Tuesday, August 21, 2007

Tuppence in the Sun

Mr. Dawes Sr. If you invest your tuppence wisely in the bank, safe and sound, soon that tuppence, safely invested in the bank, will compound! And you'll achieve that sense of conquest, as your affluence expands! In the hands of the directors, who invest as propriety demands!

The lyrics to the song that follows this bit of wisdom in the musical Mary Poppins can be found here. The next song, Step In Time is much more energetic and it is perhaps understandable that a song about compound interest would fail to catch on.

We are seeing a lack of propriety these days in a number of financial transactions. The slicing and dicing of risk seems to have led to a question of what value many securities have if any at all. But, if you want to take on projects that extend over a substantial period of time, credit markets are likely to be a part of what you do.

One thing we need to do is transform how we get energy and a number of options include long term components. Nuclear power, for example, extends so far into a climatically uncertain future that it is seeking extra help with finance through federal loan guaranties.

While renewable energy is forever, its implementation can be taken in 10 to 25 year chunks so it fits much better with standard lending terms. Further, risk is low so while raising capital though venture mechanisms can happen, it is also attractive to banks, especially since renewable energy equipment can serve as insured collateral. This is why so much of the financing for renewable energy is coming from institutions like Credit Lyonnais and Morgan Stanley especially in the commercial sector. In the residential sector, solar power equipment is being rolled into a mortgages for new home construction while installers for existing homes are getting savvy at helping customers find financing through secured credit based on increased equity.

But, what if you want to follow the commercial sector model of separating ownership of the equipment from the use of the equipment in the residential sector. Individually financing each deal, as might work for supplying Walmart with solar power, becomes time consuming and thus expensive. What is needed is an aggregate instrument. One way that aggregation has been used with propriety is the securitization of leases. CVS, for example, financed its eastern expansion based on the security provided by the fact that it had property leases to conduct its business. This brought them lower cost financing since the aggregated leases were more secure than individual leases.

One way to secure low cost credit to allow the long term use of solar power on homes is to secure the credit on the basis of an aggregate of rental contracts which assure repayment of the debt. So long as those contracts are sufficiently attractive that few of them are likely to be broken (they save customers money) then you have a low risk security that does not require high interest. This is the form of financing that Citizenre has adopted for its solar power equipment rental business. Shaving the cost of financing puts it in a better competitive position than attempting to work out deal-by-deal financing, so much so, that it can afford to ignore state-level rebates available to individual purchasers of solar power equipment.

There is certainly room for venture capital in the solar power business, especially for high risk new technology development. But, for deployment of proven technology, the model being adopted in the commercial sector using more traditional financing leads to cost savings that are important for market competitiveness. Carrying this over to the residential market, with its much larger roof space resource, will likely rebalance the solar market towards an acceleration of its current 30% annual growth.

No comments: