While the UN Climate Conference in Baku has highlighted the increasing tensions and challenges in coordinating the global renewable energy transition, the EU will likely continue to stick to its ambitious targets. The REPowerEU plan, which foresees 45% of energy generation from renewable resources by the year 2030, will remain a priority.

Luckily, wind and sun are virtually unlimited, and the technologies to harvest them are well understood. The challenge for the EU is then, how to break down this herculean task into smaller solutions, and how to finance them.

A good example for “smaller solutions” in the sense of the word – or rather hundreds of millions of smaller solutions – is the decentralized approach to the energy transition: the production of energy through solar panels and heat pumps at the consumers’ own home and the self-consumption of that energy for heating, cooling, driving, and living. The European Solar Rooftop Initiative is just one example for the political support of this approach.

Technology has improved vastly since 1991 when Germany introduced feed-in compensation, a subsidy to individual homeowners to bolster efficiency and fight high cost. Solar panel prices have since dropped dramatically, along with the costs for heat pumps and storage. Many argue that subsidies, which add an additional layer of complexity, unpredictability, and market distortions, are no longer necessary and may even hinder further mass adoption.

What has not gone away, however, is the need for consumers to find attractive financing for the upfront investment into their own energy generation, and for the financial industry in turn to create attractive investment opportunities to allow responsible investors to put their money into the refinancing of this consumer demand.

Looking to the US

Over the past 20 years, building renewable energy capacity consisted mainly of large, utility style projects for on- and offshore wind and solar parks. Accordingly, funding came in form of project financing. It is not surprising, that the first financings of decentralized solar panels on individual houses followed the established pattern of project financing.

However, for the strong growth ahead of us, this turns out not to be the ideal form of financing, due to a range of factors including cost, scalability, flexibility, and investor diversification.

The US seemed to have identified a more suitable solution, where the first solar securitization in 2013 created a new asset class, flexible and scalable, and even allowing retail investors to participate in the financing of the green energy transition. Since then, a liquid and growing market has been established, with more than 50 solar ABS issuances raising a total volume of more than USD 20bn. 

Scalable capital markets funding, and the flexibility of tailor-made waterfall structures which perfectly matches the 20-year duration repayments of solar assets would surely be the perfect solution for Europe as well? Not so fast.

Europe will find its own path towards structured financing and securitization

For many years now, EU solar securitization has been predicted to make an entrance with a vengeance. No less than the European Union itself has formulated it as a cornerstone in the financing of the energy transition, fully in line with its general intention to grow securitization into an important building block for capital markets funding across Europe.

And indeed, some initial green shoots can be seen in Europe, including the first public securitization by German solar company Enpal this October, the securitization of energy-related receivables by French EDP’s tariff deficit transactions, or most recently the green synthetic significant risk transfer (SRT) by the Estonian Inbank. While all this is encouraging, the long-awaited avalanche of issuance, catching up or even overtaking the US over the next years, remains elusive. 

Apart from Europe’s traditional reliance on bank vs. capital market funding, the main reason for the slow start has been identified as the high level of fragmentation with heterogeneous legislation, regulation, consumer preferences and energy mixes. The resulting multitude of differently structured and managed consumer portfolios, makes it difficult for a specific portfolio to reach critical mass for a successful securitization, let alone for a recurring program.

But that doesn't mean that going back to project finance is the fate of the growing number of innovative, fast-moving companies which offer tailor-made financing solutions to consumers’ green home upgrades. On the contrary, specifically those players should learn from the experience of others before them, who had to learn the hard way that taking the initial bait of a project finance structure, often locks them into inflexible arrangements, limiting their scaling and their transition to more scalable and cheaper financing solutions.

Also, those companies should not be disheartened by the seemingly unreachable volumes that are sometimes quoted by lawyers or investment banks as the minimums to even think about securitization, especially as these responses are most often driven by the constraints of those parties themselves and not the fundamentals of what actually works for clients or for the market.

The truth is, solutions are not black (project finance) or white (public securitization), but there are many structured credit solutions on the grey scale, which will accompany a renewable financing business to grow into full securitization over time – or in fact to other attractive financing options.

Those solutions range from forward flow structures (which either subtly structure the underlying assets into something that is more natively attractive for unleveraged capital, or is geared specifically to a third party sponsor that itself aims to eventually secure back leverage or securitization), through single-tranche secured financing or ABL structures, up to private warehousing structures which themselves can vary in terms of recourse, duration, advance rate, approach to residual value and more, as a function of what the client is aiming to achieve.

At Alvarez and Marsal, we have an experienced team with practitioners from the renewables financing industry, coupled with a proven track record of advising independently from banks on the best structured credit solutions for your business and growth plans. Come talk to us.