Published on February 19, 2014
CEFIA’s Residential Solar Financing Products Bert Hunter, Executive VP and CIO, CEFIA February 6, 2014
Agenda • What’s the Situation? • What’s the Complication? • What’s the Resolution? • What have we learned? • Discussion 2
What’s the Situation? Four Macro Challenges in CT High Energy Costs CT has THE highest cost for electricity in the "lower 48" Need for "Cleaner / Cheaper" Energy Sources Programs that will diversify our energy mix into renewable/clean power Grid Reliability 5 major storms in 2 years with unacceptable outages Government Spending Constrained Emergency budget deal in 2013 3
What’s the Complication? Challenges for Clean Energy Adoption Lack of Scale in Residential & Commercial PV • High installer margins = low volume and solar more expensive than grid • No transparency / lack of information for customers Financing Options Limited • • • • Market “trained” on subsidies and / or tax motivated Nationals tend to focus on select markets & towns Specialty lending available…at high cost and / or shorter term Self-financing constrained Would-be Mass Lenders Dislike Product Risk • • • • Energy upgrades small cost relative to mortgage Low visibility to clients Internal bandwidth limited Unfamiliar with revenue generation aspect of clean energy products 4
Subsidizing entire viable solar market is part of complication # Residential Rooftops 700,000 Solar Market Size by Rooftops 659,312 • Only 0.9% of viable market served 600,000 • ~3.9 GW of viable solar capacity remaining 506,714 500,000 400,000 • At current subsidy level, would cost state over $4 billion to penetrate 100% of market! 300,000 200,000 100,000 4,500 0 Total Addressable Market Economically Viable Market • Not a solution Actual Penetration 5
Must transition from grants to loans • Subsidizing entire market is fiscally unsustainable • Must transition from grants to financing • Capital can be public or private • Want to maximize private investment, however currently not enough capital available • Green banks will turn on faucet, draw in private capital 6
As installations grow, need to move from grants to loans increases $/W Reduced installed $/Watt 9% year-over-year since 2011 Lowered subsidy by 20% since 2011 Installed capacity grew 150% year-over-year since 2011 kW 7 7
What’s the Resolution? Green Banks build bridge between demand and installers Develops a "menu" of financial products to scale-up deployment of solar PV Lowers cost of installation with demand aggregation, scale efficiencies Lowers cost of capital Provides new asset classes for capital providers Acts as a clearinghouse for information and data transparency Provides Consumers & Installers with Access to Necessary Capital 8
CEFIA offers residential solar financing for installers, homeowners, banks • Try to provide roughly equal economic value in each product to let market identify which is most desired; constant process of market discovery • Products must fund all upfront costs in return for power price lower than grid CT Solar Lease Target Market ~Amount Available Eligible Technologies Ownership Down Payment? Interest Rate FICO Min DTI Max CT Solar Loan Smart-E Loan Installers Homeowners Banks $60M $5M $28M Solar PV Solar Hot Water Solar PV Efficiency, HVAC All renewables (PV, SHW, Geothermal, Biomass, etc.) No (option to purchase) Yes Yes Not required if installed cost is less than $4.50/W Minimum of 5% of net installed cost Not required N/A (20 years) 6.49% (15 years) 4.49% (5-yr), 4.99% (7-yr), 5.99% (10-yr), 6.99% (12-yr) 640 45% 680 45% 640 45% 9
Lease savings steady, loan savings high at end $2,500 $2,000 Lease Savings $1,500 $1,000 $500 $0 $500 Solar Lease savings Profile • Lease is cash flow positive for customer from day one • Long, steady stream of savings $1,000 $1,500 $2,000 $2,500 $2,000 $1,500 $1,000 $500 $0 $500 $1,000 $1,500 Loan Savings Solar Loan Savings Profile • For Loan customer has to pay out of pocket upfront • Cash flow positive by year three using ITC savings • Greater savings on back end $2,000 10
