Tom Konrad CFA
Disclosure: I and my clients have long positions in HASI. I have sold NYLD $40 and $45 calls short.
The secret sauce for bringing residential solar into the mainstream is the solar lease. With the simple value proposition of little or no money down and cost savings from day one, a homeowner does not have to be an environmentalist or green to be interested in the green of a solar lease. He or she simply needs to live in a state where the combination of annual sunshine and state incentives provide the economics to make solar leases profitable for the lender and installer.
Low interest rates and the rapidly falling price of solar panels have rapidly expanded the number of states where solar leases are available in recent years, so much so that residential solar lease pioneer SolarCity (NASD:SCTY) grabbed 26% of the rapidly growing residential market in 2013. Of the top five residential solar installers on GTM Research’s 2013 U.S. PV Leaderboard, four offer solar leases. Commercial solar leases were pioneered by SunEdison (NASD:SUNE) a decade ago, but they only began to transform the solar market place when SolarCity and competitors like SunRun and Vivint Solar began offering them to homeowners.
While the opportunity to take advantage of attractive solar economics is expanding rapidly to more states, not every home owner has a suitable unshaded roof. Those who want to democratize the solar opportunity usually favor community solar farms, also known as solar gardens. These structures allow community members to each buy a share of a larger central solar installation, receiving credits on their electric bill, as well as a proportional share of the tax benefits. Unfortunately, creating solar gardens requires specific state legislation or action by the local utility or utility regulatory commission, and the difficultly of making such rule changes means that solar gardens are available in far fewer locations and to fewer individuals than solar leases.
Solar Mosaic is also working to democratize solar investment through crowdfunding. The company avoids the complexity of direct investment in solar farms by making loans to solar developers backed by a solar farm’s cash flow. It then offers pieces of loans to small investors though its crowd funding portal, taking a small cut of the interest to pay for its operations. While individuals can investment as little as $25, securities laws currently limit this opportunity to accreditied (i.e. wealthy) investors and residents of California and New York.
In practice, an even greater limitation has been the lack of available projects, with only $5.6 million invested in 34MW of projects since the first investment in late 2012. That is approximately as much solar as 5,683 typical 6kW residential solar systems.
Fortunately, the size and number of Solar Mosaic’s loans has been increasing. One particularly intriguing forthcoming project is the Mosaic Home Solar Loan in partnership with national installer RGS Energy (NASD:RSGE). I expect this product will appeal to Solar Mosaic’s investors, since it will finance residential systems. Financing solar for a homeowner will likely have more emotional appeal than financing a commercial installation on a convention center or school.
Another crowdfunding site, SunFunder, enables individuals to invest in solar projects bringing power to the developing world. It offers interest-paying investments to accredited investors. Ordinary investors can participate with loans that earn repayment of principal as well as interest credits in the form of “Impact points.” Impact points cannot be withdrawn, but they can be re-invested in other projects.
It seems likely that it will be some time before Mosaic can get enough solar loans (residential or otherwise) into its system to satisfy investor demand. Until that happens, and until Mosaic is able to offer investments to ordinary investors nationwide, many will have to look elsewhere to invest in solar installations.
One promising option on the horizon is bonds backed by solar leases. SolarCity was the first to issue such bonds, with a $54.4 million offering in November of last year. That offering was 71% backed by residential solar leases, with the balance backed by commercial solar. They followed this with a 87% residential $70 million offering which closed on April 10th. Like most green bond issues in recent months, SolarCity’s bonds were only available to institutional investors. SolarCity has little incentive to offer these bonds to small investors, because demand from institutional investors greatly exceeded supply.
Another company likely to issue bonds partially backed by solar leases is Hannon Armstrong Sustainable Infrastructure (NYSE:HASI.) This REIT invests in a wide range of sustainable infrastructure, and then issues Sustainable Yield Bonds (SYBs) backed by these projects, but also keeps some on its balance sheet.
Hannon Armstrong’s CEO, Jeffrey Eckel, told me in an interview that he believes Hannon Armstrong is unique in that it explicitly measures the climate emissions reduction associated with each project it invests in. The first $100 million round of SYBs, issued in December, invested in projects which reduced greenhouse gas emissions by 0.61 metric tons per $1,000 investment. That means a typical US-based investor with a carbon footprint of 17.6 metric tons per year could offset a year’s worth of emissions with a $28,852 investment in the first tranche of SYBs. While that is far more than the cost of equivalent carbon offsets, such offsets are a cost, while SYBs are an investment which also pay a competitive 2.79% interest rate.
