Page 1

The Taxpayers Protection Alliance (TPA) is a non-profit non-partisan organization dedicated to educating the public through the research, analysis and dissemination of information on the government’s effects on the economy. TPA, through its network of taxpayers will hold politicians accountable for the effects of their policies on the size, scope, efficiency and activity of government and offer real solutions to runaway deficits and debt. Through blogs, commentaries, and special spending alerts, TPA will publish timely exposés of government waste, fraud, and abuse. Recognizing the importance of reaching people through traditional and new media, TPA will utilize use blogs, Twitter, and Facebook to reach out to taxpayers and government officials. Ultimately recognizing that the greatest power of change rests with the millions of Americans across the country who are ready for a smaller more accountable government, TPA will be a catalyst for connecting taxpayers to their elected and non-elected officials.

Where We’re Located

Taxpayers Protection Alliance

About the Organization

1401 K Street, NW; Suite 502 Washington, DC 20005 (202) 930-1716

Connect With Us Online

Contents 1 Introduction 2 Taxpayer-Subsidized Solar 4 Subsidies Encourage Third-Party Leasing and Use of

Asset-Backed Securities 6 From Leases to Loans and Solar Bonds 7 Concerns with Taxpayer-Funded Financing Schemes 9 Economic Damage Extends Beyond Potential Taxpayer

Losses 10 The Inflated Value of Solar 11 Conclusion 12 Citations

The 2007 - 2008 financial crisis left a sour taste for Wall Street in the mouths of many Americans. Policymakers and pundits chastised financial investors for being greedy and preying on Middle America. However, one does not have the scratch the surface too deeply to identify the real culprit of the financial bubble and fallout from its collapse: Washington.1 Government policies, specifically those using taxpayer-provided money and taxpayer-backed loans, ignited the fire. Other government-imposed rules which incentivized banks to securitize mortgages that in a free market would have been undesirable (low quality and high risk), along with the government purchase of those mortgages, burned the house down.2


Few people realize that the United States could be heading down a similar path with its current promotion of solar power. Subsidies available for solar power at the federal and state level come in a variety of forms. Most importantly, they are unreasonably generous. Much like the governmentcreated housing bubble, the policymakers’ goal to increase renewable energy production is arbitrary and unnecessary. And much like the housing bubble and subsequent financial crisis, handouts at the federal and state level are creating a solar bubble that taxpayers are propping up, and it will be the taxpayers and investors who take the hit when the industry comes crashing down. Solar subsidies are moving from Washington to Wall Street, leaving the taxpayer defenseless between two powerful lobbies. In recent years, companies have used a variety of financing mechanisms, most notably third-party solar leasing, to take advantage of lavish handouts. Companies are then bundling and securitizing those leases to raise funds to pay the upfront costs for more home and small business solar installations. Utilizing these financial strategies is an effective tool to raise funds and diversify risk; however, when subsidies are involved, risk and reward are significantly distorted. This report examines the public and private financing of solar power in the United States and the dangers that combining policy and finance present to the U.S. economy. Perhaps solar leasing and in-house lending programs would have emerged and thrived without government subsidies; we don’t know. We do know, however, that the federal and state subsidies created a market that is larger than a world without the special benefits, putting public and private money at risk. In fact, billions of taxpayer dollars and private investment have already been squandered from failed solar investments in the United States. Continuing to channel spending towards politically-preferred sector of the economy and propping up an industry dependent on subsidies could result in a collapsing green bubble. The solar industry is making big financial promises that may be difficult to keep 20 to 30 years down the road, or even sooner. The results could be, and in some instances already are: Billions of taxpayer dollars wasted. Billions of dollars in lost financial investment and misallocated capital. Homeowners struggling to sell their homes because of solar lease contracts and a rapidly depreciating solar asset. Solar manufacturers and leasing companies facing financial difficulties if future revenue streams are not as predicted, resulting in losses for investors. Fundamental policy reforms should remove picking winners and losers and allow market forces to determine the value of solar as an energy source in America. Doing so will benefit taxpayers, investors and even establish a more robust solar industry by creating a system that relies more on competition and innovation and less on securing the next handout from Washington. From Washington to Wall Street: How Government Policies are Skewing Solar Investments