CEFIA currently provides five forms of support for solar lease product CT Solar Lease provides local installers an important sales tool, while customers benefit from affordable, no-money-down financing and peace of mind. CEFIA Sub Debt Equity Loan Loss Reserve PBI (incentive) Developer services Debt Syndicate led by First Niagara Debt Tax Equity System, Insurance, Lease CT SLII, LLC $ CEFIA Holdings , LLC System Contractor $ (SHW, Resi. or Comm. PV) Install PV or SHW Customer (Resi., Comm., or Muni) 11 11
80% of CT Solar Loan sold to Mosaic and Hampshire Foundation to replenish, relend capital CEFIA Crowdsourcing Platform $ $ $ from loan repayments (20%) Sub Debt CEFIA (CT Solar Loan LLC) Foundation $ Sungage & LeaseDimensions $ from loan repayments (100%) $ Contract PV Contractor CT Solar Loan provides local installers an important sales tool, while customers can take the 30% ITC and benefit from long-term, low cost capital that allows them to own PV Monthly Loan Payment Loan Agreement Install Residential PV Customer 12 12
Smart-E Loan product targets local banks with loan loss reserve from CEFIA Community Banks and Credit Unions CEFIA Loan Loss Reserve tiered Min. Underwriting Guidelines Technical Project Approval Technical Approval PV, RE, EE or HVAC Contractor $ Install $ $ Residential PV, RE, EE, HVAC Customers 13 13
Cost of loan is only better than cost of grant if default rate is low enough • Goal is to transition from grants to loans, but key is finding good loans • If credit risk is too high, may be better to give grant Cost of Loan = Loan Amount x Expected Default Rate Cost of Subsidy = Amount of Subsidy If expected default rate is high enough, better to do grant 14
CEFIA provides credit enhancements to enable more favorable terms from private lender • All three residential solar financing products have loan loss reserve credit enhancements to increase economic value for customers • A loan loss reserve enables banks to offer better terms because CEFIA shares in each loss, capped at a total amount of potential losses • Private lender has reassurance of payback, but still has to cover portion of losses – ensures quality underwriting practices CT Solar Lease CT Solar Loan Smart-E Loan Installers Homeowners Banks Capital for Financing $60M $5M $28M Size of Loan Loss Reserve $3.5M $300K $2.5M Covers P&I for delinquencies >90 days 7.5% of Loan Balance for FICOs 680 and up 15% of Loan Balance for FICOs 640-679 Target Market Terms of LLR Used to smooth DSCR to reduce risk to tax equity from leverage 15
Aggregating demand lowers costs and attracts cheaper capital • Demand aggregation brings scale efficiencies to installation, lowers costs of projects • Also takes step toward obtaining scale needed to draw private capital at low costs CEFIA Credit-Enhanced Product CT Solar Loan CT Solar Lease II Smart-E Loans Demand Aggregation Market Transformation 9% year-over-year reduction in residential installed $/W since 2011 150% year-over-year CAGR in installed kW since 2011 16
Providing customers with actionable data and options creates demand • CEFIA brings impartial source of data to communicate with installers and customers • Roof-by-roof analysis can be done cheaply, and empowers customers 17
Transparency drives confidence in market stability • CEFIA regularly provides industry stakeholders, customers with data on status of the market • Installers know what average costs are • Customers and installers know what subsidy level is and when it will be reduced • Transparency creates trust in CEFIA 18
Lessons are green banks attract private capital, customer acquisition key to success • Good Program Design Attracts Capital – Green Banks can design products and programs that make it more attractive for private capital to fund Solar PV and Energy Efficiency • Marketing and Customer Acquisition are the Keys to Programmatic Success – Volume is the main challenge, programmatic success and design tweaks will stem from robust customer demand; transparency / data sharing, marketing and customer acquisition are all tools Green Banks have to stimulate demand 19
