In the US, there is no natural lender for the $500,000 to $5 million segment of this market. Open Energy is attempting to slot itself into this void – one that displays relatively low risk but offers high, and consistent yields. This is also an area of project finance where banks are reluctant to lend. Banks only want to get involved in projects that are worth over $20 million; whereas Open Energy is focused on commercial and small-scale utility projects that cost in the region of $500,000 to $1 million.
The investment thesis behind the company is that it is offering commercial solar project owners a streamlined avenue through which to refinance their assets. But the ‘tenant’ in this case is a rated entity like a utility that has a 15 year lease at a fixed price, and they have asset security, in contrast to an unsecured consumer in traditional P2P models. Furthermore, by helping the solar project owner to refinance, that owner is then free to attempt additional projects.
Open Energy is syndicating the debt from these projects, structuring the loans and selling them to investors. The reason why this investment carries so little risk is that the strong counterparty is paying for the electricity at agreed rates for the lifecycle of the investment. Open Energy is able to fund these projects using an online platform where investors can login and see how their investments are performing as well as monitor payment schedules in a clear and logical way.
Solar power is a young industry and so there are few standard measures of how to value projects. This necessitates a good deal of manual work when valuing individual projects. One of the main considerations is the credit rating of the entity that is buying the electricity. The electricity tends to be sold to well rated entities, such as municipalities, schools and utility companies, which helps give a better rating to the project.
Investment into these projects is long term by nature and the investments are for about 7-10 years minimum. No platform has yet brought out a secondary market for this debt but this may emerge in the future, especially if the market continues to grow. Having a secondary market would have the added advantage of attracting more investors to the space. The benefits of investing in solar energy are that it has low maintenance costs, which makes ongoing costs of a project very predictable.
At present, Open Energy is solely focused on solar power but it is hoping to move onto other types of renewable energy in the future.
The solar loans market is becoming increasingly popular. Last month Sungage landed a $100 million solar loan fund from a large credit union. This will finance about 4,000 solar installations. But this firm is not a peer-to-peer lender and is different to Open Energy in that it is providing loans to people for the purpose of installing their own solar panels, whereas Open Energy concentrates on the yield available from selling the electricity created by solar panels.
Mosaic has recently announced that PartnerRe, a global reinsurer that is highly attentive to risk, will provide up to $100 million to back Mosaic’s residential solar loan program. Mosaic was the first peer-to-peer platform dedicated to providing access to solar loans. PartnerRe will help expand this offering with its $100 million investment. This is on top of the announcement by Dividend Solar’s CEO that last month the company raised a solar loan fund in the “8 figures” from “a group of well known and very sophisticated Wall Street investors”.
There is huge investor appetite for the renewable energy space. Parallels could be drawn with the green bond market, which has seen issuance double this year to $40 billion. Issuance in this sector is led by utility companies, which shows that institutional investors are eager to buy bonds in the renewable energy space. Many investors are interested in this sector as a method of diversifying their investment pools and as part of their socially responsible investment (SRI) strategies. The strength of this market indicates that there are many institutional investors who would be interested in Open Energy’s offerings. The advantage of solar bonds over any other type of green bond is the relatively high interest rate they offer with relatively low risk.
Open Energy plan is to invest $5 million of loans this year, and grow that to $40 million in 2015. Their plan is to focus on institutional investors who can help increase the flow of funds. Open Energy is currently in discussions with an institutional lender that would allow the platform to close a deal in 30 days or less. Currently the funds come from a combination of high net worth and institutional investors. The platform has completed 2 deals worth a combined $717,500, sourced from 37 investors, for an operational solar plant in Georgia. The project had a strong payment counterparty, Georgia Power, and an experienced international owner/operator. Now Open Energy is looking to scale up the operation as quickly as it can, and with the bugeoning market for renewable energy investment behind them the future could be bright indeed for this promising young platform.