Taxpayer Subsidized Solar

Taxpayer-Subsidized Solar

Solar power provides the least bang for Americans’ taxpayer buck; the federal government heavily subsidizes solar but it only provides 0.6 percent of America’s electricity supply.3 The U.S. Energy Information Administration reports that electricity-related subsidies increased 38 percent from FY2010 to FY2013 and “This increase was largely the result of a $4.2 billion increase from $1.1 billion in FY 2010 to $5.3 billion in FY 2013, in support of solar energy […].”4 Before understanding how and why Wall Street uses different approaches to finance residential and commercial rooftop solar, it is important to understand the federal and state’s government role in pushing more solar into the electricity mix.5 After all, the accessibility of these taxpayer-provided subsidies is the primary reason the United States is witnessing a flood of new companies and new financing schemes to take advantage of the “free” money. Here are the six ways the solar industry is funded: Investment Tax Credit. The massive federal subsidy available to commercial and rooftop solar that generates interest from Wall Street is the Investment Tax Credit (ITC), a federal income tax credit that is worth 30 percent of the entire installed solar system.6 Projects are eligible through December 31, 2016. Beginning in 2017, commercial properties will be eligible for a 10 percent credit with no sunset date and the residential credit will fall to zero.7 The American Recovery and Reinvestment Act temporarily allowed projects to take a cash grant in lieu of the ITC. State Incentives and Mandates. The ITC is even more gratuitous because it is redundant with a wide variety of state and local incentives directly benefit the solar industry. Subsidies exist in the form of state tax credits, cash grants or rebates, Production Based Incentives (PBIs) and renewable energy certificates (RECs). Many states also have renewable portfolio standards that mandate a state produce a certain percentage of its electricity generation from renewable power. Click here for a detailed list of state solar power subsidies. Net Metering. Net metering is another built-in subsidy for solar power. Net metering permits homeowners and small businesses to sell their excess electricity back to the grid. While net metering may sound like a harmless policy that promotes competition, it is more akin to a mandated wealth transfer. In most cases, utilities must purchase the solar electricity from homeowners at retail rather than wholesale prices as they do from other electricity providers. Those costs are then passed onto non-solar residents. By nature, solar electricity is available during points of low demand, making the energy less valuable. Though solar homeowners depend on the grid when the sun isn’t shining, they don’t pay for grid maintenance in their utility bills. The result is a convoluted transfer of wealth, as the Wall Street Journal emphasizes: “[U]tilities collect much of their fixed costs— the unavoidable costs of power plants, transmission lines, etc.—from residential customers through variable-use charges, in other words, charges based on how much energy they use. When a customer with rooftop solar purchases less electricity from the utility, he pays fewer variable-use charges and avoids contributing revenue to cover the utility’s fixed costs. The result is that all of the other customers have to pick up the difference.”8 Net metering subsidies totaled nearly $2 billion last year for two of the country’s largest solar adopters, California and Arizona.9 The real burn? Solar companies have been under investigation for inflating the value of their product in order to collect more money from the taxpayer. A Barron’s investigation that analyzed “153,628 records from databases of solar contracts in California and Arizona showed SolarCity had repeatedly reported fair market values at higher rates than compe titors.”10 Consequently, Senator Jeff Sessions (R-AL) sent a letter to the U.S. Treasury demanding an investigation.11 SolarCity’s Initial Public Offering (IPO) filing states that “The U.S. Treasury Department has determined in a small number of instances to award us U.S.Treasury grants for our solar energy systems at a materially lower value than we had established in our appraisals and, as a result, we have been required to pay our fund investors a true-up payment or contribute additional assets to the associated investment funds.”12 From Washington to Wall Street: How Government Policies are Skewing Solar Investments


Taxpayer-Subsidized Solar

SunShot Initiative. Money spent by the Department of Energy goes much farther than basic research and development the agency should be doing and spends taxpayer resources on commercializing technologies and reducing their costs. DOE’s SunShot Initiative launched in 2011 and mirrored after President Kennedy’s man-on-the-moon mission aggressively pursues a goal of cutting the cost of solar-energy technology by 75 percent by 2020. The budget request states that “[r]educing the total installed cost for utility-scale solar electricity to roughly 6 cents per kilowatt hour without subsidies will result in rapid, large-scale adoption of solar electricity across the United States.”13 The statement is fundamentally oxymoronic. The SunShot Initiative is itself a huge government subsidy, spending hundreds of millions of taxpayer dollars a year to reduce the cost of solar. As part of SunShot, the DOE recently announced that $32 million in taxpayer money will go to solar jobs training programs, another role for the private sector, not the federal government.14 Federal Loan Guarantees. Utility-scale solar is also the beneficiary of the federal government’s loan guarantee program, which placed taxpayers on the hook for $536 million because of the now-defunct solar panel manufacturer Solyndra. The DOE has made 12 high-profile loans to solar manufacturing or generating companies, in some cases providing government-backed loans to well-established companies.15 The solar farms are massively under-delivering on their big promises. The $2.2 billion solar-thermal farm Ivanpah, the recipient of a $1.6 billion loan guarantee despite being backed by renewable energy giant NRG and Google, “is supposed to be generating more than one million megawatt-hours of electricity each year. But 15 months after starting up, the plant is producing just 40 percent of that, according to data from the U.S. Energy Department.”16 Department of Defense Initiatives. The Department of Defense, through many executive orders, has made a large push to increase the use of renewable energy, particularly solar. Out of the 885 renewable energy projects completed by the DOD at the end of FY2013, 511 of them were solar projects.17 If solar-powered helmets for soldiers improved mission capability, for example, there may be justification for spending on renewables. But the federal government should ensure that energy programs for defense applications prioritize national security requirements over political interests.

Government has no business trying to make private-sector projects cost-competitive or improving a technology’s reliability to make it more palatable for private investors and financiers. Furthermore, the government is not very good at it. The global market for electricity is a multi-trillion dollar opportunity; any solar technology that can capture a part of that market will not need handouts to compete.

