CEFIA’s Residential Solar Financing Products

Bert Hunter, Executive VP and CIO, CEFIA

February 6, 2014

Agenda

• What’s the Situation?

• What’s the Complication?

• What’s the Resolution?

• What have we learned?

• Discussion

2

What’s the Situation? Four Macro Challenges in CT

High Energy Costs

CT has THE highest cost for electricity in the "lower 48"

Need for "Cleaner / Cheaper" Energy Sources

Programs that will diversify our energy mix into renewable/clean power

Grid Reliability

5 major storms in 2 years with unacceptable outages

Government Spending Constrained

Emergency budget deal in 2013

3

What’s the Complication? Challenges for Clean Energy Adoption

Lack of Scale in Residential & Commercial PV

• High installer margins = low volume and solar more expensive than grid

• No transparency / lack of information for customers

Financing Options Limited

• Market “trained” on subsidies and / or tax motivated

• Nationals tend to focus on select markets & towns

• Specialty lending available…at high cost and / or shorter term

• Self-financing constrained

Would-be Mass Lenders Dislike Product Risk

• Energy upgrades small cost relative to mortgage

• Low visibility to clients

• Internal bandwidth limited

• Unfamiliar with revenue generation aspect of clean energy products

4

Subsidizing entire viable solar market is part of complication

5

659,312

506,714

4,500 0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

Total AddressableMarket

Economically ViableMarket

Actual Penetration

# R

es

ide

nti

al

Ro

oft

op

s

• Only 0.9% of viable market served

• ~3.9 GW of viable solar capacity remaining

• At current subsidy level, would cost state over $4 billion to penetrate 100% of market!

• Not a solution

Solar Market Size by Rooftops

Must transition from grants to loans

• Subsidizing entire market is fiscally unsustainable

• Must transition from grants to financing

• Capital can be public or private

• Want to maximize private investment, however currently not enough capital available

• Green banks will turn on faucet, draw in private capital

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$/W kW

As installations grow, need to move from grants to loans increases

7

Reduced installed $/Watt 9% year-over-year since 2011

Lowered subsidy by 20% since 2011

Installed capacity grew 150% year-over-year since 2011

7

What’s the Resolution?

Green Banks build bridge between demand and installers

Develops a "menu" of financial products to scale-up deployment of solar PV

Lowers cost of installation with demand aggregation, scale efficiencies

Lowers cost of capital

Provides new asset classes for capital providers

Acts as a clearinghouse for information and data transparency

Provides Consumers & Installers with Access to Necessary Capital

8

CT Solar Lease CT Solar Loan Smart-E Loan

Target Market Installers Homeowners Banks

~Amount

Available $60M $5M $28M

Eligible

Technologies

Solar PV

Solar Hot Water Solar PV

Efficiency, HVAC

All renewables (PV, SHW,

Geothermal, Biomass, etc.)

Ownership No (option to purchase) Yes Yes

Down Payment? Not required if installed cost is

less than $4.50/W

Minimum of 5% of net

installed cost Not required

Interest Rate N/A (20 years) 6.49% (15 years) 4.49% (5-yr), 4.99% (7-yr),

5.99% (10-yr), 6.99% (12-yr)

FICO Min

DTI Max

640

45%

680

45%

640

45%

CEFIA offers residential solar financing for installers, homeowners, banks

• Try to provide roughly equal economic value in each product to let market identify which is most desired; constant process of market discovery

• Products must fund all upfront costs in return for power price lower than grid

9

Lease savings steady, loan savings high at end

10

$2,000

$1,500

$1,000

$500

$0

$500

$1,000

$1,500

$2,000

$2,500

$2,000

$1,500

$1,000

$500

$0

$500

$1,000

$1,500

$2,000

$2,500

Loan Savings

Lease Savings Solar Lease savings Profile • Lease is cash flow positive for

customer from day one • Long, steady stream of savings

Solar Loan Savings Profile • For Loan customer has to pay

out of pocket upfront • Cash flow positive by year

three using ITC savings • Greater savings on back end

11

Contractor (SHW, Resi. or

Comm. PV)

PV or SHW Customer

(Resi., Comm., or Muni)

CT SLII, LLC

CEFIA

Debt Syndicate led by First Niagara

Debt

Tax Equity Sub Debt Equity Loan Loss Reserve PBI (incentive) Developer services

CEFIA Holdings

, LLC

$ $

System

System, Insurance, Lease

CT Solar Lease provides local installers an important sales

tool, while customers benefit from affordable, no-money-down financing and peace of mind.