Credit scores, training, and time are primary challenges • Banks don’t like FICOs below 680 – Require credit enhancements – Solar Lease 2 achieves 640 FICO (limit on exposure as % of portfolio); Smart-E doubles credit enhancement for 640-679; Solar Loan - not yet • Training is essential – Contractors, lenders require focused investment in training – Critical to channel marketing strategy • Real innovation takes time – Huge time investment to develop program design, capital partners, docs – CEFIA shares its structures, documentation. NYSERDA has done so as well. We hope other Green Banks will follow our lead to save others time! 20
Green bank must address four key questions • Financing • Program / incentive design • Transparency • Installers • Lenders • Utilities / Regulatory framework Gaps in the Market Key Drivers of Scale • Existing Market Channels • Role of Incentives • Standardization • Education / Data State of the Market Migration from Incentives to Financing • Public Policy Goals • Communication / Coordination 21
Appendix Burt Hunter, Executive VP and Chief Investment Officer Clean Energy Finance and Investment Authority 860.563.0015 Bert.firstname.lastname@example.org
Residential solar financing product attributes and goals CT Solar Lease CT Solar Loan Smart-E Loan What Makes It Special? Hassle- and worry-free. No money down Low monthly payment, long term makes owning solar affordable Quick, flexible financing from your local bank Targeted # of Transactions, Year 1 984 123 1200 YTD 178 72 82 23
Value of CEFIA’s Products for PV Customers CT Solar Lease What Makes It Special? Own Your Solar? Down Payment? Terms CT Solar Loan Smart-E Loan Hassle- and worryfree, no money down Low monthly payment makes purchasing solar affordable Quick and easy financing from your local bank No Yes Yes Not required if installed cost ≤ $4.50/W Minimum of 5% of installed cost Not required 20 years 15 years 5 - 12 years (option to purchase) 24 24
CEFIA drew multiple private investors into single product for Solar Lease Role Tax Equity Lend to CT SLII Major Risk(s) How Addressed Recapture caused by default Loan Loss Reserve PBI CEFIA Equity Assurant Bundle Not enough cash for debt service at a % of capital for “build” cost Interest rate risk Subordinated Debt Equity Fund Developer Customers can’t or won’t pay lease Install / Contractor Risk - PR Loan Loss Reserve PBI Assurant Bundle Rate swap Loan Loss Reserve PBI Assurant Bundle 25
Each component of Solar Lease serves specific purpose in making deal work for partners and customers Performance-Based Incentive - Statutorily-mandated incentive - Loan Loss Reserve Applies to all resi. leased systems in CT What it is - $3.5M repurposed ARRA-SEP funding - Why it was used Cost of $ = f(R*P(R)) Increase R for equity investors Increase P(R) for debt investors by diversifying sources of cash flows - Increase P(R) for all investors by enhancing cash flow covenants (effectively improves DSCR) Result: very cost-effective interest rate - R=Return - First loss for deficiencies in lease payments Current rate is $0.18/kWh Subordinated Debt Equity - CEFIA “developer equity”, bundling working capital loan to the fund, leases, systems, and arranges insurance products - Increase P(R) for bank syndicate and US Bank Increase R for CEFIA (channel to clean energy programs) - - - CEFIA contributes sub debt at a reduced rate 2-½%; 20-Yrs Fully amortizing behind Senior Increase P(R) for debt syndicate Increase R for US Bank and CEFIA 26
CEFIA contracts with insurer to cover panel damage - - Assurant SubContractor Provides “Boots on the Ground” for repairs from all causes - Wraps Contractor Workmanship and Manufacturer Warranty - Fulfills warranty even in event of manufacturer bankruptcy - Provides Property, Liability, and Casualty Insurance for install - Authorizes and pays for repair Contracts with Assurant Ensures each project meets contractor and equipment requirements: - 20-year inverter warranty - 25-year panel warranty PV Contractor - Contractor must warranty workmanship for minimum of 6 years CEFIA holds back 1.75% of each install as assurance 27
Customer has simple panel problem resolution through insurer Assurant (NYSE: AIZ) is a leader in niche insurance products • $27B assets • $8B annual revenue • > $1 billion from warranty mgmt Installer Workmanship (ROLL A TRUCK) OEM Warranty (ROLL A TRUCK) • Market capitalization ~$3B • No. 310 on Fortune 500 • No. 1024 on Forbes Global 2000 • Operations in 12 countries Simple "Handle by Phone" Issues (HOMEOWNER) "1-Call" Resolution FOR HOMEOWNER Property Insurance (ADJUSTER DISPATCHED) • 14,500+ employees worldwide • AM Best’s “A” rated 28
