Solar-Backed Securities: Opportunities, Risks, and the Specter of the Subprime Mortgage Crisis
Existing project financing structures utilizing the Investment Tax Credit (ITC) and depreciation benefits have helped spur growth in the solar industry but are insufficient on their own to enable the residential solar sector to scale up and become a mainstream energy source. In the span of only a few years, the solar market has grown from a fledgling niche industry to an important global player. Solar installations in the United States grew at an annual rate of 70% between 2005 and 2012. Federal tax incentives and state-level subsidies have largely driven this growth. However, for reasons I explore in this Comment, these tax incentives and subsidies will be unable to sustain such rapid growth in the coming years, especially in the residential sector. If the solar industry is to continue to grow and become competitive with other energy sources, innovative private financing mechanisms are needed to allow residential solar developers to tap into capital markets and access new classes of investors (e.g., mutual funds, pension funds, and other institutional investors).
The securitization of solar leases presents a promising solution to this problem, but a variety of barriers currently prevent solar companies from securitizing these assets successfully. This Comment identifies and assesses these barriers and recommends strategies to promote low-cost securitization of residential solar leases while minimizing the potential risks that such securitization poses.
In Part I, I introduce the solar market, emphasizing in particular the current mechanisms to finance solar systems, the existing policies promoting solar energy, and the residential solar leasing model. In Part II, I present an overview of the asset-backed securitization process, outline how it might apply to solar leasing, and assess the risks and benefits of solar lease securitization. Finally, in Part III, I recommend strategies to reduce the risks posed by solar lease securitization and offer some predictions for the sector going forward. This Comment focuses primarily on residential solar systems but will also address some concepts common to commercial and utility-scale solar systems. Ultimately, I argue that while securitization is not a quick fix, it is a valid option for increasing liquidity and attracting new sources of capital to the solar leasing market.