Investors interested in funding solar leases should be interested in Hannon Armstrong’s future SYB rounds, since the company just signed two deals to fund solar leases. On April 16th, the company announced a deal to jointly originate and fund up to $100 million financing for distributed solar projects with Sol Systems. This followed the April 3rd announcement that the company had provided $42 million in debt to fund SunPower Corporation’s (NASD:SPWR) residential solar lease program.
According to Ec
kel, solar leases tend to have a lower climate impact per dollar invested than most of it other investments, but the impact will be positive for both these investments.
Solar Lease Stocks
With bonds backed by solar leases mostly being sold to institutional investors, stocks are probably the easiest way for individual investors to gain exposure to solar leases. Both SolarCity and Hannon Armstrong are retaining a portion of their solar leases on their own balance sheets. By far the purest exposure to solar leases will come from industry leader SolarCity, while Hannon Armstrong’s exposure to renewable energy projects will always remain below 25%, since this is a requirement of its REIT status.
SolarCity had deployed approximately 380 MW of solar through the end of March. With a market capitalization of $5.28 billion, that means each $14 dollars invested in SCTY was backed by 1 watt of a solar lease. In other words, if you’re thinking of investing in SolarCity stock as an alternative to putting solar on your roof, you’re essentially paying $14 a watt. That is far more expensive than any installation SolarCity has installed. The typical cost per watt for a residential solar system in California was $5.75 in the fourth quarter of 2013.
While Hannon Armstrong has funded far fewer solar systems, the two deals for $142 million described above should account for about 15% to 20% of its future market capitalization. If the $42 million for SunPower comes in at $6 per watt, and the $100 million of distributed commercial systems cost $4 per watt, that will amount to a total of 32 MW of solar. As of the end of 2013, Hannon Armstrong had invested 32% of its capital (or $202 million) in clean energy projects, some of which would have been solar. If 20% of this was solar at $5 per watt, that would amount to another 40MW of solar. Putting this together, my best estimate is that each $10 to $20 invested in HASI will include funding for 1 watt of solar, as well as 5 or more watts of wind and geothermal projects and yet more energy efficiency. Unlike SolarCity, Hannon Armstrong is currently profitable and pays a 6.6% dividend yield at the current $13.34 stock price.
Another yield-focused stock with some investments in solar leases is NRG Yield (NYSE:NYLD.) This company has a dividend yield of 3.1% at the current stock price of $42.50. The company owns a mix of thermal and renewable generation, with 34% of its generation from renewables in 2013. It owns 313 MW of mostly utility scale solar, and 101 MW of wind farms, and has a $2.09 billion market capitalization. Hence each $6.67 invested in NRG Yield funds 1 watt of utility scale solar and 1/3 of a watt of wind.
If you always wanted to own a solar system, but lack a suitable roof, a large and rapidly growing number of investments are now available. If your primary goal is attractive financial returns, the best investments are Solar Mosaic (4.4% to 7% yield) and Hannon Armstrong (6.6%.)
Solar Mosaic investments have a number of downsides, such as the limited number of available projects, restriction to accredited investors and residents of New York and California, and the requirement that you hold your investments to maturity. While most of the money invested in Hannon Armstrong goes to fund types of sustainable infrastructure other than solar, each dollar funds approximately as much solar as a dollar invested in SolarCity, but also includes much larger investments in other types of clean energy and in energy efficiency.
At $6.67 per solar watt, NRG Yield is the cheapest way to fund solar with a stock market investment, but this company includes considerable fossil generation and has a much lower yield (3.1%) than Hannon Armstrong.
While none of these investments is perfect in its ability to replicate the economics and climate impact of putting solar on your home, the number of options is rapidly increasing. If you live in one of seven states (MA,CO, ME, RI, VT, WA,DE, OH) you may be able to invest in a solar garden. Until then, my top pick combining high climate impact with high yield and ease of investment is Hannon Armstrong Sustainable infrastructure.
DISCLAIMER: Past performance is not a guarantee or a reliable indicator of future results. This article contains the current opinions of the author and such opinions are subject to change without notice. This article has been distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.