The global market for electricity is a multi-trillion dollar opportunity; any solar technology that can capture a part of that market will not need handouts to compete.

The result of all these targeted and indirect subsidies has been a rapid scale up of residential and commercial solar through third-party leasing companies. If these projects under deliver in a similar manner to the large scale solar firms, it could spell financial gloom for those companies.

From Washington to Wall Street: How Government Policies are Skewing Solar Investments


Subsidies Encourage 3rd Party Leasing and Use of Asset-Backed Securities

“Homeowners don’t understand what they’re signing when they get into this. You’ve got another layer to add on top of finding a buyer for the house. It’s not a plus.”

Subsidies Encourage Third Party Leasing and Use of Asset-Backed Securities Solyndra made it quite clear why the government should not play the role of investment banker, but the half-billion dollar boondoggle was only one of many government spending projects. Artificially inflating demand for solar with subsidies may have even broader economic consequences beyond the sheer waste of taxpayer dollars. What happens when solar projects exist on rooftops all over the country, all relying on the crutch of the taxpayer? What happens when companies sell families and businesses on the idea of green energy so they will sign 20- or 30-year leases? And what happens when the leases, based on a weak economic foundation, are bundled and sold to an investment fund? Sound familiar? Solar companies’ use of asset-backed securities with dependence on subsidies could very likely result in the next government-created bubble bursting. The biggest question of course, if that does occur, is who will pick up the cost and how much public and private money could be lost? But first, it is important to understand how solar companies and financial institutions take advantage of the subsidies available and create the bubble we see today. For the average homeowner, and for most small businesses, the upfront cost (before subsidies) for rooftop solar is quite expensive. A 4kW-8kW system could cost between $15,000 and $30,000, or more.18 One solar company projects that the average upfront cost for a residence is $10,000$50,000 and for a commercial building is $100,000 to $5 million.19 Many homeowners and commercial building owners do not have the liquidity to install the solar systems; as a result, solar leasing companies have formed to fill the void. SolarCity is the most prolific solar leasing company but many others exist, offering solar leases or power purchase agreements (PPA).20 Effectively, the homeowner pays zero or little upfront costs and rents the solar system. The leasing company owns, maintains and operates the system and enters into a long-term contract with the homeown-

From Washington to Wall Street: How Government Policies are Skewing Solar Investments


Subsidies Encourage 3rd Party Leasing and Use of Asset-Backed Securities

-er, typically between 15 and 30 years. The homeowner can either pay for the cost of the system plus additional power necessary to power his or her home (lease) or pay for the power the system produces (PPA). Most of the contracts have price escalators that increase the lease payment annually, regardless of what happens with utility rates, which in and of itself presents a concern. Homeowners consequently have experienced difficulty selling their homes, being forced to drop the asking price to persuade potential buyers to take on the solar lease.21 The solar leasing company must also approve the new buyer to take over the lease. One home appraiser remarked, “Homeowners don’t understand what they’re signing when they get into this. You’ve got another layer to add on top of finding a buyer for the house. It’s not a plus.”22 In a sense, solar leases act as a property lien, although not specifically defined that way, which complicates home sales.23 Most solar leasing agreements explicitly say they will not put a lien on the home or property but banks view it as such and therefore the result is a de facto lien.

Homeowners with solar panels can experience difficulty selling their homes, being forced to drop the asking price to persuade potential buyers to take on the solar lease.

Since most homeowners do not have enough tax liability to utilize the Investment Tax Credit and some state incentives, the leasing company can take advantage of subsidies the average homeowner cannot, helping to lease the system more cheaply at the expense of the taxpayer.24 Solar leasing companies then take hundreds or thousands of leases and PPAs and bundle them together to offer them to investors (banks, insurance corporations and corporate investors) as asset backed securities, using the homeowner’s lease or PPA payment to service the debt.25

The subsidies available make it easy for solar leasing companies to promise guaranteed returns to the financial institutions as those institutions can claim those subsidies in the early years of the project. In 2014, SolarCity alone received $800 million in subsidies at the state and federal level.26 SolarCity completed its first securitization of distributed solar energy in November 2013, raising $54.4 million with a 4.8 percent interest rate and Standard & Poor’s rating of BBB+.27

From Washington to Wall Street: How Government Policies are Skewing Solar Investments


