SunRun Talks About Tough Times in Solar Financing

The recession has gotten bad enough that solar, until recently the boomtown of energy, is now struggling to grow at all. The problem isn't with manufacturers, though; the world, it seems, it awash in solar panels. The choke-point is development and installation of solar facilities, where there's not enough financing to pay for panels, even discount ones.

One of the more successful home installation companies is SunRun, a San Francisco outfit that puts solar on rooftops, but maintains ownership of the panels, selling the power they produce to the customer at a fixed rate. The company recently got a $105 million commitment from US Bancorp that will allow it to keep working, even as strong local competitors like SolarCity have had difficulty raising money.

I got on the phone with SunRun's CEO, Ed Fenster, to see if he could explain some of the intricacies of finding funding in a bad environment. (Side note: Ed is a BlackStone alumni, so he can get a bit technical at times.)

CM: Why can't many good companies come up with financing for renewables? Is the environment really that bad?
EF: [The rates for] tax equity came down slowly, then quickly in the mid-2000s. In 2007 it cost 2% more than Treasuries. The reason for the precipitous drop in the cost was that a number of large investment banks moved into the market in a big way. They had very low cost of capital themselves. [ed. note: Tax equity is the type of financing banks were using to buy solar projects, usually through set credit facilities with companies like SunRun.]

[But] a lot of those firms no longer have taxable income, so investments on taxed income are no longer attractive. Wind energy has born the brunt of this. It was the lowest-cost user of tax equity in renewables. They were raising at 6 percent in the heyday. Today it could easily cost 10 percent. Business models predicated on 6 percent don't work as well or at all at 10 percent.

CM: But you raised money. What's special about SunRun?
EF: As we were raising our tax equity last year, we clearly saw the collapse of the financial sector. One of the things we were able to do was focus on providers of tax equity we believe will be around for the long haul. In November, we raised equity with US Bancorp. They have weathered this financial storm with much more finesse than some of their competitors.

It was certainly true that over the course of this, a number of interested people would call and then say they didn't have the rate. The thing that's unreported is that the hurdle rate is much higher. The tax equity market stands open and ready to clear at an appropriate hurdle rate for today.

CM: So you got in with a bank that isn't collapsing. But why can you seemingly get an investment easily, while your competitors struggle?
EF: One of the challenges with tax equity funds is that they're difficult to structure. It's takes lots of work to create them and make sure they agree with the tax code.

Back when there were more tax equity investors, many people selected investors who are now out of the marketplace. They're now needing to raise from people who are in the market. But the bandwidth of these companies, who have all these people banging on their doors, is limited.

Typically companies like SunRun do repeat business with their tax equity investor. Reprinting the transaction is low-cost and easy to do. Taking on a new client, if you're an investor, takes a lot of work.

CM: What else? What's the secret sauce that made SunRun interesting in the first place?
EF: There are a lot of details about our company model and product that would are interesting. We don't escalate our contracts over time. The more you do, the more risk the tax equity investor takes, where their contract has escalated to be more expensive than the utilities. [ed. note: Escalating a contract means raising the price for the end consumer over the time, which can reduce the likelihood of that customer paying -- as occurred with subprime mortgages.]

On the other hand, most tax equity investors don't know how to evaluate consumer credit. But as much as the recession is harming homeowners and individuals, the toll that it might take on retail businesses is potentially much greater. So the risk of providing to a homeowner vis-a-vis a big-box retailer may be attractive. The question is just whether they can evaluate that.