Case Study: Distributed Generation through Residential Solar Leasing

1
Case Study Distributed Generation through
Residential Solar Leasing

• Adam Stern
• EVP
• The Gemstone Group, Inc.
• IPED
• Financing Solar Energy Conference
• May 2009

2
About Gemstone

• Founded in 1993
• Generalist - Investment and merchant banking
• Specialization in renewable energy since 2002
• Develop and finance commercial projects
• SREC Aggregation
• Develop and operate residential finance programs
• Specialize Public/Private partnerships
• developing niche programs with states, utilities,
  PUCs, non-profit sponsor groups as well as
  leading manufacturers and contractors

• Sample - Relevant Projects
• Bear Creek/Atlantic City Wind projects in PA and
  NJ
• Keystone HELP Program state sponsored
  residential energy efficiency loan program
  (www.keystonehelp.com)
• CT Solar Lease Program state sponsored
  residential solar finance company for moderate
  income homeowners

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CT Solar Lease Program

• How It Started
• Connecticut rebate program successful in
  implementation of several hundred residential
  systems- primarily on large homes in affluent
  neighborhoods- high upfront cost of solar leaves
  most homeowners out
• State desired loan program to help moderate to
  low income homeowners pay for balance of system
  cost
• After evaluation, lease was deemed to be the
  preferred financing vehicle
• In return for sponsorship and support, State was
  allowed to write some of the rules so that
  program met their stated objectives (qualifying
  income limits, etc.)

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CT Solar Lease Program

• How it ended up
• 47MM program for approximately 1,000 systems
  over 3 years
• Homeowner chooses installer and equipment
  negotiates price
• System Cost typical system costs 47,000
• Rebate same as available to CT homeowners
  (approx. 50)
• Term Initial lease term is 15 years, optional 5
  year extension
• No Money Down required from homeowner
• Lease payment of approximately 120/month
• End of 15 years
• Extend lease for another 5 years
• FMV purchase
• Return to leasing company

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CT Solar Lease Program

• How it Works
• State fund provides rebate and support for debt
• Gemstone manages leasing company and underlying
  assets for investor and utilizes AFC First, the
  third party administrator (TPA), for program
  administrator/lender/servicing functions
• US Bank provides equity
• Leasing allows
• Immediate use of ITC and effective use of other
  tax benefits
• Aggregation and diversification for
• Consumer credit quality (portfolio loans)
• Effective monetization of renewable energy
  credits
• Asset management, monitoring and state reporting

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Choose Your Partners Carefully

• Third party administration is key
• In CT program, Gemstone splits operational and
  management duties with AFC. Gemstone manages
  leasing company including asset management and
  system relocations, REC aggregation and sales,
  accounting and tax functions
• AFC provides installer training, consumer credit
  underwriting, lease origination, servicing,
  collections and consumer protection compliance
• A good manager and TPA team is vital to create
  attractive terms and economics for all parties.
  Poor credit underwriting drives up program costs-
  collections, potential ITC recapture, system
  relocations, etc.
• Set Sponsor (eg State) objectives and
  expectations carefully
• What is best for the homeowner might not meet IRS
  requirements
• Use professionals (legal, accounting, etc.) with
  experience in leasing, tax credits and related
  structures
• Need to evaluate many alternatives to meet needs
  of the public and private sector interests. For
  example, all leverage vs. no leverage structures
  and partnership flips vs. master lease structure

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Credit Quality Will Rule

• Managing credit quality drives down costs
  increases competiveness and reduces risk to all
  parties
• Credit quality is much more than just a good
  credit score. An experienced TPA can achieve far
  better results from a pool of sub-700 credit
  scores than a pool of higher scores
• Strong initial underwriting with personal contact
  with each lessee who thoroughly understands
  details and importance of transaction before a
  lease is signed
• Strong credit profile Leasing collateral
  generates its own cash flow to support the lease
  payment pay LC and reap energy profit or pay
  Utility more!
• Long term investment vs. short term savings
  decision
• Lease allows effective fix of electric rates for
  15-20 years but might not always be lower than
  offset utility cost in year 1
• Avoid investing 50,000 on a roof where the
  primary motivation is to save 10-20 on next
  months utility costs

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Credit Quality Will Rule (Cont.)

• Indicative default and charge-off rates provided
  by AFC on unsecured energy efficiency loan
  portfolio

2008 Update National Avg. 4.22 AFC
.83
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Is Third Party Ownership Still Viable?

• Lifting ITC cap does little to help typical
  middle to lower income family
• Still need to write a big check for balance of
  system cost and wait for many state rebates and
  tax refund
• Home equity loan and mortgage refinancing market
  on thin ice
• Most homeowners not equipped to manage proper
  monetization of incentives such as RECs and
  perform required reporting and verifications
• Sale of home within 5 years could create thorny
  tax recapture issues
• Third party ownership simplifies contractor sales
  process
• Simple monthly cost can easily be compared to
  utility savings
• Removes key objections and obstacles (no money
  down)
• Expands market. Moderate income homeowners who
  were lookers can now be lessees

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Whats the Latest?

• From true start at end 2008, CT Solar has
  approved rebates and signed leases for nearly 15
  of the total portfolio and a pipeline (post
  credit/pre rebate) over 25.
• Installation process in CT is takes nearly 140
  days vs. other states like CA
• In discussions with other eastern states for both
  a general product offering and specialized
  program

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Questions and Contact Information

• Gary Kleiman
• 610.254.4110 gkleiman_at_thegemstonegroup.com
• Adam Stern
• 610.293.2507 ajstern_at_thegemstonegroup.com
• 37 West Avenue Suite 105
• Wayne, PA 19087