From Leases to Loans and Solar Bonds

From Leases to Loans and Solar Bonds In October 2014, SolarCity introduced a new way for homeowners and small businesses to manage the high upfront costs of solar installation by creating MyPower. MyPower allows customers to obtain loans as opposed to leasing the system and therefore own the solar power system once the loan is paid in full. As a result, the homeowner or business owner is the one who claims the 30 percent Investment Tax Credit but they must have a federal income tax liability equal to the value of the credit to take full advantage. SolarCity offers a fixed annual percentage rate as low as 4.5 percent for 30 years with a 30 year warrantee.28 The company announced a $200 million non-resource financing facility with Credit Suisse in January 2015, boasting that 8,000 customers had already signed up for MyPower loans.29 SunPower and Mosaic offer similar loan programs.30 Similar to lease agreements, a 30-year loan for a solar system could present challenges to selling a home in the future. The seller would have to convince potential buyers to take over the loan, pay off the loan themselves, or pay the solar company to take down and install the solar power system on their new homes.31 Selling or transferring the system becomes even more challenging if the technology quickly becomes out-of-date. Another relatively new way in which SolarCity is increasing its availability of debt financing is through the issuance of solar bonds. In the same month SolarCity announced the creation of MyPower, the company announced a sale of $200 million in bonds.32 The bonds start at $1,000 with the returns ostensibly coming from the monthly payments to the solar leasing or loan.33 Solar bonds are the direct obligation of SolarCity and do not carry the same financial protections as a Treasury bond or a bank CD, but the unsecured solar bonds offer more attractive rates for the higher risk. In fact, solar bonds carry much higher risk because risk exists with the potential for homeowners to default, for SolarCity to overpromise on its installation and production promises and simply the risk that solar competes with many other energy sources. A Bloomberg article cites Moody’s Investors Service saying the solar bond market is ‘distinct’ and ‘emerging’ but “also warned that “the short performance histories and track records of solar companies [are] a difficulty in assessing risks in the asset class.”34 In the same article, head of securitized products at Janus Capital Group John Kerschner said, “My view is that SolarCity’s deals are structured with fairly long weighted-average lives of the bonds” therefore making him “nervous for an emerging-technology and unproven business model.”35 As detailed in the next section, whether it is the use of leases, loans or bonds; risk and uncertainty is prevalent in solar investments for a number of economic factors, and government dependence on expiring subsidies significantly elevates that risk. Given the long-term structure of the leases, loans and bonds and the near-term expiration of the subsidies, customers, solar companies, investors and taxpayers could incur significant losses.

From Washington to Wall Street: How Government Policies are Skewing Solar Investments


Concerns with Taxpayer-Funded Financing Schemes

Concerns with Taxpayer-Funded Financing Schemes Third-party financing and securitization is not a new phenomenon nor is it an unlawful way to attract financing. Investments in securitized assets such as mortgages, auto loans, student loans and potentially solar leases can be safe and diversify risk.36 Providing loans and crowd financing to allow the public to invest in corporate bonds is a new emergence of Wall Street creativity, although these strategies are relatively new with solar. None of these financing options on their own should be construed as problematic. When paired with government subsidies, however, the financial risk becomes alarming and potentially disastrous for taxpayers. If solar leasing companies are in a mad dash to finance and build as many rooftop solar projects before the end 2016 when the ITC expires, will the industry collapse when the subsidies run dry? As the United States witnessed in the past with the wind production tax credit, production dropped off significantly after the credit expired, a sure indication the subsidy resulted in an oversupplied market.37 Solar could very well suffer a similar fate. A lot can and will change in the next two to three decades that will impact solar’s economic viability, some for better and some for worse. The risk factors identified in S&P’s report of SolarCity’s securitization issuance presented a number of reasons for concern. They include a limited asset and customer history, panel quality and system maintenance and failures, intermittency of solar power, renegotiating contract terms and depreciating solar assets and competition with conventional sources of electricity.38 Each is discussed in more detail: Industry Infancy. Financial institutions want a lot of data before making an investment to assess the rate of a default. Because the solar leasing industry is new and the contracts with homeowners and commercial owners last 20-30 years, historical data is limited or unavailable. As S&P warns, “Given that the length of these agreements may run up to 20 years, we believe that reliance on short-term data may not accurately reflect how an offtaker will behave over an extended period of time. In addition, we believe early adopters of this technology will be less likely to default because their reasons for entering into a lease or PPA may go beyond the more straightforward economic motivations. As such, we expect that defaults would be relatively low among the first generation of adopters and increase as the second and third generations move into the industry.”39 Maintenance, Repair and Replacement Costs. Another variable that will affect the profitability of the solar leasing industry is the costs of operations. Generally, uncertainty exists with regard to the amount of maintenance that will be necessary over a two or three decade time period. Not only could the cost of maintenance, repair and replacement negatively affect future cash flows, but so could the number of providers offering Operation and Management (O&M) services.40 With such rapid manufacturing and installation, and since the industry has never experienced such rapid growth, there are a limited number of companies offering O&M services, creating potential for higher costs and extensive delays in repair times, adversely affecting the productivity of the panel.41 Furthermore, in many instances the company that manufactures the solar panels differs from the company that leases the system. Intermittency of Solar Power. The weather is one large unknown that has dramatic implications for the performance of the solar industry.42 S&P notes that “there is some risk, due to measurement errors and a small inherent variability, that actual sunlight will be less than the forecast amount. The amount of sunlight also varies by location and time of year, which may result in the securitization having a volatile cash flow profile.”43 Renegotiating Contracts and Depreciation of Solar Assets. Solar technologies are improving and costs are falling. While that may be a promising indication the industry can compete without preferential treatment from the government, From Washington to Wall Street: How Government Policies are Skewing Solar Investments


