Solar securities may offer major investment potential

A new study published in the academic journal Energy Policy makes the case for photovoltaic systems themselves to be used as collateral for loans aimed at financing solar installations.

Securitization of Solar Photovoltaic Assets: Costs, Risks and Uncertainty, co-authored by economist Theresa Alafita and solar engineer Joshua Pearce of Michigan Tech, finds that while photovoltaic costs have dropped and the solar industry is enjoying a boom – including the addition of more than 23,000 jobs last year resulting in more than 140,000 currently employed in the sector – low-cost financing remains limited and most families in the United States lack the money to purchase photovoltaic systems for their homes.

"They need to be able to get a loan with reasonable terms, which is possible if the PV itself can act as the asset to secure the loan," the authors argue, adding that securitization of solar assets provides a solution to this problem.

In assessing the viability of solar asset-backed securities (ABS) as a lower cost financing mechanism, the study identifies policies that could facilitate implementation of securitization and finds that securitization is a viable mechanism for improving the financing of PV projects.

Pearce, an associate professor in the Department of Materials Science & Engineering and Department of Electrical & Computer Engineering explains, "Our results show that, under reasonable assumptions, securitization of solar power purchase agreements or PPAs can significantly reduce project financing costs.

"What this means is that firms that create securities from solar PPAs can make a healthy profit while helping unlock the billions of dollars of existing economically-viable solar projects in the U.S." says Pearce.

As more companies begin to take advantage of this opportunity, financing costs will continue to decrease and open up new markets, according to the study, which finds that the costs of asset-backed securities declines because the risk is reduced through standardization of contracts and the contracting process, improved access to contract and equipment performance data and geographic diversification.

"With the current cost of solar equipment and this financing model the home owners make money, the solar industry makes money and the firms setting up the financing make money. There is no question, the solar industry is ready for investors," Pearce says.