The residential solar industry in the United States has continued to regain momentum after a difficult spring season due to the coronavirus crisis. In addition to the recovery in demand, the strong performance of assets throughout the pandemic has proven that residential solar is ready for further investment from various sources of capital.
Attractive financing options, especially solar loans, have greatly contributed to the market recovery. Homeowners are looking to save money during this tough economic time. Buying a solar system through debt offers immediate bill savings and doesn’t require customers to spend precious money.
Tuesday, Sunlight Financial ad that it has funded more than $ 3 billion in loans for solar systems and home improvement projects, while Mosaic passed this mark back in January of this year. Loanpal, currently on the biggest financier in the industry, financed more than $ 4.5 billion in solar loans in October, according to a report by the Kroll Bond (KBRA) rating agency.
These three major solar loan providers are among the fastest growing private companies in the United States in recent years. In addition to the large second quarter market contraction due to the coronavirus, this growth trend continued into 2020. Installers and loan companies have reported monthly increases in sales and loan approvals since the governments of the States have started to relax lockdown restrictions. Many players have also achieved record sales volumes in recent months.
Solar loan portfolios passed COVID-19 stress test
The proliferation of these financiers and more generally of the solar credit market is a well documented trend in industry. But the strong overall performance of the asset class is arguably an even more important indicator of success.
The remarkable resilience of residential solar power throughout the pandemic has proven that these assets can withstand times of economic downturn and uncertainty. Positive news came in May when KBRA announced a full review of all outstanding ratings for asset-backed solar loan securitizations in response to the macroeconomic impacts of the COVID-19 pandemic. For the 17 securitizations rated by the agency, KBRA did not issue any downgrading or placement under surveillance.
Sources: Kroll Bond Rating Agency, Sunlight Financial, Wood Mackenzie. Loss rates for Mosaic, Sunnova and Dividend are based on cumulative net loss. The rates for Loanpal and Sunlight Financial are based on cumulative gross loss.
Solar loan providers continue to report that their business volumes have maintained healthy forbearance demand levels and low default rates. Several vendors have introduced payment relief programs to help customers get through COVID-19. As documented by KBRA, these have remained mostly intact. Loans to which Loanpal has granted COVID-19 disaster tolerance peaked at just over 1% of its overall portfolio in June, and that rate fell to 0.38% in October. Only 0.3% of Sunnova customers needed short-term payment assistance in May. Mosaic had granted extensions to 2% of its customer base, also in May, and that figure fell to 0.29% in August.
The concept of a “bill hierarchy” can help explain the low default rates of residential solar assets. Most solar customers enjoy a bill swap and substantial monthly savings over their utility bill before they switch to solar. The alternative to paying for a solar loan would likely be more costly for the customer; therefore, there is a powerful incentive to stay up to date on the loan. This is especially true in times of economic downturn where saving money is crucial.
It’s time to pick the industry winners
Securitization markets are just a glimpse of the investment landscape. For example, Sunlight Financial sources capital from forward agreements and private portfolio transactions. Here, too, we see strong asset performance and loss rates among the lowest of any deal.
Of course, performance varies between transactions and vendors. Mosaic has the most experienced loan portfolios and therefore the longest data trail. The company’s latest securitization, which has been repeatedly oversubscribed, demonstrated the strong demand for these assets as more historical data on loan performance accumulates month after month. Investors looking to enter or expand their presence in this space will closely observe these changes in loss rates for each supplier. This will be an important step in investment due diligence going forward.
It is true that solar loan portfolios are still in their infancy and years of payments are yet to come. However, now that the industry has proven itself through a crisis, little doubt remains when it comes to assessing the merits of the asset class. Issuers trade more frequently, and a growing history of performance data provides more clarity and insight for investment decision making.
As a result of these factors, investors have become more comfortable with the residential solar asset class over the past couple of years and have rewarded players with more capital at lower costs. Banks and credit unions have more cash on hand due to increased deposits as homeowners keep their savings. These organizations are looking for a place to solidly deploy their capital. Their question regarding residential solar is shifting from “Should we invest?” To “What company should we invest our money in?”
While the pandemic is not over and the solar industry is still battling a recession, one thing has become clear: As a mature asset class, residential solar has achieved its first real test, and there are many positive signs for the future. Institutional investors who have settled into this space are sure to be happy with the results they have seen so far.
Bryan White is a solar analyst at Wood Mackenzie and author of Update on Residential Solar Finance in the United States report series. Look for the report’s next publication in December on woodmac.com.