Concerns with Taxpayer-Funded Financing Schemes

homeowners with outdated technology and higher payments will feel a need to renegotiate the terms of the contract and therefore reduce the cash flows to the leasing company. The rapid pace of technological advancement in solar means rapidly depreciating solar panels for early adapters. Attempts to renegotiate a lease contract could occur multiple times throughout the 20-year agreement and as S&P stresses, having outdated solar technology could be especially problematic for homeowners attempting to sell.44 Energy Competition. Solar companies are not just competing with themselves; in fact, far from it. The United States has a diverse mix of electricity suppliers. As the U.S. witnessed with the hydraulic fracturing boom, energy markets can change rather quickly, and the result has been dramatically cheaper natural gas prices, putting downward pressure on electricity bills.45 If utility bills become cheaper, solar homeowners may again feel some buyer’s remorse and seek to renegotiate their contract. The fact that many of the solar lease and PPA contracts have escalator prices makes this even more probable. S&P underscores this point, “Depending on how the parties establish the differential between standard utility rates and the solar rates, the economic incentive may erode over time. We believe that, trend analysis aside, projecting a utility’s billing rates is a difficult exercise and that the longer the projection period, the higher the margin for error.”46 What do these risk factors and dependence on subsidies mean for the future of homeowners and small business owners who have installed solar panels and what does it mean for solar manufacturers and thirdparty leasing companies? As with most anything, it depends. If a solar manufacturer ceases to exist over the next 10 years, not only will it prove difficult to repair and honor the warrantee but it will also be costlier to find the labor familiar with that particular technology. Solar leasing companies have protections built into their lease agreements should they go bankrupt. For instance, in their lease agreement SolarCity agrees to “create a priority stream of operation and maintenance payments to provide enough cash flow in our financial transactions to pay for the Limited Warranty obligations and the repair and maintenance of the system in accordance with this Lease even if SolarCity ceases to operate.”47

If a solar manufacturer ceases to exist over the next 10 years, not only will it prove difficult to repair and honor the warrantee but it will also be costlier to find the labor familiar with that particular technology.

Furthermore, if the majority of homeowners and small business owners continue to pay the lease agreement whether the leasing company exists or not, the revenue stream will remain intact. However, given the uncertainties involved, there is risk that cash flow will not be enough, meaning any financial troubles will be passed onto the third-party leasing companies’ financiers. From Washington to Wall Street: How Government Policies are Skewing Solar Investments


Economic Damage Extends Beyond Potential Taxpayer Losses

Preferential treatment from the government skews the rules of free enterprise. Economic Damage Extends Beyond Potential Taxpayer Losses Solyndra captured the limelight because it was a clear waste of more than a half billion dollars in taxpayer money. But the economic damage resulting from the federal government’s marketdistorting subsidies extends well beyond the taxpayer losses. Private investors sank $1.1 billion into Solyndra but much of the private financing came after the Department of Energy announced Solyndra was one of the 16 companies eligible for a loan guarantee in 2007. That is $1.1 billion of private money that could not be invested in other, perhaps more competitive projects that did not receive special treatment from the government. Plenty of examples exist where major financing dollars chase taxpayer dollars for solar installation. In September 2009, U.S. Bancorp created a tax equity fund to finance $100 million in solar installations for SolarCity; since then, the two companies have established six funds with the largest being $250 million in 2012. In February 2011, Citi and SolarCity established a $40 million fund. SolarCity and Goldman Sachs Group Inc. set up a $500 million fund in May 2013, extending opportunities to homeowners with lower credit scores, and the solar leasing company set up $400 million with Bank of America Merrill Lynch the following year to finance installations. SolarCity activated its largest fund in April 2015, a $1 billion fund with CreditSuisse to finance installations for small businesses, non-profits and government buildings. SolarCity is far from the only third-party leasing company to build such large funds. Vivint ($150 million in June 2015),48 NRG ($150 million in April 2015),49 Sungevity ($70 million in April 2014),50 SunPower ($44.5 million in July 2014)51 and Sunrun ($195 million in January 2015)52 are all examples of major financing initiatives with third-party solar leasing companies. In 2013 alone, 22 leasing funds raised $3.34 billion and third-party leasing accounted for 70 percent of residential installations.53 It is impossible to know how much of the private financing would have occurred without the taxpayer-funded subsidies in place, but it is very safe to assume it would be substantially less. Preferential treatment from the government skews the rules of free enterprise. Private investors look at government loan guarantees and investment tax credits as a way to substantially reduce their risk. Even if a project may be an economic failure, private companies can invest a smaller amount if the government backs a portion of the project. Those investments are especially attractive if the federal government complements those handouts with state incentives and preferential regulatory treatment. If the project fails, private investors still lose money, but the risk was artificially distorted. These investors are using political calculus to hedge their bets. When economically uncompetitive technologies and companies cannot survive without the taxpayer’s crutch, there is a good reason these companies could not fully attract private financing. The distortions of market risk, the misallocation of financial capital, the market weaknesses and the dependence on subsidies could very well result in a much bigger green energy collapse than the DOE’s loan guarantee program, wasting billions of taxpayer dollars and private investment. From Washington to Wall Street: How Government Policies are Skewing Solar Investments


