In early November, thesolarindustry reached an important milestone. SolarCity, the largest vertically integrated residential solar installer in the country, was successful in selling a portfolio of solar leases into the secondary market as a unique asset class. This new solar security represents an unprecedented opportunity to lower the cost of capital and bring solar into reach for millions of homeowners.

Securitization provides a pathway to large-scale capital markets and significantly lower interest rates. This is expected to bring down the cost of solar PV to consumers, giving solar companies access to virtually limitless funds -- as long as these assets continue to perform.

Securitization represents a critical step forward and will help drive the solar marketplace well beyond its current scale. However, securitization does not come without risk. As the industry continues to mature, so must the underlying systems that protect consumers and investors alike.

Lessons from the past

In 2008, mortgage-backed securities were the driver of a near collapse of our financial systems. While there are many facets to this story, at a fundamental level, one of the key breakdowns was in the third-party system designed to provide independent valuation, as well as to avoid conflict of interest.

There were two key areas where this breakdown occurred. First, appraisers developed relationships with mortgage brokers and real-estate agents that represented a conflict and created an incentive to overestimate home values to facilitate sales. The fact that appraisers were not functioning as a true third-party led to a system-wide overvaluation of assets. Second, rating agencies responsible for rating the risk for pools of mortgage-backed securities had economic ties that many argue were too close to the banking industry, creating an incentive to overlook potential risks to drive deal flow.

To overcome these issues in the mortgage backed securities industry, appraisers were required to be selected by a neutral third party to avoid conflict of interest.

A 2009 Bloomberg Business Week article by Chad Terhune summarized the issue as follows: “Home appraisers played one of the less well-known roles in pumping up home values and contributing to the current financial crisis. Retained by lenders or brokers, they frequently colluded -- explicitly or tacitly -- in overestimating the worth of houses to justify large mortgages and the lucrative fees each member of the real estate food chain received at closing.”

Looking ahead

As the solar industry enters into the securitization market, the mistakes made with mortgage-backed securities should be closely reviewed to avoid a similar problems in the future. Setting up a system of true-third party review and quality management for solar securities, that avoids potential conflicts of interest, is a necessary step to ensure the sustainability of this new asset class.

To start with, it is in the interest of the solar industry to agree on basic standards for quality and ensure that all players meet the same minimum bar. Solar needs a standard for quality installation practice and third-party review, representing a minimum quality level required by all solar installers and finance firms. This will provide a benchmark for quality and prevent a competitive marketplace where quality is compromised and assets are not properly valued.

Creating a system that ensures solar PV systems are installed per a national protocol is essential for investors in the secondary market. Trading paper without a physical record of the assets and the verification that each solar PV system is installed correctly poses potential risks, and sets up a system that does not reward quality and creates a race to the bottom. Investors should require that solar securities have been verified and held to a minimum standard to ensure long term performance.

A quality assurance system that is applied equally will protect those companies in the market from unfair competition, ensuring that they are not being undercut by providers attempting to take market share by competing on cost through low quality. This type of situation could damage the reputation of solar as a class, and weaken access to capital for the entire industry.

There is a current effort underway to develop a National Quality Assurance Protocol, being led by some of the leading solar finance providers. The solar industry should view this as a foundational step to ensure longevity in the solar market, not as unnecessary regulation of the market.

If you share our enthusiasm for the long term growth in the solar market and the belief that we need to ensure quality to avoid potential failures in the long term, join other industry professionals interested in establishing a National Quality Assurance Protocol.

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Matt Golden is a strategic advisor to IBTS, a nonprofit organization with the goal to provide quality assurance services to ensure reliability, production and safety of installed systems.