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Sol ar Securitization: Challenges, Financial Arrangements and Policy Implications

This study explores the concept of solar securitization, its benefits and risks, and provides policy recommendations for its implementation. It examines profitability indicators for solar developers and trustee sensitivity analysis to assess risk and credit ratings.

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Sol ar Securitization: Challenges, Financial Arrangements and Policy Implications

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  1. SolarSecuritization: Challenges, Financial Arrangements and Policy Implications Jacqueline Yujia Tao IAEE Concurrent Session 21 June, Wednesday

  2. Financing Requirements USD 93 trillion1 USD 78 trillion2 ~Nominal Gross Global Product in 2014 In the next 15 years to finance the global low carbon transition 1 IEA (2017) Mobilising Bond Markets for a Low‑Carbon Transition 2 CIA (2015) World Factbook

  3. What is Solar Securitization? • Securitization is the process of transforming illiquid assets into financial instruments to be traded • Asset-backed bonds • Collateralized Loan Obligation (CLO) • Real Estate Investment Trusts (REITs) • Some considerations: • Utility Scale vs Distributed Applications • Financing or Re-financing

  4. Research Methodology • Hypothetical securitization process on existing assets of a solar developer in Singapore • Discounted Cash Flow (DCF) model • Profitability: Net Present Value (NPV), Equivalent Annual Annuity (EAA), Internal Rate of Return (IRR) and discounted payback period • Viability: Debt Service Coverage Ratio • Novelty: differentiate between cash flows of the solar project developer (the originator) and the SPV (trustee).

  5. Process of Solar Securitization Deal Consortium Engage services Underwriter (Investment Bank) Credit Rating Agency PPAs Engage services Legal Counsel Solar PV Developer (Originator) Other Intermediaries Help to set up Help to structure 3 1 2 Initial Ownership Cash for PPA Financial Instruments Backed by C A B Purchase Special Purpose Vehicle (Trustee) Invest in Investors Provide capital Source: Author’s illustration

  6. Benefits and risks of securitization Benefits Risks • Benefits to Project Developer • Increases the access to finance • Reduce cost of finance • Benefits to Investors • bankruptcy remote returns • exposure to a diversified investment portfolio of unique assets • Risks to Project Developer • Unrealised pricing benefits due to esoteric asset class and overestimation of risk • Risks to Investors • Underestimation of risk

  7. Data • hypothetical asset pool of 125MW, based on examining all projects undertaken by the leading solar developer in Singapore. • Both primary data sources and secondary sources • 25 year contract based on variable prices pegged to a benchmark price (Singapore Power Low tension electricity tariff during peak hours) • Variability of annual electricity prices was modelled using a Geometric Brownian Motion (GBM) stochastic approach

  8. Scenario Setting

  9. Profitability Indicators for Solar Developers Source: Model Results

  10. Profitability Indicators for Solar Developers Source: Model Results

  11. Net Project Cash Flows by Year Source: Model Results

  12. Profitability Indicators for Trustee

  13. Sensitivity Analysis Source: Model Results

  14. Risk Assessment and Credit Rating • Importance of coupon rate  appropriate pricing of risk • Appropriate pricing of risk and the required expertise • Technical performance • Consumer behavior • Technological advances • Complications due to “pooled solar securitization”

  15. Discussion: Cash flow management of Trustee • Over-collateralized cash flows presents opportunity for short-term liquidity management strategies. • If well executed: increased profitability • If poorly executed: potential default Source: Forbes, Assessed from: https://www.forbes.com/sites/antoinegara/2016/04/13/solar-energy-giant-sunedison-may-be-in-technical-default-according-to-creditsights/#17bd612b26ba

  16. Policy Recommendations • Standardize contractual and technical asset terms • Industry trade meetings: bridge the information gap in the financial industry • Incentivize Investor Demand • Incentivize benchmark bond issuance • Provider of external credit enhancement facilities • Investor Protection through financial regulation

  17. Thank you! Energy Studies Institute 29 Heng Mui Keng Terrace Block A, #10-01 Singapore 119620 Jacqueline Tao Tel: (65) 6516 6692 Email: esity@nus.edu.sg

  18. Model Parameters

  19. Model Parameters

  20. Energy Price Modelling - Geometric Brownian Motion (GBM) Random Component • PE(t): future energy price in year t • PE(0): initial energy price of PE • αEt : annual price drift effect • ε: random error . Drift Component

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