The Inflated Value of Solar

The Inflated Value of Solar

Like most industries, the future of the solar firms in the United States is difficult to predict. Perhaps the solar leasing industry will turn a profit and will develop into a sustainable business model without federal and state subsidies. Despite the amount of funding raised and the number of installations completed, SolarCity and other leasing companies are operating at a loss now.54 However, leasing companies are playing the long game, depending on lease payments for longterm viability. One way in which the leasing industry has been promoting its long-term viability has been through retained value. However, the use of retained value may inflate the true value of the companies by painting too rosy of a future. As defined by SolarCity, the retained value is the present value of the future cash flows generated from lease payments at a six percent discount rate.55 Travis Hoium, who specializes in solar energy analysis for The Motley Fool writes that “In short, retained value is the value an investor could expect to capture if the rest of the business was shut down, and they just cash flowed the solar systems for 30 years. These aren’t insignificant figures, either. SolarCity has reported $2.18 billion in retained value as of the third quarter of 2014, and SunEdison says it has retained $918 million in value in the first three quarters of this year.”56 The idea of retained value is not LOFTY GOALS: unreasonable, but SolarCity’s assumptions in calculating its retailed value are. As Hoium The current retained value and other market analysts have warned, the assumes that every homeowner current retained value assumes that every and small business owner pays homeowner and small business owner pays their contractual obligation, their contractual obligation and whoever whoever sells their home sells their home will successfully transfer will successfully transfer the the leases to the new owners.57 Another leases to the new owner, and extremely generous assumption is that customers will renew their lease customers will renew their lease for another for another 10 years after the 10 years after the 20th year for 90 percent of 20th year for 90% of the price. 58 the price. No evidence exists that this will be the case. The fact that the leases contain escalator clauses make it even more improbable. Hoium points out that “$640 million of SolarCity’s $2.18 billion in retained value is based on the renewal assumption.”59 Hoium also stress that “The biggest thing investors often don’t understand is that retained value doesn’t include the costs associated with signing up customers. These are operating costs for sales, administration, executives, etc. These are very real costs to the business that are paid upfront.”60 Another generous assumption is the 6 percent discount rate. Liam Denning of the Wall Street Journal writes, “Of all the inputs, SolarCity’s discount rate looks the most aggressive. The company can point to recent, small securitized-debt issues priced at yields of less than 5 percent and, over time, the risks of this business should reduce as it becomes more established. At 6 percent, though, the discount rate is only about 2.5 percentage points above the yield on 30year Treasurys, a thin risk premium for a business that aims to revolutionize power consumption and depends, at least for now, on solar-friendly regulations and subsidies. And while SolarCity leads on market share, its leasing model is relatively new and has low barriers to entry, making competition a real risk. A discount rate of 10 percent looks more realistic for shareholders. This would better reflect the mix of operating and competitive risks and time horizon involved.”61 The volatility of the stock alone is an indicator that the market does not know how to value solar leasing companies and that the financial stabilities of the firms is uncertain.62 Boom or bust, policymakers and the public should question why the federal government is directing taxpayer money to financial giants. From Washington to Wall Street: How Government Policies are Skewing Solar Investments


Conclusion Elon Musk, the Chairman of SolarCity and CEO of SpaceX and Tesla Motors, told CNBC that “none of the incentives are necessary, but they are all helpful.”63 Musk is right. None of the handouts are necessary, but not for the reason he suggests. The handouts are unnecessary because taxpayers and government policy should not be privatizing gains and socializing losses. If the solar leasing and loan industry is as profitable as they claim it to be, they should not need to stand on the backs of taxpayers. If their financial model is built on a taxpayer-funded house of cards, the handouts are misallocating and wasting billions of taxpayer and private investment dollars.


Musk continued on to say, “voters want a particular thing to happen, and faster than it might otherwise occur.”64 But Musk should replace the word “voters” with “politicians.” Members of Congress are the ones who use taxpayer dollars to fund their politically preferred technologies. They can claim they “created” jobs in their district and the companies successfully lobbying for the taxpayer-funded incentives can support the politician during his or new next re-election. The way to stop the cycle of politicians and lobbyists in Washington deciding who produces what is to eliminate the preferential treatment. Congress should ensure that the solar Investment Tax Credit permanently expires at the end of 2016, reduce the remaining 10 percent commercial properties tax credit to zero and eliminate funding for all taxpayer money that props up specific energy technologies. Furthermore, states should remove the market distortions created through net metering policies, renewable portfolio standards and the glut of state incentives that exist. Wall Street has never seen a handout it didn’t like, so it is no surprise to see companies utilizing various financing mechanisms to raise funds to capture the subsidies. The high risks of the industries’ long-term profitability, the competitive environment to supply affordable and reliable energy and the dependence on government could result in a permanently cloudy solar empire.

“Wall Street has never seen a handout it didn’t like.”

