Financing the solar age

08-10-2014 | Foresight | Roland Hengerer



New financing structures spur the development of cost competitive solar projects
After years of relying on government subsidies, solar energy has finally become competitive with other forms of energy generation in a growing number of regions worldwide. As the market moves away from heavily subsidized (and cloudy) Europe to the sunnier US and emerging markets, subsidies are declining in importance. Demand for solar energy is increasingly driven by cost competitiveness, the need for cleaner power generation, and immense global power infrastructure needs.

Cumulative global solar installations have grown exponentially from 1.4 GW in 2000 to almost 140 GW by the end of 2013.1 However, the expansion of solar power requires huge investments, with over USD 1.3 trillion required over the next 20 years.2 Private sector participation will be essential to financing this growth as government incentives decline. But mobilizing private capital will require new business models and risk mitigation via novel financing structures.

Some of the financing approaches that have been gaining traction, particularly in the US, include combining solar assets into securitized portfolios that are registered as publicly traded companies (Yield cos), tax equity funds, or solar asset backed securities (ABS). For instance, MidAmerican – a division of Warren Buffet's Berkshire Hathaway – issued USD 1 billion bonds for solar projects in 2013, with interest rates under 5.5 %.

Such financing structures expand the pool of investors – significantly increasing available capital for solar projects – reduce the cost of capital and potentially eliminate the need for government incentives. As the solar sector matures and investors realize that solar projects provide fairly predictable electricity production and related cash flows, the required return for investing in these assets should decline further.

As a result, financing for new solar projects should be easier and less expensive to obtain, driving volume growth and associated revenues and profits for companies along the solar value chain. In particular, companies active in solar module production and solar project management, such as SunEdison, SunPower, and Canadian Solar should benefit from the expected inflow of capital into their large pipeline of solar projects.

1 European Photovoltaic Industry Association
2 International Energy Agency

roland-hengerer-autor.jpgRoland Hengerer, PhD
Sustainability Investing Analyst
RobecoSAM Smart Energy Strategy 
"Solar energy has become cost competitive without the need for subsidies. Financing this clean energy revolution offers a great opportunity for long-term investors to participate in the global solar boom, creating opportunities for companies along the solar value chain and generating stable long-term dividends."
roland-hengererRoland Hengerer, PhD
Sustainability Investing Analyst
RobecoSAM Smart Energy Strategy

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