Will Nevada Net-Metering Vote Cripple Solar Financing?

By | February 2, 2016

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Key subsidies, Credit Suisse analyst Patrick Jobin says, will make residential rooftop solar economical in 2017 for 49 states. Nevada won’t be among them. In December, the Nevada Public Utilities Commission (PUC) voted unanimously to overhaul its net-metering program — slashing payments for energy fed back into the grid and raising solar customers’ base rates. It was a stark reminder for solar companies, investors and customers that the residential solar market still relies heavily on subsidies and favorable regulation. The decision prompted installers SolarCity ( SCTY ) and Sunrun ( RUN ) to shutter their Nevada operations. SolarCity is chaired by Tesla ( TSLA ) CEO Elon Musk. Tesla is building a massive battery facility in Nevada. Nevada could still grandfather all existing solar customers for 20 years — a vote is scheduled for Feb. 8 — but the damage is done, S&P Capital analyst Angelo Zino says. “Clearly, you’re not going to have the opportunity you’ve had in recent years in that market,” he told IBD. “Given that, in our view, demand is going to hit the floor in Nevada.” He added: “I’d expect greater caution all around.” Banks Continue Financing Solar That greater caution could land on banking shoulders, Zino says. But it’s not likely, Jobin told IBD. On Jan. 19, Sunrun and Investec Bank closed $250 million of senior secured credit facility to fund continued residential solar growth, according to the press release. Less than a week later, SolarCity finalized its fifth securitization of loans — the world’s first securitization of distributed solar loans — for $185 million. Credit Suisse helped finalize the deal, according to the press release. And on Jan. 25, SolarCity closed a $160 million, five-year debt facility with the help of Bank of America Merrill Lynch, KeyBank and Silicon Valley Bank. “These three financings were when Nevada was still retroactively sticking with the new rates,” Jobin said. “I’m not concerned by financing markets taking Nevada’s ruling and suggesting every state will follow through.” He added: “We do not think (Nevada’s decision) sets precedent for elsewhere. And clearly finance providers also do not think it sets precedent.” The problem is, growing the residential solar market takes an enormous amount of capital. Jobin estimates the U.S. industry will need $10 billion in capital to grow the 2016 residential market. Financing the volatile solar market is risky, Barclays analyst Jon Windham says. “You’re betting on incremental projects and long-term growth with these companies, not their 20-year contracts with customers,” he said. On the bright side, SolarCity’s need for internal financing to build its infrastructure continues to plunge as the company grows, while Sunrun doesn’t have the same fixed costs, he told IBD. But “these are fragile business models that do require continuous access to capital,” he said. “Capital markets do freeze, and these companies can’t grow without access to capital.” A Credit Problem, Not Solar Nevada accounts for about 3% of the U.S. solar market vs. California, which comprises half of all installed bases, Jobin estimates. California’s rules are especially solar-friendly. In a 3-2 decision, California regulators recently upheld net-metering payments for solar customers — a decision that SolarCity, SunPower ( SPWR ), Sunrun and the Solar Energy Industries Association loudly applauded. Utilities complain that residential solar customers don’t pay for the full cost of operating and maintaining the electricity grid. But in Nevada, solar-friendly regulations were in nascent stages in December when the PUC voted to overhaul its net-metering program. The decision came days after Congress voted to extend the Investment Tax Credit on solar. Analysts say that without the ITC, which underpins the industry, solar demand would have hit a cliff in 2017, following its expiration on Dec. 31, 2016. Leasing also helped the industry grow. According to Utility Dive, third-party-ownership — a model used by Sunrun outside California — “changed residential solar by bringing billions in institutional money into the sector to drive out the high-upfront-cost adoption barrier.” Zino saw leasing programs fill out the solar market in 2011-2013. “Solar was murky from 2012-2013, as we saw significant reductions in incentives across the globe,” he said. “It was around that point that financing vehicles started to become more popular across the globe.” Could banks hesitate to underwrite solar leasing programs? Windham says no. “You essentially have a portfolio of consumer loans with 750-plus FICA score customers, and it’s attached to your house as collateral,” he said. “If, as a market, we can’t do that level of customer finance, we have a real problem in the credit market.” Going The Way Of Arizona, Hawaii Wall Street slammed solar stocks under the pall of the Nevada net-metering decision. On Dec. 22, as the PUC debated, IBD’s 22-company Energy-Solar industry group fell 4.1%. The group has continued to tumble, though it hit a near-term bottom on Jan. 20, along with the general market. That’s what Nevada’s solar demand is going to look like, say Windham, Jobin and Zino. But SunPower CFO and 8point3 Energy Partners ( CAFD ) CEO Chuck Boynton disagrees. This is the time to innovate, he says. “I think Nevada is going to be an amazing solar market,” he told IBD. “What you’ll see is companies like us developing technology to deal with policy.” Boynton is referring to solar storage, a pie-in-the-sky ideal for the solar industry. Right now, SunPower’s Energy Link lets customers “use our system to control demand to effectively self-consume their energy.” Tesla Motors sells Powerwall batteries for residential power storage, but generous net-metering policies in most states make the batteries uneconomic for most homeowners. Jobin isn’t as sunny on Nevada’s solar future. He expects that the state will likely go the way of Hawaii and Arizona. Hawaii — 14% solar penetrated — just resolved a net-metering battle that preserved retail rates for existing solar customers, but new customers will have to choose between two less lucrative options. “Growth came to a screeching halt while these policies were being debated,” Jobin said. In Arizona, utilities Salt River Project and Arizona Public Service have submitted proposals to gut net-metering policies. The SRP proposal was successful and hiked rates for solar customers who purchased their systems after Dec. 31, 2014. “As a consequence, growth fell off the cliff for that region,” he said. Windham says that some customers in Nevada will be willing to purchase solar systems outright — usually at a $20,000 price tag. “Some people will still do solar, because they want to do it, because they want clean energy,” he said. “But we’re much closer to zero (demand in Nevada) than we were a year ago. You really need net metering for rooftop solar to work. Without that net metering, the economics don’t really work.” Scalper1 News

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