Harris Roen, Editor
Roen Financial Report
February 28, 2013
As more homeowners and business become interested in installing solar, a myriad of financing options have evolved. From third-party financiers to Solar REITs, the options available to benefit the renewable energy industry and end users keep expanding. This article highlights what alternative energy investors should know about trends in creative financing for renewables, and which investments should profit.
What it is:
A Real Estate Investment Trust (REIT) is a security that invests directly in real estate. Investors can buy and sell shares of the REIT like a stock. The REIT can either own the property outright, or own mortgages, or both. REITs generally earn money from rents, or mortgage interest. Solar REITs take this concept and invest in solar properties.
Benefits of Solar REITs:
Typically REITs invest in commercial real estate (hotels, malls, offices, apartments, etc.), which allows investors to become shareholders in profitable real estate projects. A solar REIT generates large-scale financing and allows individuals to own a piece of a significant solar project.
There is one REIT I know of that has a hand in solar, Power REIT (PW). This REIT owns the land under the huge 5.7-megawatt solar farm in Salisbury, MA. It also owns long-term leases on 112 miles of railroad that services Marcellus Shale natural gas developments.
There was an excellent analysis of the company by Forbes blogger Tom Konrad a few months ago when it was trading around $8/share. The stock peaked around $11/share about a month ago, and it is still probably a good buy if it moves down to the $10 range. Caution is advised, though, due to legal issues the company is working through. However, Konrad reports that there is light at the end of the tunnel for PW.
On another front, Bloomberg New Energy Finance reports that a new California startup, Renewable Energy Trust Capital, Inc., may soon win approval to start raising money as a solar REIT. Should this be approved, I expect more Solar REITs to become available to investors in the years ahead.
What it is:
This is a model where a go-between or “third-party” puts up the money to pay for solar panels that are installed on a house or building. The third party makes money by being paid through one of a variety of creative arrangements. This type of third-party financing may also be used for large-scale commercial solar arrays.
There are many flavors of third-party financing, including joint ventures, lease pass-throughs, sale-leasebacks and others. In one example, a homeowner pays a set rate per kilowatt for the electricity they use from their solar panel. This is paid back to the third party, who owns the panel. Another arrangement is where the homeowner pays a monthly fee for the use of the panels, regardless of how much electricity is generated.
Benefits of Third-Party Financing:
One of the challenges of going solar is that the owner has to pay large up-front costs for equipment and installation. With third-party financing, the owner can get the benefit of clean power and reduced electric bills without having to fork out a large sum early on.
This type of financial arrangement benefits solar companies up and down the business stream, from photovoltaic manufacturers to installers to third-party investors to companies that put the whole deal together. It is the latter type of company I find the most intriguing for investors, and is best exemplified by the recently ballyhooed IPO of SolarCity (SCTY).
SolarCity is not the only player here, there are many other companies implementing this business model including SolarWorld, SunCommon, OneRoof and others. Solar City, though, is the only publically traded company whose mission is solely focused on financing and installing solar for the masses, and they are committed to it on a grand scale. While SolarCity stock will likely be very promising for the long-term investor, currently it is not an investment for the faint of heart. My previous article lays out some of the risks, but once SolarCity hits its stride, returns could be robust and consistent.
A more tangential way to profit from this trend is to buy stock in some of the third-party investors themselves. These companies range the gamut of categories, and include Credit Suisse (CS), Google (GOOG), PG&E Corporation (PCG) and Honda (HMC). One of the more attractive options is U.S. Bancorp (USB), who according to Greentech Media has financed hundreds of millions of dollars toward residential solar Power Purchase Agreements. USB is trading at a reasonable PE of about 12.
Master Limited Partnership (MLP)
What it is:
A Master Limited Partnership (MLP) is a type of company that allows investors to buy shares of fossil fuel energy projects while getting favorable tax treatment. Since it is a partnership, taxes only go to the investors (or partners), and as a result taxes at the corporate level are avoided. U.S. Senator Chris Coons (D-Delaware) has introduced legislation to expand MLPs so that the MLP business structure can be applied to renewable energy projects.
Benefits of Master Limited Partnerships:
This favorable tax structure allows an MLP to sell “shares” like a corporation, but be taxed like a partnership. This generally allows MLPs to offer high yields for investors, a huge bonus in today’s low interest rate environment. Current MLP statutes only allow this finance model to be utilized for oil, natural gas, coal, and pipeline projects.
This has caused a boom in MLP fossil fuel investments. According to Senator Coons this creative finance structure has infused an estimated $290 billion in capital toward energy projects through about 100 MLPs. Investors have been rewarded: the Dow Jones Brookfield Global Infrastructure Master Limited Index is up 53% in the past three years, as compared to a 38% gain in the S&P 500 over the same time period.
We are in the early stages of the movement toward allowing MLPs for renewable energy projects, but the prospects are promising. Bloomberg reports that ranking member of the Senate Energy and Natural Resources Committee Lisa Murkowski (R-Alaska) and other Republicans support the bill. If the legislation is enacted, I expect several new MLPs to be listed on one or more of the major stock exchanges this year.
These new trends in financing show a maturing of the alternative energy industry. It also reflects a confidence of large dollar financiers toward the economic viability of renewable energy projects.
Of course, individuals could use their capital to install solar panels on their roof to reap financial and alternative energy benefits directly. This may be an attractive option for some, especially considering the drop on the cost of PV panels. For others, though, taking advantage of one of the options above could be a good addition to a diversified portfolio of alternative energy investments.
Remember to always consult with your investment professional before making important financial decisions.