Green Bank Prodcuts - Residential Solar

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.hunter@ctcleanenergy.com

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

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

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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