CT Solar Loan uses subordinated debt and loan loss reserve to enhance credit Role Major Risk(s) How Addressed Loan Loss Reserve Senior Lenders to CT Solar Loan Not enough cash for debt service Subordinated Debt Customers can’t or won’t pay loan Subordinated Debt Install / Contractor Risk - PR Loan Loss Reserve CEFIA Rebate Sungage 29
CT Solar Loan components increase economic value, ensure payback to lender Credit Enhancement Tool What it is Expected Performance Based Buydown - Statutorily-mandated incentive - Applies to all resi. hostowned systems in CT - - Increases R for investors Cost of $ = f(R*P(R)) - Increases P(R) for investors by reducing required investment per system R=Return Subordinated Debt - $300,000 repurposed ARRASEP funds - CEFIA leverages 80% of the loan payment streams - First loss for deficiencies in loan payments - 20% is kept as subordinated debt - Increase P(R) for all investors - Increase P(R) for senior debt - Increase R for CEFIA Current amount is $1.25/W for the first 5kW and $0.75/W for greater than 5kW and up to 10kW Why it was used Loan Loss Reserve 30
Smart E-Loan credit enhancements deploy more private capital at lower costs Role Major Risk(s) Primary Lenders and Servicers Customers can’t or won’t pay loan How Addressed Loan Loss Reserve Technical Origination 31
Tiered loan loss reserve & underwriting guidelines align lender and green bank interests Smart-E Financing Terms Eligible Contractors HES, HPwES, BPI-certified, or other contractor authorized by utilities or CEFIA (CEFIA runs QA/QC inspection process) Eligible measures Any measure (or combination) that qualifies for CEFIA, utility or CEEF incentive or rebate, with a focus on oil-to-gas conversions 20% of total amount financed can go toward related non-energy measures like roof repair, asbestos remediation, etc. Borrower Credit Criteria (option to offer only Class A) LOAN LOSS RESERVE Class A: 680+ Class B: 640 to 679 Debt-to-Income: 45% 7.5% 15% Term (years) 5 7 10 121 Interest rate 4.49% 4.99% 5.99% 6.99% (not to exceed, may be lower depending on lending institution) Eligible Homes 1-4 Units Loan Amount Minimum $3,000 Maximum $25,000 (min/max, may be higher depending on lending institution) Participating lenders Participating banks and credit unions 1 CEFIA places deposits = 15% of original PBO of loans >10Y 32 32
Smart-E Loans: Green Bank Credit Enhancements Used Credit Enhancement Tool What it is Expected Performance Based Buydown Loan Loss Reserve - Statutorily-mandated incentive - $2.5M repurposed ARRASEP funds - Applies to all resi. host-owned systems in CT - Current amount is $1.25/W for the first 5kW and $0.75/W for greater than 5kW and up to 10kW Covers up to 100% of lender losses of eligible loans - Lenders take first 1.5% loss to align interests - Increase P(R) for lenders Increases willingness to extend LOWER rates for LONGER periods due to LESS expected loss - Why it was used Cost of $ = f(R*P(R)) R=Return - Increases P(R) for lenders by reducing required investment per system 33
Smart-E (12 Year – PV): Annual Homeowner Cash Flows $2,500 $2,000 Value of ITC essentially covers net payments due over 12 year term $1,500 (savings) $1,000 $500 $0 $500 $1,000 $1,500 (25 years) $2,000 34 34
Smart-E Loan effect of term on annual cash flows for WholeHouse Solution 5-year term 7-year term 10-year term 12-year term REFERENCES Net installed costs and average savings based on numbers provided by CL&P. Calculation assumes gas rate of $1.40/ccf and oil rate of $4.00/gallon as well as an energy price escalator of 2.99% 35 35
Different forms of credit enhancements serve specific purpose in supporting loan • Anything that provides a potential lender or investor additional reassurance that the assets will perform, resulting in more favorable terms for the borrower Source: SEEAction Credit Enhancement Guide 36
Green Bank Academy Washington, DC February 6-7, 2014 www.greenbankacademy.com 37
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