17 Oct Can funding for renewable energy ever be AAA risk?
Twenty years ago, rating agency analysts disagreed on whether non-AAA corporations could issue AAA-rated structured securities. Aircraft finance was the poster child of the debate. “Impossible. Too volatile,” corporate analysts reasoned. Structured analysts would retort: “Not even $1 of securities can be funded at AAA?” And, if $1 can be funded at AAA levels, what about $2? $3? $1 MM?
This spring, R&R got close to the emerging solar securitization market through committee work coordinated through the U.S. Department of Energy’s National Renewable Energy Laboratory (NREL), which is working to promote solar energy and preparing for the imminent (2016) solar tax credit phase-out. In December 2013, NREL’s Travis Lowder and Michael Mendelsohn published a white paper, The Potential of Securitization in Solar PV Finance, which argues for securitization as replacement funding. R&R discovered that rating agency bias exists against solar PV lease securitization, similar to corporate. The agencies willing to issue ratings (some are not) are capping the rating at low Investment Grade risk levels.
Really? Not $1 of securities backed by energy that continuously self-generates is capable of being rated AAA?
Of course, it is possible. Securitization is not corporate credit analysis. It is collateralized, measured risk. Receivables volatility is determined, then matched with an appropriate level of capital cushion (credit enhancement) to engineer securities at a target risk level. AAA securities are made when investors purchase them at a AAA cost of funds and the receivables perform to expectation. And they do–most of the time–when there is reasonable duty of care.
R&R believes solar PV securitizations could merit AAA ratings for up to 85% of the capital structure of a solar-issuing SPE. This, in turn, would dramatically lower the cost of solar production and accelerate our renewable energy goals. But, to confirm or revise the 85% number, R&R would need access to lease performance data. Unfortunately, data-hoarding by early entrants (Solar City is one name) prevents the deep dive on performance history that is required to answer the question–not “is AAA possible” but “how much AAA is rational?”
In reality, there is no economic justification for capping the rating, aside from concerns about changing energy production too rapidly and disrupting the economics for our conventional producers. However, this is a proper policy question, not a proper rating agency question. Of course, capping the rating enables sophisticated financial institutions to buy up the asset at low ratings and “arb” or squeeze out the difference between its price, keyed off the rating, and its intrinsic risk. When it comes to ratings that are set too low or too high, the question “a qui profite?” is one that should concern, not just rating agencies, but everyone with an interest in a sustainable future.