A Collaborative Effort to Improve Solar Lending
By Haresh Patel
Earlier this month, we had the pleasure of sitting in on the Banking on Solar working group that was organized by the Department of Energy’s National Renewable Energy Laboratory. The working group included more than 50 participants who represent various stakeholders in the solar industry. The purpose of the group was to address barriers that banks face when lending money to homeowners for solar upgrades and equipment.
Our biggest take away from the conference was how much progress solar has made as a mainstream energy source. We’re no longer discussing whether solar is a viable option, but rather what mechanisms we can put in place to make it more accessible to more people. Working groups like Banking on Solar and the SAPC are excellent collaborative initiatives to push the industry forward.
Group members from the solar industry were joined by representatives from the banking, regulatory, legal, and financial industries. One of their primary focuses during the working session was developing a standardized set of contracts and documents that banks can use when lending to homeowners for solar upgrades and improvements. They also discussed ways in which the solar industry can better educate and inform banks of the many benefits of including solar lending in their product mix.
There’s an appetite among banks to diversify their asset base and to gain exposure to a high-growth market. However, many banks don’t know how to enter the market, how to facilitate the loans, or how to gauge the risk profile of solar projects.
Banking on Solar is working to address these issues in parallel with a similar effort from a working group called Solar Access to Public Capital. The SAPC was also formed by the National Renewable Energy Laboratory. The SAPC is focused on the backend of the bank’s role in the solar market. Specifically, they are examining barriers to banks’ ability to securitize their solar loans, get them off their balance sheet, and free up capital for new projects. The two groups are working together to share information, ideas, and best practices.
On the lending side, there was much discussion about the standardization of documents. This industry is still so new that industrywide language and documents have not yet been developed. That means every bank is using its own custom process to underwrite solar projects. The feeling is that standardized documents will help streamline processes, eliminate duplicated work, and facilitate more lending. However, there was also an opinion that custom documents and process are fine so long as everyone is using the same language. The group is working to standardize that language and develop a set of processes and documents that all banks can use.
Another challenge is that there isn’t a long history of data available on the operations of solar equipment. The issue impacts both lending and securitization. Banks are somewhat hesitant to provide loans on equipment that don’t have much operational history. Similarly, banks face that resistance from investors when trying to package and securitize the loans.
The group discussed several solutions to this issue. One solution is possibly allowing for shorter-term securitizations for the time periods in which data is available. The issue could also be resolved by new innovations within the industry. Assurant has new warranty insurance that would cover all hardware and would replicate a manufacturer’s warranty. That warranty could allow a bank to lend with confidence, knowing that the hardware will be covered even if it doesn’t reach its full life expectancy.
Another major issue that was discussed was the need for some type of rating that could help banks and investors quickly determine the worthiness of a solar project. This is an especially urgent need on the securitization side. Banks want to package and securitize these projects to get them off their balance sheet, but without any type of rating in place, it’s difficult to present the loans to investors. Any investor who is willing to take the securitized loans will have to do their own due diligence to determine the loan’s risk profile and return potential.
A widely accepted rating system could help an investor quickly sort through securitized loans and find the package that is most consistent with their investment goals. The group discussed designing a rating that could be applied to a project on the front end and would stay with the project through the entire process from credit application all the way to securitization. That kind of standard rating would not only help banks securitize the loans, it would also free up capital on their balance sheet so they could make more loans to consumers.
As CEO of Mercatus, Haresh Patel is a leading solutions provider for the energy project finance industry, he recently attended Banking on Solar, organized by the Department of Energy’s National Renewable Energy Laboratory. This is his take-aways from the session which highlights how the banking and solar industries can work together to make solar more accessible to more people.