Residential solar financier Sunnova Energy Corp. closed a new round of funding this week that includes a private placement by its subsidiary, Helios Issuer, of approximately $255 million of asset-backed notes.
Credit Suisse acted as the sole structuring agent and sole bookrunner. The deal also includes two warehouse credit facilities in an aggregate principal amount of $360 million. Combined, this represents a $615 million round of funding. It’s also Sunnova’s first asset-backed notes securitization, and one of the largest in the industry’s history.
A day after announcing the raise, Sunnova closed on the issuance of $80 million of senior secured notes, bringing the company’s total 2017 capital raise to $775 million.
Sunnova says it has now raised more than $2 billion in the past four years from various sources, including tax equity, debt and corporate equity, from private equity firms, institutional investors and major Wall Street banks.
The funding round was a bit of good news for the residential solar sector in the wake of Sungevity’s sudden bankruptcy, a looming solar trade dispute and shifts in the marketplace that have prompted large players like SolarCity and Vivint to reassess their business strategy. In recent months, the residential solar industry has also been questioned over misleading sales practices and consumer protection measures.
In an interview several months ago, Sunnova CEO John Berger predicted there would be a spate of residential solar company bankruptcies. Since that interview, Sungevity and Verengo Solar have gone bust, One Roof has started to sell off its assets, rumors have emerged of troubles at Spruce and several other solar industry players have had to make layoffs.
While there’s bound to be more turmoil ahead, Berger said his outlook is much sunnier today. “There are a lot of positive things that are going on in the industry, but the industry clearly has changed and shifted into a new stage,” he said in an interview this week. “New leadership is emerging,” he said, as some companies fail to turn the corner with their business model.
“We continue to see that our industry is a power industry, and that residential solar is becoming conventional power, which is a good thing for all of what we're trying to achieve as an industry,” Berger continued. “What really goes to the heart of it is if you manage a good financial ship, the investors will come, the lenders will come.”
Cleaning up the home solar industry's act
Sunnova is currently registered to do business in 20 states and active in 15, working predominantly on the coasts with an emerging presence in Texas. The pure-play residential solar financier is the sixth largest residential financier in the country and the fifth largest third-party-ownership financier, according to GTM Research. Sunnova's overall market share was 3 percent in 2016, down from 6 percent in 2015.
Berger attests that business is healthy. Sunnova has been EBITDA positive for 14 straight months, and is approaching cash flow positive, he said. The company hasn’t done anything unique to get to this point, “we’re just doing things like the conventional power business,” he said. “That's obviously a lot more of what investors want to see.”
Where Sunnova differentiates itself is on customer care, the CEO said. “We want to make sure there's the proper oversight involved in both the sales and certainly the installation process, and if something is not right there, that the company that did it — in this case us — makes it right,” he said.
Whether a customer wants a lease, a PPA, a levelized PPA, or a loan, Sunnova calls it a “solar service agreement.” A key part of these agreements is offering a robust operations and maintenance service. The notion that an installer can set and forget a solar project for 20 years is “ridiculous, and it frankly ought to be against the law,” Berger said.
There need to be proper protections for consumers, including quality assurance and quality control. “We need some cleanup going on in our industry or … we're going to continue to see these negative stories,” he said, referring to a recent article on PACE loans in the Wall Street Journal.
Berger is wary of blending solar sales with energy efficiency, having sold both in the past. In his view, companies that try to sell solar and efficiency together can’t get profitable, and the better play is to have focus.
He said he’s also wary of some of the solar loan providers out there. If he had to call it, Berger predicted one or two more companies in the residential solar space will really struggle in the coming months. It may not be a bankruptcy, but there will be some kind of a “shakeout,” which could be triggered by a regulatory crackdown, he said.
Congress recently introduced a bill, for instance, that requires PACE issuers to make additional disclosures to potential residential solar customers. The PACE industry has said the legislation would effectively kill the sector.
“I think if you have enough of the regulatory authorities coming in, whether it's the attorney-generals' offices or the feds or whatever it may be, maybe joint agencies coming after [consumer protection], you can see enough big enough fines and lawsuits that certain firms would not be able to withstand that kind of financial pressure,” Berger said.
Berger didn’t name any company names, and he praised efforts by the PACE industry and others to improve customer protections. To that end, the Solar Energy Industries Association launched a nationwide consumer education campaign and “protection portal” last month. Solar transaction disclosures are now also available online.
The solar industry needs to clean up its act “or the government is going to step in and clean it up for us, and that would be unfortunate,” Berger said.
Customer choice and a new energy storage offering
Berger reiterated that the solar story is, overall, a positive one. And as shifts take place within the industry, they’re also taking place in the broader energy landscape in a way that’s beneficial for solar. Electricity markets are becoming more consumer-friendly, with major efforts led by New York, California and most recently Nevada. Texas is already thriving retail market and the Federal Energy Regulation Commission is looking at ways to expand access to wholesale energy markets.
“This is just unprecedented, the speed at which things are happening, in terms of becoming an open and free market that's consumer-friendly, that promotes consumer choice,” Berger said. “That is something that has everything to do with solar, residential solar … which is very, very positive for our industry.”
As the customer choice conversation evolves, solar companies and utilities need to address how to better integrate rooftop solar with the centralized grid and create favorable policies surrounding that.
Berger said he could see the industry adopting some kind of minimum bill structure to ensure solar customers are paying their fair share to support the grid network. However, slapping solar customers with, say, a $50 monthly fee “is just abusive,” he said.
For Sunnova’s part, the company plans to enhance customer choice by starting to offer energy storage. Chief Marketing Officer Jordan Frugé said the company is currently packaging up storage with solar and a full O&M package to last for the duration of the customer’s lease.
The battery systems are designed primarily for rate arbitrage, and not for backup power. The company is in the process of signing up new customers in Hawaii, targeting the self-supply tariff. On the island of Oahu, Frugé said Sunnova is able to deliver 19-cent power with solar-plus-storage, where customers are currently paying the utility around 27 cents per kilowatt-hour. “It's pretty significant savings to the customer, all with no money down,” he said.
As policies and markets continue to evolve, Berger said he hopes utilities will look to cooperate with solar companies for the benefit of the customers.
“I think our industry is very much in going in the right direction. We've got a few things that we need to clean up and do better, but I think we've entered a nice, good new stage of growth with a new leg up,” said Berger. “Like I said, the sun is rising, not setting. “