bills that keep the lights on -- so loans tied to solar installations aren’t a bad credit risk. On the contrary, pools of installed solar projects are now looking like an attractive way for commercial banks to diversify their portfolios.

For example, New Resource Bank closed its first loan on a solar project pool in October. We provided OneRoof Energy with about $2 million in debt financing to lower its cost of funds on a portfolio of existing projects, freeing up additional working capital for the company and enabling it to grow more quickly.

Demand is growing

We’re looking at several more deals like this, and we see demand for debt financing secured by project portfolios continuing to grow along with the residential solar market. Three factors are converging to make this happen:

  • The residential solar market continues to expand rapidly; whether the homeowner finances the system through a loan or a lease, sourcing low-cost capital will be critical.
  • Many solar providers have accumulated substantial lease portfolios. While they may be too small to securitize and sell off, adding a debt component may be a good interim step on the path to securitization.
  • Commercial banks are recognizing the strong demographics and desirable credit characteristics of typical residential solar buyers.

While large solar developers look to the investment banking community to fund expansion, smaller developers have fewer options, often turning to private investors for capital. These solar providers can leverage their portfolios utilizing lower-cost debt financing, enabling them to grow faster and provide a greater return on equity to their investors -- and they can deliver a more affordable system to homeowners.

Companies that have a substantial number of seasoned projects -- where homeowners have been reliably making payments for one to three years -- are best positioned to obtain debt financing. Banks will apply their own risk criteria to the pool (which may be different from the provider’s criteria), and the provider will need to segregate a portfolio of projects that meet those criteria.

Securitization is on the horizon

By 2020, analysts predict, the solar photovoltaic market will more than triple and annual revenue from solar PV installations will surpass $134 billion. As the market matures, we’re going to see massive securitization of solar loan portfolios -- similar to the securitization of home mortgages. Solar system contracts are highly homogenous, so it is fairly easy to slice them into pools, diversify the risk and sell them to investors. Debt financing based on solar loan pools will be the proving ground -- and a good path to securitization for many developers.


Bill Peterson is chief credit officer at New Resource Bank in San Francisco.