SolarCity is gearing up to capture a bigger slice of a commercial and industrial solar market, which is replete with opportunities for new financing solutions. SolarCity, which was the first player to foray into the asset-backed securities market for distributed solar, has issued three securitizations backed by leased solar assets, even as it strengthens its relationships with banks and capital providers, and explores new ways of diversifying its funding sources.
SolarCity expects to issue multiple ABS products in 2015, Marco Krapels, senior v.p. of structured finance and strategy at SolarCity, says in the second instalment of this PFR exclusive. Krapels sat down with Senior Reporter Olivia Feld to discuss trends in the evolving ABS market as well as the company’s growth strategies in the C&I market.
PFR: You recently partnered with Google to raise $750 million, should we expect to see more partnerships with non-traditional lenders?
Krapels: I think you can expect SolarCity to continue its banking and non-banking relationships as it pertains to capital. You can expect us to continue growing bank relationships, as well as non-bank capital provider relationships.
PFR: Going through some of the innovative structures SolarCity have pioneered, SpaceX recently announced that it would invest $90 million in bonds for the company’s own online platform. Could you talk about SolarCity’s plans for large scale bond issuances, and more generally, what you are planning in terms of many more such innovative deals?
Krapels: SpaceX purchased $90 million in bonds and that was a decision made by the SpaceX CFO Bret Johnsen. He reviewed the materials and he bought the bonds online from us, which was really exciting. They purchased the bonds online and under the same terms as any other investor. SpaceX had a certain amount of excess cash on its balance sheet and was looking for attractive returns relative to the risk. They concluded that we provided higher returns than those they could have achieved through comparable investments with the same maturities in the market available. That was an issuance that we made and that was a great start to a relationship.
Regarding the bond platform that we have, we will continue to evaluate how we can leverage that to achieve our objectives. There is definitely potential there and there is interest for it. We have a great relationship with our institutional placement agents. You look at our securitizations and the question really is to what extent we issue more through the bond platform vis-à-vis our long-term institutional relationships that have also done a great job in achieving low, long-term fixed rates in the institutional market through our securitizations. We’ll continue to evaluate both and we will always execute where we can get the best deal. The solar bonds platform is a great tool to have at our disposal, and we’ll evaluate the uses of that on an ongoing basis.
PFR: Looking at the solar securitizations pioneered by SolarCity, could you tell us whether the company has plans to do further securitizations? Also, what are your impressions of the market and how the investor class is maturing in the solar space?
Krapels: The ABS market has served us well and we’re happy with how we’ve been able to tap the ABS market. We continue to view ABS as an attractive market and expect to have multiple issuances in 2015 and continue to lead the industry.
PFR: I’ve spoken to other developers who have given me the impression that they are looking at ABS. Can you give me your sense on how this market is developing? Do you think there is going to be a lot more of this activity?
Krapels: We’ve proven that this is an investment-grade asset class, and it’s great to be able to lead the industry and help diversify its funding sources. I think we’ve set the stage for what’s possible. Further broadening this asset class is a good thing. I’ll leave it up to our competitors to make use of the fact that we established this as an investment-grade asset class. It really depends on individual companies to what extent they want to use ABS as a tool to maximize the cash they can raise against installed assets, and to also lock in rates on a longer term basis.
PFR: What do you think is next for the residential solar industry and what areas of growth would you encourage our readers to watch?
Krapels: That’s a great question. First of all, the penetration in the U.S., which is still below 2%, is extremely low. That alone presents a phenomenal opportunity. Solar competes in many states vis-à-vis utility rates, and I think that SolarCity is uniquely positioned to compete very well on a cost basis, now and post 2016. So, there is going to be a lot of activity in this space now through the end of 2016, when the ITC steps down from 30% to 10%. I think there are folks out there that are probably relying on that because their construction cost is still relatively high. They’ve got a lot that they need to finance and they are relying on being able to monetize tax equity to be do so. We are in a fortunate position to see our costs continue to decline, in part aided by the vertical integration we’ve achieved, and partly by having much more control over our cost structure by nature of vertical integration. We’re executing extremely well on lowering our cost structure and we will be very well positioned to compete post-2016.
I think a lot of folks in the industry need to work hard on trying to be in the same position. I think that is certainly going to be very interesting for you and others. I think you are going to see an addressable market for residential solar that is already vast with a very low penetration, and that addressable market is going to continue to increase.
I think residential space and commercial and industrial are big focus areas for us as well that we will continue to pursue aggressively. If you are a business owner and you have seen your cost of power increase by 50% over the last 10 years, and someone comes to you and allows you to lock in at a rate equal to or below the rate you are paying and avoid those future increases, it’s the right decision to make.
So, we’re really allowing a lot of people to buy long-term fixed power at a cost lower than they are currently paying the utility, and effectively being a hedge against future rising electricity rates. So it’s a massive market and we have plenty of financing options at our disposal.
PFR: I want to follow up on a point you were making about C&I. Within C&I, what are the areas of focus at the moment?
Krapels: Within C&I, you’ll see us execute with the larger retailers and the middle markets as well. Municipalities will be a focus too. We’ll continue to evaluate ways to expand and capture a larger slice of that vast market. Given where our costs are, we were competing quite well in many of the geographical areas where you have middle markets and retailers that are still paying higher utility rates each year. I think you are going to continue to see us grow our C&I business quite significantly.
PFR: In terms of the wider renewable industry, what trends are you seeing at the moment?
Krapels: I see tremendous, repeatable growth in residential and C&I. The reason why I say that is that the utility-scale business to some extent really still does depend on renewable portfolio standards that need to be met in certain states that drive utilities to sign up large power purchase agreements to procure a certain amount of their generation from renewable sources. It’s not to say utility-scale also does not compete on a different economic basis since that certainly is the case in certain states. But all of our products compete on an economic basis. Our homeowners go and buy renewable energy from us, they buy solar energy from us because it’s fixed, it’s cheaper and it’s clean. But being able to offer power at an economically attractive rate is what is driving a lot of the demand. That’s an important distinction to make. Therefore, we have tremendous confidence in our growth because it’s an economic extrapolation of where we currently are – our costs relative to what those of utility rates are. Right now, the overall renewable contribution to our power mix is 7%. When it comes to new electricity generation in the U.S., year-to-date last year in 2014, we’ve seen renewables grow to substantially more new electricity generating assets built in the U.S, and I do believe that that is a sustainable trend.
PFR: Finally, have you have made any new hires to your 20-person team since you’ve been at SolarCity?
Krapels: We are positioning our team for substantial, multi-year growth and have been constantly hiring top notch people at all levels. As we continue to expand into these different categories, it really starts to add up and we are a multibillion-dollar capital raising machine for which we will continue to attract top-notch people.