Let There Be Light: European Funding for Solar ABS and Renewables | Hogan Lovells
As we witness a rapid increase in the costs of energy, particularly fossil fuels and electricity, across Europe, alongside the biggest increase in the rate of inflation for decades, we are reminded that renewable energy is not a thing of the distant future, but much needed at today’s level. A key factor in limiting carbon emissions and contributing to a Europe independent of energy supplies from countries outside Europe is the development and significant increase of renewable energies. Solar energy will play a predominant role in this development. The European Solar Strategy, which was re-announced in early 2022, projects 20 gigawatts of annual generation capacity from solar power by 2025 and 600 gigawatts by 2030. Much of this renewable energy will come from installed solar panels on roofs, many of which are installed on residential homes. However, this potential is – to date – not sufficiently represented by the financing of the acquisition of such solar panels.
What’s going on on the other side of the pond? Experience in solar ABS and renewable energy financing in the United States
To get an idea of future developments in Europe, one has to take a look at the United States.
Since the first solar loan transaction in 2013, the market has grown rapidly. Beginning with a $50 million transaction in 2013, the market has grown to a size of $15 billion. This development was also motivated by legal and regulatory reasons. For the past two years, solar panels have been eligible for the investment tax, which has allowed households to reduce their income taxes. Additionally, California passed a law requiring all new residential homes to be equipped with solar panels. To date, this growing market for residential installations in the United States is highly concentrated in the hands of a small number of very large and powerful originators who are solely focused on the installation and related financing of solar panels. This results in highly concentrated portfolios of such a size that a portfolio-based funding approach makes a lot of sense and adds structural protection for investors.
With the much higher volume of these assets comes a need and potential for commercial-scale solar financing, and therefore we are likely to see more and more commercial-scale solar financing alongside the consumer solar financing.
European Solar ABS
In Europe, we see a growing market for renewable energy and solar panels. Some countries already require new buildings to be equipped with solar panels, which will boost the market for helping individuals finance the equipment. The European Union has passed a directive that allows member states to reduce VAT on solar panels on and adjacent to homes and private accommodation. In addition, in some countries, such as Germany, for example, subsidy programs have been introduced to facilitate the installation of solar panels and guaranteed tariffs for long periods for private households who sell the energy from their panel to the grid. .
However, the situation is very different from the United States. While there is a high concentration of market share in the hands of just a few originators in the US, the situation in Europe is much more diverse: Here we see a much more fragmented market. One of the reasons being the diversity of jurisdictions. Although the difference between a consumer loan in California and such a loan in Florida is not considerable, the differences of these loans between European states are much greater. This results in smaller portfolios and therefore makes securitization much more difficult. Therefore, it is much more likely that we will see the development of “national champions” in each European region. These National Champions are dedicated initiators whose sole focus is solar installation and related financing. The more these originators take market share from commercial banks, which are the alternative in terms of credit, the more chances there are of reaching the critical mass necessary for securitization.
The Challenges of Adopting Solar ABS
In this context, the challenges of the securitization of solar credits in Europe are numerous:
- Fragmentation: Much of the European market is covered by small installers with little standardization of approaches and data between them, making it difficult to obtain a standardized set of data on a number of installers needed for the ABS.
Changing the consumer approach: In many European countries, the upfront payment for the installation of solar panels on residential roofs has become widespread. A key challenge for new initiators will be to bring the long-term nature of a solar loan or lease product to the end consumer and show the potential for consumer savings, particularly in the context of rising prices. energy prices and high inflation rates.
Legal uncertainty: Although the specifics of legal and regulatory requirements vary from jurisdiction to jurisdiction in Europe, typical questions that arise in this regard are: does the solar panel become part of real estate – and as will this be covered by the collateral mortgage – or can it be financed separately? Can you take separate security on the solar panels? Can the investor remotely deactivate the panel if there is a default in a portfolio? Can you reallocate the electricity sale and recover the sale proceeds? Can the investor intervene if the property is sold? Many of these issues are still unresolved, creating legal uncertainty for consumers as well as lenders.
Long funding periods: Unlike other asset classes, solar panels require a longer financing period, typically 15-20 years. It’s much longer than other asset classes and it requires specific skills and an ever-changing investor base. In a small portfolio environment, funding such long assets is particularly difficult in multi-currency scenarios, such as in a pool of assets spread across several European countries.
Adequate regulatory support: The development of a private finance market will also depend on the government’s approach to subsidizing solar panel installations. We have seen extensive subsidy programs in Europe, where consumers could recoup the full cost of installing solar panels up front, if they retrofitted their home in a specific way. Such strong government support minimizes the need for private financing and the potential for ABS.
Driven by rising energy costs and high rates of inflation, the demand for cleaner and cheaper renewable energy generated on the roof of your own roof is increasing across Europe. This is underlined by the European Solar Strategy, which aims to achieve the climate and energy objectives of the European Green Deal.
Simultaneously, we are already seeing an increased demand for sustainable and ESG-compliant finance today and a growing appetite from investors to create ESG-compliant ABS. The European Commission has published a proposal for European standards for green bonds, which is currently in the legislative process. Although there is no final EU directive yet on European green bond standards, solar loans will certainly fall into this category, which creates potential for future securitisations.
The key question, however, will be which originator will have a large enough portfolio for securitization. In Germany, for example, there is on the one hand the public bank KfW, which is very active in solar loans, but will not securitize its portfolio, and on the other hand a number of local savings banks which do not only have small wallets. In this context, we believe that the driving force behind securitizations will come from solar installation companies that generate large enough portfolios for securitization. One of the mitigating factors for fragmentation could be a European regulation that could help standardize data, which is a necessary step for ABS. The United Kingdom could lead by example in this respect: there, all solar panels must be certified under the microgeneration certification system, which could help to obtain a standardized data set for a certain number of installers.
We believe that we are likely to see private securitizations in the not too distant future, which will pave the way for public securitizations further downstream.
After all, we could be on the cusp of a golden age for solar power in Europe: for consumers, the gap between opportunity costs and the ability to produce cleaner, cheaper energy on their roofs is growing faster than in other markets right now. Growing demand for renewable energy in the context of climate change and rapidly rising fossil fuel and energy costs could accelerate the transition to a green economy. While the consumer benefits are clear, security could play a key role in accelerating this transformation.