From Washington to Wall Street: How Government Policies are Skewing Solar Investments


Peter Wallison, Hidden in Plain Sight: What Really Caused the World’s Worst Financial Crisis and Why It Could Happen Again, January 2015, 2 Norbert Michel, “Government Policies Caused The Financial Crisis And Made the Recession Worse,” Forbes, January 26, 2015, 3 United States Energy Information Administration, “What is U.S. electricity generation by energy source?” 4 United States Energy Information Administration, “Direct Federal Financial Interventions and Subsidies in Energy in Fiscal Year 2013,” March 2015, 5 Taxpayers Protection Alliance, “A House of Cards: Solar Energy’s Subsidy-Based Business Model,” April 2015, 6 Solar Energy Industries Association, “Issues & Policies: Solar Investment Tax Credit (ITC),” http:// 7 26 U.S. Code § 48, 8 Brian H. Potts, “The Hole in the Rooftop Solar-Panel Craze,” The Wall Street Journal, May 17, 2015, 9 Ibid. 10 Avi Salzman, “Barron’s Story on SolarCity Sparks Congressional Inquiry,” Barron’s November 18, 2013, 11 United States Senate Budget Committee, “Letter to Department of Treasury Secretary Jacob Lew,” November 18, 2013, id=1647cbb3-9f1c-4a9e-8136-4ad75c87eb12&SK=5255760CED22C38DD5E9CB5B1C778BDE 12 Securities and Exchange Commission, Amendment No. 1 to Form S-1, Registration Statement Under The Securities Act of 1933, SolarCity Corporation, data/1408356/000119312512480916/d229977ds1a.htm 13 United States Department of Energy, “Powering Your Community With Solar: Overcoming Market and Implementation Barriers,” 14 United States Department of Energy, “Energy Department Announces $32 Million to Boost Solar Workforce Training, Drive Solar Energy Innovation,” May 26, 2015, 15 United States Department of Energy Loan Programs Office, “Ivanpah,” 16 Cassandra Sweet, “High-Tech Solar Projects Fail to Deliver,” The Wall Street Journal, June 12, 2015, 17 Vince Font, “The Solar Battlefield: How the US DOD Will Bring Solar Technology Mainstream,”, April 23, 2014, the-solar-battlefield-how-the-us-dod-will-bring-solar-technology-mainstream.html 18 GTM research , “U.S. Solar Market Insight Report, 2014 Year in Review”, available for purchase at 19 John Stanton, “Solar Finance,” SolarCity Presentation at the 2015 national Association of Regulatory Utility Commissioners Winter Committee Meeting, Presentations/Sunday%201pm%20STANTON,%20John.pdf 20 Energysage, “Solar Leasing Companies,” 21 Will Wade, “Rooftop Solar Leases Scaring Buyers When Homeowners Sell,” Bloomberg, June 24, 2014, 22 Ibid. 23 Tori Richards, “Surprised solar customers find themselves with liens,”, April 15, 2015, 24 Samantha Jacoby, “Solar-backed Securities: Opportunities, Risks, and the Specter of the Subprime Mortgage Crisis,” University of Pennsylvania Law Review, Vol. 162, pp 203-240.



From Washington to Wall Street: How Government Policies are Skewing Solar Investments


Trefis Team, “Why Is SunPower Planning To Issue Solar Asset Backed Bonds?” Forbes, March 12, 2014, 26 Niraj Chokshki, “The United States of subsidies: The biggest corporate winners in each state,” The Washington Post, March 18, 2015, 27 Press release, “SolarCity Completes Industry’s First Securitization of Distributed Solar Energy,” SolarCity, November 21, 2013, and Standard & Poor’s, “Presale: SolarCity LMC Series I LLC (Series2013-1),” November 11, 2013, https://www.standardandpoors. com/servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs &blobheadervalue2=inline%3B+filename%3DSolarCity+LMC+Series+1+LLC+%28Series+20131%29+Presale+Nov+11+2013.pdf&blobheadername2=Content-Disposition&blobheadervalue1=ap plication%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1244345237149&blob headervalue3=UTF-8 28 Press release, “SolarCity Introduces MyPower, a First-of-its-Kind Solar Loan Paid Back by the Sun,” SolarCity, October 7, 2014, 29 Press release, “SolarCity Creates Initial $200 Million Financing Facility with Credit Suisse for New MyPower Product,” SolarCity, January 14, 2015, cfm?ReleaseID=891227 30 Ucilia Wang, “SolarCity Offers Its First Home Solar Loan,” Forbes, October 8, 2014, http://www. 31 MyPower Q & A,” SolarCity Blog, November 13, 2014, 32 Ucilia Wang, “SolarCity Offers Bonds, Wants Everybody To Invest In Solar,” Forbes, October 15, 2014, 33 SolarCity, Solar Bonds, 34 Matt Scully, “SolarCity Turns to Bond Market to Fill Tax-Credit Funding Void,” Bloomberg, May 19, 2015, 35 Ibid. 36 Brian Perry, “Investing In Securitized Products,” Investopedia, bonds/08/securitzed-assets.asp 37 Nicolas Loris, “The Wind Production Tax Credit and the Case for Ending all Energy Subsidies,” Duke Environmental Policy & Law Forum, Vol. XXIII, pp 323-349, viewcontent.cgi?article=1248&context=delpf 38 Standard & Poor’s, “Presale: SolarCity LMC Series I LLC (Series2013-1),” November 11, 2013, &blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3DSolarCity+LMC+Series+1+LLC+ %28Series+2013-1%29+Presale+Nov+11+2013.pdf&blobheadername2=Content-Disposition&blobhea dervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=12443452371 49&blobheadervalue3=UTF-8 39 Ibid. 40 Travis Lowder, Michael Mendelsohn, Bethany Speer and Roger Hill, “Continuing Developments in PV Risk Management: Strategies, Solutions, and Implications,” National Renewable Energy Laboratory, February 2013, 41 Standard & Poor’s, “Presale: SolarCity LMC Series I LLC (Series2013-1),” November 11, 2013, &blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3DSolarCity+LMC+Series+1+LLC+ %28Series+2013-1%29+Presale+Nov+11+2013.pdf&blobheadername2=Content-Disposition&blobhea dervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=12443452371 49&blobheadervalue3=UTF-8



