Sun Still Rising on Residential Solar

16 Jan 2014

We still see tremendous potential in commercial and industrial (C&I solar), but we’re also bullish on residential solar.

We still see tremendous potential in commercial and industrial (C&I solar), but we’re also bullish on residential solar.

There is much evidence pointing to a rosy future for residential solar.  High retail utility rates provide a compelling reason for homeowners to go solar while residential installation costs continue to drop.  Many of our partners claim that residential system development is more profitable than commercial development. Even solar developers that historically led the commercial and utility sectors are taking strides to enter the residential space.

In late 2013, SolarCity, successfully securitized cash flows from a portfolio of solar assets, accessing capital from the public markets via a $54 million bond offering. SolarCity accomplished the securitization milestone at a rate of 4.8%, and other solar companies may follow with perhaps even lower rates. Solar asset securitization deepens the pool of capital while cheapening the cost of capital. Meanwhile, SolarCity’s stock price has skyrocketed since its IPO a year ago, and new IPOs may be on the horizon for SunRun, Clean Power Finance, and Vivint Solar.

A Mercom Capital Group report on the 2013 solar sector reported that three of the top five VC-funded solar companies were involved with residential financing and installations (Clean Power Finance, which raised $62 million; Sungevity, which raised $43 million; and OneRoof Energy, which raised $30 million.) Residential lease funds also showed strong growth in 2013, with Vivint Solar, SolarCity, Sunrun, and SunPower acting as top fundraisers.

While Sol Systems certainly sees an enormous future in commercial solar and focuses intently on financing for the commercial and industrial sector, we also have our roots in providing SREC financing for residential solar and one of our biggest deals in 2013 involved a tax equity deal for 1000+ SunPower Corporation residential systems. In 2014, Sol Systems will make another sizeable investment in residential solar.

Part of the reason for residential sector success is that investors like diversifying their risk through portfolios of projects, and in many ways it is easier to group residential solar projects into portfolios than it is for small commercial projects. Of course, investors must get very comfortable with the reputation and experience of the residential developer (who acts as sponsor equity) in order to trust that they are installing quality systems, but it is fairly easy for investors to get comfortable with host credit via the homeowners’ FICO scores.  Moreover, residential developers don’t typically allow customers to negotiate special provisions into their contracts, which makes legal documentation much more uniform. They also tend to use similar panel and racking technologies.  Additionally, residential systems are naturally grouped into a handful of geographic areas where project economics make the most sense.  Even when residential portfolios encompass geographic diversity, investors view it positively, whereas a commercial portfolio that is diversified across state lines generally creates more complexity and the need for costly due diligence.

If the solar industry can keep net-metering threats at bay, many of these proof points and indicators imply that residential solar will continue to grow at impressive rates — perhaps faster than the commercial and industrial sectors, and perhaps at the impressive levels that they’ve sustained in markets like California in the last two years.  We certainly hope so.

About Sol Systems

Sol Systems is a boutique financial services firm that offers investor clients direct access to the solar asset class and provides developers with sophisticated project financing solutions. Founded in 2008, Sol Systems focuses on meeting the most critical needs of the industry, including SREC monetization, capital placement, tax equity, and New Market Tax Credits. To date, the company has facilitated financing for thousands of projects and facilitated hundreds of millions in investment on behalf of Fortune 100 companies, private equity, family offices and individuals.

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Natacha Kiler

Natacha Kiler