SolarCity has announced plans to sell solar-backed securities directly to individual investors. By selling directly to individuals, they hope to reduce the cost of capital while expanding their solar leasing program.
SolarCity has grown rapidly by offering 20-year leases on solar panels to homeowners. The monthly rate is often less than what homeowners typically pay to a utility, but they don’t have to incur the five-figure installations costs associated with buying panels outright.
The company has already sold solar-backed securities to investment banks, recently offering $54.4 million in product to Wall Street. But this new retail adventure represents an aggressive step forward, and shows that in the solar industry, financial innovation can be more important than technological breakthroughs. The CEO of SolarCity, Lyndon Rive, said, “we expect billions of dollars of investment through this platform,” although he offered no specific timeline or amounts.
SolarCity purchased a technology provider, Common Assets LLC, in order to build the trading platform required to handle the transactions. This puts them in a position to use crowd funding to finance their plans for growth. Since big banks and institutional investors typically want 8% to 9% rates of return, being able to sell directly to investors at a lower rate will significantly reduce SolarCity’s capital costs.
These reduced costs aren’t without risk. Securitization of assets is precisely what led to the sub-prime mortgage crisis. SolarCity contends that it only offers leases to individuals with high credit ratings, but that doesn’t remove the risk that payments may be missed. Once an asset becomes securitized, it can be repackaged and sold as a derivative product, often distorting the underlying economics of a product.
Nonetheless, as tax subsidies to the renewable energy sector expire, innovative companies will have to find new models for capital formation. Taking advantage of online trading platforms to connect directly with consumers represents an opportunity to fund large scale expansion and growth.
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