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BlackRock, Barclays and L&G cash in on rise of UK residential solar energy


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Happy Friday. Despite its famously rainy weather, the UK has major untapped potential for solar power. But to date, residential solar financing has been a niche market.

For today’s newsletter, I looked at a deal that could bring UK solar power as an investible asset class to public capital markets, including pension funds, which could be attracted by its creditworthy borrowers and long payback periods. But will the new cash be enough to overcome non-financial barriers to originating more residential solar deals? Read on.

RENEWABLE ENERGY FINANCING

New prospects for UK residential solar power

For much of the past decade, the outlook for residential solar energy in the UK seemed dim. Britain once handsomely subsidised households supplying electricity to the grid, giving the nascent sector a head start. But the Conservative-led coalition government led by David Cameron made cuts to the scheme, with Cameron reportedly saying in 2013 that the government would cut the “green crap” in order to bring down energy bills. Adoption plateaued.

Now, residential solar power is becoming more popular again. “Policy-wise, not a lot has changed,” Lara Hayim of Bloomberg NEF told me, but the combination of dirt-cheap panels and Europe’s energy price spike has inspired more homeowners to consider solar. As a result, she said, “our forecast for the residential segment is becoming a lot more bullish”.

BlackRock, Barclays and Legal & General are among the investors cashing in on that comeback by backing a company that is consolidating and securitising the market for residential renewables.

Energy services provider Hometree Group announced today that it had secured £250mn ($318mn) from London-listed bank Barclays in an asset-backed debt facility that will finance loans and leases for solar panels, batteries and heat pump installations in the UK.

Chart showing a decline in UK residential solar capacity additions since 2015, but strong growth since then, and a forecast of continued strength in the market

Securitisation allows loan originators — in this case, green equipment installers — to realise the value of their lending by refinancing in public capital markets, making solar an investable asset for investors such as pension funds.

Hometree plans to use the facility to finance 28,000 residential solar panel systems, batteries and heat pumps over the next two years. When the facility is fully tapped, the company plans to refinance by issuing a green bond.

The deal comes two months after Hometree announced it had raised an undisclosed amount of debt from BlackRock, the world’s largest asset manager, to finance its buyout of two renewable energy businesses. And earlier this week, Hometree announced it had acquired another heat pump installer, marking the eighth acquisition in its “buy and build” strategy to consolidate the UK’s top renewable installers.

Clean energy strategy lead John Bromley of L&G, which made an early equity investment in Hometree, told me he was pleased to see Hometree “present more opportunities for private investors to participate in this part of the market at scale”.

But while Hometree’s buying spree and asset-backed solar debt may attract more financing for clean energy appliances, challenges remain — including the UK’s high electricity prices and a shortage in the installer workforce.

A growing asset class

Solar asset-backed securities (ABS) have been around for more than a decade in the US. Elon Musk’s SolarCity pioneered the model with a $54mn offering in 2013. Since then, total US solar ABS issuance has grown to more than $24bn, according to Kroll Bond Rating Agency, which rates the asset class. A total of $1.2bn US solar ABS have been issued to date in 2024, KBRA said.

But Hometree’s deal marks the first solar securitisation in the UK, according to chief executive Simon Phelan.

“It’s a genuine green asset class,” Phelan said. “It’s timely because [the opposition Labour party] is talking at the moment about, if they are in government, wanting to harness the power of third-party capital to solve some of our bigger problems here in the UK. Clearly, this is a real sign of the capital markets being willing to come in.”

Robert Sannicandro, head of esoteric asset-backed securities at Deutsche Bank, told me the growth of solar ABS had “taken pressure off the bank market to provide the financing for all this origination, and allowed for more development of the solar market”.

Solar ABS are particularly attractive to pension funds, which have long investment horizons, since renewable equipment is paid down over time spans that can exceed 20 years.

But one challenge facing the sector is its workforce. In the US, the supply of skilled electricians is dwindling. Private equity groups such as Blackstone and Leonard Green have thrown their weight behind strategies to roll up home heating, ventilation and air conditioning businesses, which are often small and family-owned — a trend which could further deter workers from joining the industry.

Internet forums for electricians are buzzing with complaints that buyouts have led to a decline in HVAC quality, as new management teams push for faster turnover. “Getting sick and tired of nothing but massive private equity firms scooping up every single mom and pop shop,” one user wrote on Reddit, in a typical post titled “PE ruined this industry for Residential”.

In the UK, it may not get that far. “The industry is not going to completely consolidate,” Phelan predicted. But other installers will need low-cost financing for solar and heat pumps, he said, and utilities will also offer renewable hardware to their customers. They are unlikely to raise financing for solar ABS, he predicted: “This is quite a specialist type of financing and it took a long time for us to raise. So right now, we’ll be the only provider of this type of capital.”

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