The Role of Solar Financing in the Path to Economic Recovery: Hear it from the Experts

Can solar lead the way in spurring crucial economic development post-COVID-19?

Energize Ventures
August 27, 2020

Can solar lead the way in spurring crucial economic development post-COVID-19? Industry experts in the financing sector believe so — hear their thoughts below.

In July, our portfolio company Aurora Solar hosted its first ever virtual summit dedicated to navigating the unique challenges and possible opportunities amid COVID-19. Energize Principal Tyler Lancaster moderated and participated in the session titled Show Me the Money: Solar Project Financing in a Downturn, featuring experts from Mosaic, Sustainable Capital Finance and kWh Analytics. In this post, we’ll cover the key takeaways shared during our discussion. If you’d like to listen to the full session, you can watch it for free on-demand here.

Solar as a renewable energy source is now mainstream, yet it’s still just the beginning for the industry. As of 2020, solar serves more than 2 million households in the U.S., and, alongside wind, accounts for more than 75 percent of new capacity additions to the grid. However, rooftop solar is currently installed on less than 2 percent of U.S. homes. The outlook for growth in the sector has never been more promising now that the levelized cost of solar is less than the ongoing cost of operating coal plants. In other words, it’s currently cheaper to build more solar than operate many of our existing fossil fuel infrastructure.

Despite the COVID-19 pandemic and subsequent economic downturn, we believe solar will be an influential driver of economic recovery in a post-COVID environment. Why?

1) Resiliency: Distributed solar provides an economical and resilient alternative to grid electricity, especially when paired with battery storage. With work and school going remote, home power bills are rising — and solar can provide immediate cost savings with no-money down financing. Weather disasters are also on the rise, reducing the reliability of grid electricity in many locations across the U.S. Solar paired with storage ensures essential appliances and equipment stay on during outages.

2) Air Quality: Solar reduces localized air pollution and accelerates decarbonization of the power sector. As folks spend more time walking in their neighborhoods, municipalities and cities, the improved air quality during quarantine is instantly noticeable. Shifting away from fossil fuel power and combustion engine vehicles can dramatically improve local air quality, fast.

3) Jobs: Solar creates high-quality jobs in local communities. Clean energy accounts for more than 3 million jobs in the U.S. alone, outnumbering oil and gas 3 to 1. In fact, solar technician has been one of the fastest growing careers over the past decade.

Solar financing, in particular, has a unique role to play in the near-term recovery and future growth of the industry and economy at large. Panelists the Summit’s solar financing session agreed and shared the following themes during our discussion.

  • Sustained Deal Flow: Financing deal flow remained robust even during the height of COVID-19, when all but essential businesses were shuttering doors. Solar was deemed an essential service early on, and industry players from installers and banks to utilities and municipalities rapidly adopted digital tools to sustain operations even during stay-at-home orders.
  • Robust Capital Market Dynamics: Overall, capital access for solar remains strong, especially for high-quality assets and developers with a robust track record. The cost of capital has increased slightly due to higher credit spreads (despite low interest rates) to account for heightened risk and a reduced appetite for tax equity with shrinking corporate profits. However, many of the near-term capital market dislocations are expected to stabilize quickly as solar as an asset class remains attractive with good growth prospects, continued cost declines, and stable long-term cash flows.
  • Focus on Familiarity Underscores Importance of Relationships: Amid financial uncertainty, we’ve seen a “flight to familiarity” — now more than ever, entities that can demonstrate a compelling return on invested capital with real operating history are rewarded. Though this can pose a challenge for newer clean energy companies, we recommend higher-risk endeavors seek out grant funding, specialty financing, family office investment and other forms of long-term capital willing to bear higher risk.
  • Cost Effectiveness Enabled by Technology: As adoption of technology and software in solar rises, there is optimism that the industry can finally get a handle on soft costs, which now dominate the cost stack. Solar entities are increasingly utilizing software to streamline workflows in customer acquisition, project financing, installation and design, which will create a more sustainable and profitable cost structure long-term.
  • Stimulus Legislation: On the solar wish list for post-COVID stimulus legislation? A cash grant direct pay mechanism to augment the investment tax credit (like the 1603 program offered historically), or at a minimum a solar ITC extension. In addition, a battery storage tax credit to reduce the cost of storage for homes and businesses would help further accelerate the 20–30 percent storage attachment rates we currently see for solar.

Unlike the 2008 financial crisis when many investors fled from clean energy funding, the industry has remained resilient during the current pandemic. In fact, it has attracted additional investor capital as a clear growth opportunity coupled with compelling economic fundamentals. Solar’s resilience during COVID-19 is a harbinger of the decade to come — a mature industry with a vast pool of potential new customers, increasing access to mainstream financial tools, and a mission to create access to solar for all.