This post is part of a blogging series by economics students at the Presidio Graduate School’s MBA program. You can follow along here.
by William Ray Yeager
In the new energy economy prices are at historic lows and falling. Yet the question everyone still asks is, who will pay for it? Established technologies dependent on fossil fuels benefit from economies of scale that never would have been possible without massive public and private investment. Likewise, renewable energy (RE) technologies will only achieve significant market share once the world of institutional finance shifts its focus greenward. This trend is building momentum not where one might expect, in megalithic power plants, but on residential streets across America.
Creative companies with catchy names have been quietly building portfolios of small-scale power plants. Through leasing arrangements or power purchase agreements (PPA) organizations such as SunRun, Sungevity and SunEdison are connecting billion dollar investment funds with individual homeowners. For companies like US Bancorp and Wells Fargo the market is so small as to be almost beneath their radar; none of the big Wall Street firms are equipped to manage thousands of assets, most worth less than $50,000. On the other side, far more homeowners can benefit from their own solar array than can afford to buy several decades of electricity up front.
It is clear that these sort of financing arrangements will play a big role in the expansion of renewable energy technologies. What remains to be defined are the mechanisms that will streamline this process. Underwriting standards and well vetted, boilerplate contracts common in the real estate, auto loan and credit card industries are unheard of in RE. Until these standards are developed growth in this field will be limited. That said, great strides are being made by the aforementioned firms and others.
The last piece of the puzzle, the piece that will make the RE market as hot as housing once was, is a global market in RE asset backed securities (ABS). Investors can now buy bonds backed by credit card debt, auto loans and real estate with returns, and corresponding risk, to match their strategy. Will we soon see bonds backed by the cash flows generated from residential solar electric systems? If the current upward trend in energy prices and the current downward trend in RE costs continue in the coming years the answer is yes.