Securitizing electricity revenues

The Times reports of the first ever securitization of solar electricity payments,

Standard&Poor’s has given its preliminary blessing to the first offering of this kind, rating a set of notes intended to raise $54.4 million for the fast-growing installation company SolarCity... it gave a rating of BBB+, a low investment-grade designation, to the notes. SolarCity plans to sell the bonds, which are secured by a bundle of residential and commercial power contracts, privately this month... Many of the power contracts are with individual residences and businesses, which have increasingly turned to leasing solar systems to avoid the upfront costs. Under those terms, SolarCity pays for installing and maintaining the system in return for monthly payments for the electricity generated. The deal will help finance the rapid expansion of SolarCity, which has become a leading installer of solar systems in the United States... It has signed up more than 82,000 customers so far...

Theoretically contracts backed by tariff payments by consumers should be attractive given that people will continue to use electricity and bill default rates are very low. However the lack of standardization of contracts and the lack of any performance history increases the risks associated. The prevailing market conditions have undoubtedly played a role in the issuance,

The bonds are expected to have a yield of around 4.8 percent, which, in a time of low interest rates, is a relatively high rate that compensates investors for buying such an untested security. The offering is also relatively small and will be sold only to select institutional investors.

As solar and other renewables sector expands, developers are already facing financing constraints. In the circumstances, they have to rely on such innovative approaches to mobilize the resources required to finance their investments. But such investments are not likely to be readily forthcoming in normal times. Further, there is the associated danger that the promoters, many with only a handful years of existence, may disappear leaving investors saddled with massive loans. Finally, there is the ever-present danger associated with securitization when it goes beyond its first stage into transactions that are far removed from the original contract.