Install

CEFIA currently provides five forms of support for solar lease product

11

80% of CT Solar Loan sold to Mosaic and Hampshire Foundation to replenish, relend capital

12

Crowdsourcing Platform

Foundation

CEFIA (CT Solar Loan

LLC)

Sungage & LeaseDimensions

PV Contractor

Residential PV Customer

$ $

$

$ from loan repayments (100%)

$ Contract

Install

Monthly Loan Payment Loan Agreement

CT Solar Loan provides local installers an important sales tool, while customers can take the 30% ITC and benefit from long-term, low cost capital that allows them to own PV

CEFIA

Sub Debt

$ from loan repayments (20%)

12

Smart-E Loan product targets local banks with loan loss reserve from CEFIA

13

Community Banks and Credit Unions CEFIA

PV, RE, EE or HVAC Contractor

Residential PV, RE, EE, HVAC Customers

Loan Loss Reserve tiered Min. Underwriting Guidelines Technical Project Approval

$

$

Install $

Technical Approval

13

Cost of loan is only better than cost of grant if default rate is low enough

• Goal is to transition from grants to loans, but key is finding good loans

• If credit risk is too high, may be better to give grant

14

Cost of Loan = Loan Amount x Expected Default Rate Cost of Subsidy = Amount of Subsidy

If expected default rate is high enough, better to do grant

CEFIA provides credit enhancements to enable more favorable terms from private lender

• All three residential solar financing products have loan loss reserve credit enhancements to increase economic value for customers

• A loan loss reserve enables banks to offer better terms because CEFIA shares in each loss, capped at a total amount of potential losses

• Private lender has reassurance of payback, but still has to cover portion of losses – ensures quality underwriting practices

15

CT Solar Lease CT Solar Loan Smart-E Loan

Target Market Installers Homeowners Banks

Capital for

Financing $60M $5M $28M

Size of Loan

Loss Reserve

$3.5M

$300K $2.5M

Terms of LLR Used to smooth DSCR to reduce

risk to tax equity from leverage

Covers P&I for

delinquencies >90 days

7.5% of Loan Balance for

FICOs 680 and up

15% of Loan Balance for

FICOs 640-679

Aggregating demand lowers costs and attracts cheaper capital

• Demand aggregation brings scale efficiencies to installation, lowers costs of projects

• Also takes step toward obtaining scale needed to draw private capital at low costs

Demand Aggregation CEFIA Credit-Enhanced

Product Market Transformation

CT Solar Loan

CT Solar Lease II

Smart-E Loans

9% year-over-year reduction in residential installed $/W since 2011 150% year-over-year CAGR in installed kW since 2011

16

Providing customers with actionable data and options creates demand

17

• CEFIA brings impartial source of data to communicate with installers and customers

• Roof-by-roof analysis can be done cheaply, and empowers customers

Transparency drives confidence in market stability

18

• CEFIA regularly provides industry stakeholders, customers with data on status of the market

• Installers know what average costs are

• Customers and installers know what subsidy level is and when it will be reduced

• Transparency creates trust in CEFIA

Lessons are green banks attract private capital, customer acquisition key to success

• Good Program Design Attracts Capital

– Green Banks can design products and programs that make it more attractive for private capital to fund Solar PV and Energy Efficiency

• Marketing and Customer Acquisition are the Keys to Programmatic Success

– Volume is the main challenge, programmatic success and design tweaks will stem from robust customer demand; transparency / data sharing, marketing and customer acquisition are all tools Green Banks have to stimulate demand

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Credit scores, training, and time are primary challenges

• Banks don’t like FICOs below 680

– Require credit enhancements

– Solar Lease 2 achieves 640 FICO (limit on exposure as % of portfolio); Smart-E doubles credit enhancement for 640-679; Solar Loan - not yet

• Training is essential

– Contractors, lenders require focused investment in training

– Critical to channel marketing strategy

• Real innovation takes time

– Huge time investment to develop program design, capital partners, docs

– CEFIA shares its structures, documentation. NYSERDA has done so as well. We hope other Green Banks will follow our lead to save others time!