From Washington to Wall Street: How Government Policies are Skewing Solar Investments


International Energy Agency, “Solar,” Standard & Poor’s, “Presale: SolarCity LMC Series I LLC (Series2013-1),” November 11, 2013, &blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3DSolarCity+LMC+Series+1+LLC+ %28Series+2013-1%29+Presale+Nov+11+2013.pdf&blobheadername2=Content-Disposition&blobhea dervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=12443452371 49&blobheadervalue3=UTF-8 44 Ibid. 45 United States Energy Information Administration, Henry Hub Natural Gas Spot Price, June 10, 2015, 46 Standard & Poor’s, “Presale: SolarCity LMC Series I LLC (Series2013-1),” November 11, 2013, rldata&blobtable=MungoBlobs&blobheadervalue2=inline%3B+filename%3DSolarCity+LMC+Ser ies+1+LLC+%28Series+2013-1%29+Presale+Nov+11+2013.pdf&blobheadername2=Content-Di sposition&blobheadervalue1=application%2Fpdf&blobkey=id&blobheadername1=content-type &blobwhere=1244345237149&blobheadervalue3=UTF-8 servlet/BlobServer?blobheadername3=MDT-Type&blobcol=urldata&blobtable=MungoBlobs&b lobheadervalue2=inline%3B+filename%3DSolarCity+LMC+Series+1+LLC+%28Series+20131%29+Presale+Nov+11+2013.pdf&blobheadername2=Content-Disposition&blobheadervalue1=ap plication%2Fpdf&blobkey=id&blobheadername1=content-type&blobwhere=1244345237149&blob headervalue3=UTF-8 47 SolarCity, Contract Lease Example, 48 “Vivint Solar Announces Launch Of Commercial And Industrial Offerings With $150,000,000 Fund,” PR Newswire, June 3, 2015, 49 News Release, “NRG and NRG Yield Establish New Residential Solar Partnership,” NRG, April 13, 2015, 50 Zachary Shahan, “$70 Million More For Sungevity, Via E.ON, GE Ventures, & Others,” CleanTechnica, April 11, 2015, 51 Press Release, “SunPower Closes Agreement for Up to $44.5 Million in Non-Recourse Debt to Finance Residential Solar Lease Program,” Sunpower, July 28, 2014, http://newsroom.sunpower. com/2014-07-28-SunPower-Closes-Agreement-for-Up-to-44-5-Million-in-Non-Recourse-Debt-toFinance-Residential-Solar-Lease-Program 52 Press Release, “Sunrun and Investec Close $195 Million in Financing for U.S. Residential Solar Projects ,” PR Newswire, January 8, 2015, 53 Peter Kelly-Detwiler, “Solar Third-Party Financing at $3.34 Billion In 2013: Key To The U.S. Solar Boom,” Forbes, February 10, 2014, and Ucilia Wang, “SolarCity Offers Its First Home Solar Loan,” Forbes, October 8, 2014, solarcity-offers-its-first-home-solar-loan/ 54 Chris Martin, “SolarCity Loss Narrows After Beating Installation Forecast,” Bloomberg, May 5, 2015, 42



From Washington to Wall Street: How Government Policies are Skewing Solar Investments


United States Securities & Exchange Commission, SolarCity 8-K, secfiling.cfm?filingID=1564590-15-748&CIK=1408356 56 Travis Hoium, “Why Retained Value Is a Flawed Way to Measure Solar Companies,” The Motley Fool, December 7, 2014, 57 SolarCity: An Analysis Of Retained Value And A Price Comparison Of Its Offerings,” Seeking Alpha, August 19, 2014, 58 Travis Hoium, “Why Retained Value Is a Flawed Way to Measure Solar Companies,” The Motley Fool, December 7, 2014, 59 Ibid. 60 Ibid. 61 Liam Denning, “Throwing Light on Value at SolarCity,” The Wall Street Journal, May 11, 2014, http:// 62 Ibid. 63 Reem Nasr, “Elon Musk: Incentives not necessary, but helpful,” CNBC, June 1, 2015, http://www. 64 Ibid.



From Washington to Wall Street: How Government Policies are Skewing Solar Investments


Taxpayers Protection Alliance: From Washington to Wall Street  
Taxpayers Protection Alliance: From Washington to Wall Street