Solar energy is a capital intensive industry with almost all of the costs of generating solar energy being front loaded. There is little expenditure in terms of operational costs and most of the money is required in buying the solar panels/inverters and installing the system. Even though the lifetime costs for solar electricity has reduced sharply, the massive capital expenditure required initially is a huge hurdle to solar power adoption. Sunpower (SPWR) had earlier used bonds to finance its solar power plants in Italy, however most of the solar financing still takes place through loans from banks. There is no big market for solar bonds till now. But things may be changing as the solar industry becomes a more mature one. More than 30 GW of solar panels are going to be installed this year and almost a hundred billion dollars are going to be invested. The industry is no longer niche and it will keep growing in the coming years as the prices of solar energy keep declining (the only one to do so).

Solar Bonds

Asset securitization is not a new concept for the financial industry and cash flows from auto, home loans etc. are used in a big way to sell bonds. Solar energy bonds are also suitable for securitization as they give regular cash flows and the IRR can be calculated easily during solar system installation. Solarcity (SCTY) which is amongst the largest solar installers in USA has come out with BBB+ rated bonds, which are securitized by its commercial and residential solar leases. Homeowners pay money to SCTY each month for the electricity they consume. This creates a regular cash flow with a good return for SCTY and makes it ideal for bonds. These bonds will give 4.8% annual yield, which is not a bad one for investors considering the zero interest regime being forced by the Fed. It is also a good rate for SCTY which gets a new source of financing apart from banks and tax equity investors.

The major risks for default are that if homeowners find a cheaper source of electricity and stop paying SCTY (not a big one). The bigger risk is that if the government changes some laws and regulations. This should not be a big one in the USA, but it is a big risk in other countries even developed ones.

Czech and Spain introduced retroactive changes on solar energy developers which sharply curtailed their cash flow through new taxes. There is also the risk of fraudulent solar installers who may not have installed the solar systems or done illegally. I don’t think it will be a great idea to invest in solar bonds outside the US, especially in areas with low corporate governance. Even in the USA these bonds are carrying a higher risk rating.