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Green bank must address four key questions

• Public Policy Goals • Communication /

Coordination

• Existing Market Channels • Role of Incentives • Standardization • Education / Data

• Installers • Lenders • Utilities / Regulatory

framework

• Financing • Program / incentive

design • Transparency

Gaps in the Market

State of the Market

Migration from

Incentives to

Financing

Key Drivers of Scale

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Appendix

Burt Hunter, Executive VP and Chief Investment Officer Clean Energy Finance and Investment Authority 860.563.0015 Bert.hunter@ctcleanenergy.com

CT Solar Lease CT Solar Loan Smart-E Loan

What Makes It

Special?

Hassle- and worry-free. No

money down

Low monthly payment, long

term makes owning solar

affordable

Quick, flexible financing from

your local bank

Targeted # of

Transactions,

Year 1

984 123 1200

YTD 178 72 82

Residential solar financing product attributes and goals

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Value of CEFIA’s Products for PV Customers

CT Solar Lease CT Solar Loan Smart-E Loan

What Makes It Special?

Hassle- and worry-free, no money

down

Low monthly payment makes purchasing solar

affordable

Quick and easy financing from your local bank

Own Your Solar?

No (option to purchase)

Yes Yes

Down Payment? Not required if installed cost ≤

$4.50/W

Minimum of 5% of installed cost

Not required

Terms 20 years 15 years 5 - 12 years

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24

CEFIA drew multiple private investors into single product for Solar Lease

Role Major Risk(s) How Addressed

Tax Equity Recapture caused by

default

Loan Loss Reserve PBI

CEFIA Equity Assurant Bundle

Lend to CT SLII at a % of capital for “build”

cost

Not enough cash for

debt service

Interest rate risk

Loan Loss Reserve PBI

Assurant Bundle Rate swap

Subordinated Debt Equity

Fund Developer

Customers can’t or won’t pay lease

Install / Contractor

Risk - PR

Loan Loss Reserve PBI

Assurant Bundle

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Each component of Solar Lease serves specific purpose in making deal work for partners and customers

Performance-Based Incentive

Loan Loss Reserve

Equity Subordinated

Debt

What it is

- Statutorily-mandated incentive

- Applies to all resi.

leased systems in CT

- Current rate is $0.18/kWh

- $3.5M repurposed ARRA-SEP funding

- First loss for deficiencies in lease payments

- CEFIA “developer equity”, bundling working capital loan to the fund, leases, systems, and arranges insurance products

- CEFIA contributes sub debt at a reduced rate

- 2-½%; 20-Yrs - Fully

amortizing behind Senior

Why it was used

Cost of $ = f(R*P(R))

R=Return

- Increase R for equity investors

- Increase P(R) for debt investors by diversifying sources of cash flows

- Increase P(R) for all investors by enhancing cash flow covenants (effectively improves DSCR)

- Result: very cost-effective interest rate

- Increase P(R) for bank syndicate and US Bank

- Increase R for CEFIA (channel to clean energy programs)

- Increase P(R) for debt syndicate

- Increase R for US Bank and CEFIA

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- Contracts with Assurant - Ensures each project meets

contractor and equipment requirements:

- 20-year inverter warranty

- 25-year panel warranty

- Wraps Contractor Workmanship and Manufacturer Warranty -

- Fulfills warranty even in event of manufacturer bankruptcy

- Provides Property, Liability,

and Casualty Insurance for install

- Authorizes and pays for repair

- Assurant Sub-

Contractor - Provides

“Boots on the Ground” for repairs from all causes

- Contractor must warranty

workmanship for minimum of 6 years

- CEFIA holds back 1.75% of each install as assurance

PV Contractor

CEFIA contracts with insurer to cover panel damage

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"1-Call"

Resolution

FOR HOMEOWNER

Installer

Workmanship

(ROLL A TRUCK)

OEM

Warranty

(ROLL A TRUCK)

Property

Insurance

(ADJUSTER DISPATCHED)

Simple

"Handle by Phone"

Issues

(HOMEOWNER)

Assurant (NYSE: AIZ) is a leader in niche insurance

products

• $27B assets

• $8B annual revenue • > $1 billion from warranty

mgmt

• Market capitalization ~$3B

• No. 310 on Fortune 500

• No. 1024 on Forbes Global 2000

• Operations in 12 countries

• 14,500+ employees worldwide

• AM Best’s “A” rated

Customer has simple panel problem resolution through insurer

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CT Solar Loan uses subordinated debt and loan loss reserve to enhance credit

