Solar has made a lot of progress 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 accessible to more people. The key challenge now is that better and more sophisticated funding solutions are needed to help the solar industry reach its full potential.
This spring, we had the pleasure of sitting in on the Banking on Solar working group, which was organized by the Department of Energy's National Renewable Energy Laboratory. Representatives of the solar industry were joined by bankers, regulators and lawyers. The goal was to address the barriers that banks face when lending to businesses and homeowners for solar upgrades and equipment.
There's an appetite among banks to diversify their asset base and to gain exposure to a high-growth market. However, many banks say that they 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 trying to solve these issues, as is another NREL working group called Solar Access to Public Capital. SAPC, which is focused specifically on the backend of banking's role in solar energy, aims to help banks figure out how to securitize their solar loans, in order to get them off the 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 has been much discussion about the standardization of documents. This industry is still so new that industrywide language and uniform documents have yet to be developed. That means every bank is using its own custom approach to underwriting solar projects. The feeling is that standardized documents will help streamline processes, eliminate duplicated work and facilitate more lending. However, some argue that custom documents are fine so long as everyone is using the same language. The group is now working to standardize that language and develop a set of processes and documents that all banks can use.
Another challenge is the lack of data on the operations of solar equipment, which affects both lending and securitization. Banks can be hesitant to provide loans on equipment without much operational history, and face similar concern among investors when trying to package and securitize such loans. One possible solution is to allow for shorter-term securitizations covering the time periods in which data is available. The issue also could be resolved by innovations within the industry. Assurant has new insurance that would cover all hardware and replicate a manufacturer's warranty. That 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.
An especially urgent issue on the securitization side is the need for some type of rating system that could help banks and investors quickly determine the worthiness of a solar project. Without ratings, it's difficult to find investors. While those willing to take the securitized loans must do their own due diligence to determine the risk profile and return potential, a widely accepted rating system could help potential investors quickly sort through securitized loans to find those consistent with their investment goals.
Solar proponents are encouraged by the progress the industry has made thus far, including a recent announcement by President Obama about an initiative that will lead to $2 billion in energy efficiency upgrades to federal buildings; measures to help save businesses nearly $26 billion on their energy bills; and training programs at community colleges to help 50,000 workers enter the solar industry by 2020. But more needs to be done, particularly when it comes to the massive financing the industry requires to grow.
With structured finance options such as securitization, solar lending could become similar to more conventional commercial real estate development. While all of this is still in progress, banks could do their part to help the nascent solar industry reach its full potential and help their own bottom line at the same time by looking into the benefits of including solar lending in their product mix.
Patel is the CEO of Mercatus, which provides software and services to the renewable energy finance market.
