Fueling the rush into the residential solar leasing business, Morgan Stanley (NYSE: MS) subsidiary MS Solar Solutions Corp. is partnering with Clean Power Finance (CPF) to help fund up to $300 million in residential solar leases. MySolar is the new solar lease provider.
Solar developer and power purchase agreement (PPA) provider Main Street Power Co., a Morgan Stanley partner in previous utility and commercial scale solar projects, will take on some of the wide range of compliance and reporting activities and responsibilities associated with deployment.
The basic idea behind CPF, CEO Nat Kreamer explained, is “to connect the capital market with the solar market.” This deal adds “major financial institutions” to the CPF list of backers that includes Kleiner Perkins Caulfield & Byers and Google Ventures.
The Morgan Stanley/MS Solar backing will provide equity capital to and beyond the amount of the federal investment tax credits (ITCs). Zions Bancorportation’s Zions Energy Link will provide debt capital.
CPF Senior Vice President Kristian Hanelt said this is a deal of unique and possibly unprecedented scale and complexity. “These are sophisticated and well-vetted financing structures,” Hanelt explained, that “have been used extensively in commercial and utility development.” Now they “are being incorporated into residential solar because its volume is starting to add up.”
CPF was founded in 2007 as an online tool to connect solar buyers and sellers with financial products and help them design solar systems. By 2010, 40 percent of all residential and small- and medium-sized commercial solar sold used the CPF software platform. Subsequently, CPF has moved to make the full spectrum of financing opportunities available in its software.
The large array of CPF “channel partners, people who sell and install solar,” Kreamer explained, will carry this financing product out to a consumer and they’re going to say ‘I have a leasing option for you.’”
By partnering with CPF, Kreamer said, “Morgan Stanley, a major money center bank, was able to decide to offer residential financing and come, with its partners, to CPF and offer that tomorrow.” Big players in the solar leasing market like SolarCity and SunRun, Kreamer said, “control the access to that deal flow, but we’re basically saying to large investors like Morgan Stanley, ‘You can come right to this market and we will help you get right into this business.’”
Solar space quality control authority Burnham Energy will continue to do provider inspections as a consultant to CPF, assuring Kreamer’s channel partners do dependable installation work. “They randomly inspect before we underwrite,” Kreamer said. In addition, a two percent holdback is required of CPF’s channel partners, further guaranteeing their work.
Rooftop solar, Kreamer said, is a low-risk, high-reward investment in what is essentially a long-term asset. In addition, with the ITC available through 2016, as much as 45 percent of an investor’s capital outlay comes back as a tax benefit in the first year of the loan. And the overall return on investment in residential solar is “anywhere from the high single digits to the mid-teens.”
Initially available only in California and Arizona, the MySolar 25-year lease will extend the variety of products offered by CPF and its network of installers. CPF is also active in Colorado, New Jersey and Massachusetts.
The 25-year term, Kreamer said, brings added value to the solar lease market. “Most solar financing has been done as 20-year products,” he explained. “What you’re seeing here is product differentiation that fits differing consumer demand.”
Even among CPF offerings, terms vary. Google’s product, backed by its $75 million 2011 investment with CPF, is a 20-year PPA. Some consumers will prefer the more standard 20-year lease, Kreamer said, but the longer-term MySolar lease may appeal to customers with a different set of risk and reward concerns.
The time of “two products, one credit score, very few product choices,” is disappearing, Kreamer said. CPF’s “different products that fit different customers” is part of an expanded marketplace. But “the reality is that the market penetration rate is small compared to the opportunity,” he said. More and more diverse products “can attract more consumers to the marketplace.”
The diversification of available products is also expanding the kinds and degrees of risk investors can choose, Kreamer pointed out. “As the finance market grows and risk-based pricing evolves and more capital and sophisticated investors come into the marketplace,” he said, “you will see more capital and more competitive capital.”
The entry of players like Morgan Stanley and Zions demonstrates, Hanelt agreed, a new level of interest in residential solar “as a form of consumer credit underwriting” like that already done in auto loans, credit cards and home mortgages.
“The right capital,” Kreamer said, “will go to the right people. That’s capital asset pricing theory in a nutshell applied to residential solar financing. This is what happens in auto loans and mortgages. It just hasn’t happened yet in solar.”
The Morgan Stanley deal brings the total amount of money CPF has available to put into solar assets to approximately half a billion dollars. Kreamer said his company is channeling money into solar at the rate of $1 million per day and, in March 2012, had its “highest level of applications ever.”