Role Major Risk(s) How Addressed

Senior Lenders to CT Solar Loan

Not enough cash for debt service

Loan Loss Reserve

Subordinated Debt

Subordinated Debt

Customers can’t or won’t pay loan

Install / Contractor

Risk - PR

Loan Loss Reserve CEFIA Rebate

Sungage

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Credit Enhancement

Tool

Expected Performance Based Buydown

Loan Loss Reserve Subordinated Debt

What it is - Statutorily-mandated incentive

- Applies to all resi. host-owned systems in CT

- Current amount is $1.25/W for the first 5kW and $0.75/W for greater than 5kW and up to 10kW

- $300,000 repurposed ARRA-SEP funds

- First loss for deficiencies in loan payments

- CEFIA leverages 80% of the loan payment streams

- 20% is kept as subordinated debt

Why it was used

Cost of $ = f(R*P(R))

R=Return

- Increases R for investors

- Increases P(R) for investors by reducing required investment per system

- Increase P(R) for all investors

- Increase P(R) for senior debt

- Increase R for CEFIA

CT Solar Loan components increase economic value, ensure payback to lender

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Smart E-Loan credit enhancements deploy more private capital at lower costs

Role Major Risk(s) How Addressed

Primary Lenders and Servicers

Customers can’t or won’t pay loan

Loan Loss Reserve

Technical Origination

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Smart-E Financing Terms

Eligible Contractors HES, HPwES, BPI-certified, or other contractor authorized by utilities or CEFIA (CEFIA runs QA/QC inspection process)

Eligible measures Any measure (or combination) that qualifies for CEFIA, utility or CEEF incentive or rebate, with a focus on oil-to-gas conversions

20% of total amount financed can go toward related non-energy measures like roof repair, asbestos remediation, etc.

Borrower Credit Criteria (option to offer only Class A)

Class A: 680+ Class B: 640 to 679 Debt-to-Income: 45%

LOAN LOSS RESERVE 7.5% 15%

Term (years) 5 7 10 121

Interest rate (not to exceed, may be lower depending on lending institution)

4.49% 4.99% 5.99% 6.99%

Eligible Homes 1-4 Units

Loan Amount Minimum $3,000 Maximum $25,000 (min/max, may be higher depending on lending institution)

Participating lenders Participating banks and credit unions

1 CEFIA places deposits = 15% of original PBO of loans >10Y

32

Tiered loan loss reserve & underwriting guidelines align lender and green bank interests

32

Smart-E Loans: Green Bank Credit Enhancements Used

Credit Enhancement Tool

Expected Performance Based Buydown

Loan Loss Reserve

What it is - Statutorily-mandated incentive

- Applies to all resi. host-owned systems in CT

- Current amount is $1.25/W for the first 5kW and $0.75/W for greater than 5kW and up to 10kW

- $2.5M repurposed ARRA-SEP funds

- Covers up to 100% of lender losses of eligible loans

- Lenders take first 1.5% loss to align interests

Why it was used

Cost of $ = f(R*P(R))

R=Return

- Increases P(R) for lenders by reducing required investment per system

- Increase P(R) for lenders - Increases willingness to

extend LOWER rates for LONGER periods due to

LESS expected loss

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Smart-E (12 Year – PV): Annual Homeowner Cash Flows

$2,000

$1,500

$1,000

$500

$0

$500

$1,000

$1,500

$2,000

$2,500

(savings)

(25 years)

34

Value of ITC essentially covers net payments due over 12 year term

34

Smart-E Loan effect of term on annual cash flows for Whole-House Solution

REFERENCES Net installed costs and average savings based on numbers provided by CL&P. Calculation assumes gas rate of $1.40/ccf and oil rate of $4.00/gallon as well as an energy price escalator of 2.99%

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5-year term

7-year term

10-year term

12-year term

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Different forms of credit enhancements serve specific purpose in supporting loan

• Anything that provides a potential lender or investor additional reassurance that the assets will perform, resulting in more favorable terms for the borrower

Source: SEEAction Credit Enhancement Guide

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Green Bank Academy

Washington, DC February 6-7, 2014

www.greenbankacademy.com

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