The broad scope of the IRA should accelerate ABS on multiple fronts

The Inflation Reduction Act (IRA), which had a storied start as President Joseph Biden’s signature social policy legislation, will have a new lease on life that will dramatically affect the markets for energy — especially solar — and the asset-backed securities (ABS) that finance it.

Most of the ABS deals on renewable energy to date have raised loans that fund the installation and maintenance of consumer solar panels, and this is where the early ABS-market impact of the IRA will almost certainly be felt. Since the first solar ABS deals came out in 2013, there has been more than $17 billion in solar ABS backlog issuance, said Ilana Lechak, who heads Bank of America Securities’ ESG research on US securitized products. The deals securitize loans as well as leases and power purchase agreements (PPAs) that support consumer solar installations.

The ABS solar issuance hit a record last year with 14 deals totaling nearly $4 billion, and sponsors had almost reached that level by early September of this year.

The current federal investment tax credits (ITC) are set to expire in two years, but growth in the market for solar panels and associated ABS is likely to continue regardless, Lipchak said, given that demand for solar power has been driven recently by rising fuel costs.

Lipchak said the IRA increases ITC to 30%, compared to the current 26% and extends through 2034, increasing incentives for solar adoption and providing greater market certainty. This support is unlikely to lead to an immediate increase in solar ABS deals, given ongoing supply chain issues. The IRA also provides incentives to increase domestic production of renewable energy equipment, Lipchak said, reducing future picks, but that would take years.

Maxim Berger, a director at Kroll Bond rating agency that focuses on consumer ABS, said ITC’s increase in IRAs makes solar energy systems more affordable for consumers and should lead to better ABS. In addition, he said, ITC has been expanded to include batteries, so it can now be used to repay loans or portions of loans used, for example, to add a battery to an existing solar PV system or as a stand-alone purchase.

The IRA tax incentives should accelerate the trend for consumers to include batteries in their purchases from the solar system, said Nathan Gapg, a partner at KPMG, which focuses on financing renewable energy, adding that a KPMG customer is now including batteries in Approximately 25% of systems. sell it Including batteries that reduce consumers’ reliance on utility grids should increase their incentive to continue paying off loans.

Gabig noted the first commercial ABS solar deal completed in May, a $402 million private deal backed by 376 solar sites by Luminace, a subsidiary of Brookfield Renewable. He added that the IRA tax incentives should speed up the issuance of more trade deals.

The IRA should also accelerate the issuance of the first ABS deals backed by “virtual power plants,” where companies like Swell Energy and Soltage build fleets of batteries in urban areas to store solar energy that they then sell to utilities and businesses during peak hours or when outages occur. Such deals are now under discussion, Gagebeg said, and input from rating agencies is awaited.

“The idea is not to waste green electrons,” he said, noting revenue streams from highly rated utilities and corporate clients should make such deals attractive to investors who demand greater exposure to credits that comply with ESG guidelines.

Another ABS market likely to be supported by the IRA will be Clean Energy Loan Provisions (C-PACE), which commercial building owners use to finance clean energy upgrades ranging from highly efficient lighting and heating systems, to heat recovery and steam traps for power systems. renewable. C-PACE loans are facilitated by nationwide public-private partnerships that include state green banks, to which the IRA is allocating $27 billion. Borrowers repay principal over time via voluntary property tax assessments, enabling long-term financing and the possibility of transferring repayment obligations to the next property owner.

“We see a huge need in the commercial real estate sector to fund the development of commercial buildings,” said Alexandra Cooley, co-founder and chief investment officer at Novin Green Capital. She cited recent research by Jones Lang LaSalle that showed a 6% rent premium and 7.6% sales premium for green-certified buildings.
Previously GreenWorks Lending until acquired by Nuveen Asset Management in 2021 and renamed in January 2022, the company issued its first private ABS deal backed by C-PACE in 2017 and two more private deals since then. Last December, it completed its largest Article 144A transaction to date backed by those assets. Trust Securities and Guggenheim Securities acted as joint managers.

Cooley said the hurdle to adopting clean energy has been large up-front capital expenditures that lead to relatively small operational savings over time. She said tools such as the International Trade Center and other tax credits – which the IRA supports – reduce these up-front expenditures. When borrowers combine these credits with the benefits of C-PACE, they can realize significant operational savings.

“If you reduce upfront expenses, the impact on bottom line will become more attractive to businesses and building owners, especially when combined with financing,” Cooley said.

In addition, the new law significantly increases the types of technologies eligible for tax credits, expanding the energy impact of projects that building owners consider financially attractive.

“The IRA is transformational as it expands eligible technologies and makes these technologies more accessible to everyone through a variety of measures,” Cooley said. She added that new C-PACE loans – which are expected to exceed $2 billion this year – could help make projects cash flow positive from the start and energy costs more predictable, facilitating future ABS deals especially those issued in the semi-public base 144 Drive.

Securitization of electric vehicle assets still has mileage limit

Much of the discussion about energy-related ABS markets naturally turns to securitization involving electric vehicles. So far, Tesla has only released ABS deals powered by electric vehicles (EVs). However, the IRA’s incentives to buy electric vehicles could speed up the arrival of such deals from other sources, Berger said, initially in the new and exciting ABS markets for cars, given the average purchase price of an electric vehicle. All in all, he added, the IRA and the billions of dollars it’s putting into the economy to reduce energy and consumer healthcare costs will bolster the broader ABS market.

“By cutting these costs, it will free up consumers’ wallets to pay off other debts,” Berger said. He added, “In the medium to long term, as the IRA is already starting to increase, it may reduce the incidence of delinquencies and defaults in other consumer ABS markets.”

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