Monday, December 30, 2013

In the Age of Solar Securitization, Is It Time for Real Third-Party Assurance?

Matt Golden 

In early November, the solar industry reached an important milestone. SolarCity, the largest vertically integrated residential solar installer in the country, was successful in selling a portfolio of solar leases into the secondary market as a unique asset class. This new solar security represents an unprecedented opportunity to lower the cost of capital and bring solar into reach for millions of homeowners.
Securitization provides a pathway to large-scale capital markets and significantly lower interest rates. This is expected to bring down the cost of solar PV to consumers, giving solar companies access to virtually limitless funds -- as long as these assets continue to perform.
At the Institute for Building Technology and Safety (IBTS), we believe this critical step forward will help drive the solar marketplace well beyond its current scale. However, securitization does not come without risk. We believe that as the industry continues to mature, so must the underlying systems that protect consumers and investors alike.

Lessons from the past

In 2008, mortgage-backed securities were the driver of a near collapse of our financial systems. While there are many facets to this story, at a fundamental level, one of the key breakdowns was in the third-party system designed as a check for quality and risk, as well as to avoid conflict of interest.
There were two key areas where this breakdown occurred. First, appraisers developed relationships with mortgage brokers and real-estate agents. The fact that appraisers were not functioning as a true third-party led to a system-wide overvaluation of assets. Second, agencies responsible for rating the risk for pools of mortgage-backed securities had ties to the banking industry.
For the mortgage industry, this issue was partially remedied by requiring appraisers to be selected by a neutral third party to avoid conflicts of interest. However, the rating agency concerns have yet to be addressed.

Looking ahead

As the solar industry enters into the securitization market, the mistakes made with mortgage-backed securities should be closely reviewed to avoid a similar occurrence in the solar industry.
So how can lessons from the mortgage industry be used to prevent a similar collapse in the solar industry? To start with, at IBTS, we think a national quality assurance protocol should be adopted, representing a minimum quality level required by all solar installers and finance firms. This will provide a benchmark for quality and prevent the emergence of a marketplace where quality is compromised and assets are not properly valuated. 
Second, creating a system where a true third party ensures solar PV systems are installed per a national protocol is essential for investors in the secondary market. Trading paper without a physical record of the assets and the verification that each solar PV system is installed correctly poses potential risks. Investors can gain assurance through a standard certification process
There is a current effort underway to develop a national quality assurance protocol, being led by some of the solar finance pioneers. The solar industry should view this protocol and the development of a true and required third-party review system as a necessary foundational element to the market. This will ensure the long-term health of the solar PV industry, and protect those companies currently in the market from potentially damaging service providers that are willing to cut corners to compete on price. If that type of corner-cutting is allowed to happen, it could damage the reputation of solar as a class and weaken access to capital for the entire industry.
Syndicated from GreenTech Media

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