Why Wall Street Is Learning to Love Solar Energy

Solar stocks have long been a thorn in the side of Wall Street's stock investors. It seems like an industry with infinite growth potential but the winners and losers come and go at a moment's notice (think Suntech Power)and new technology upends the industry on a regular basis.

But Wall Street has found a side of the solar industry it does like. Solar financing has become big business for the big banks and hundreds of millions of dollars is flowing into the solar industry at record low rates. There's a lot for Wall Street to love in solar.

Wall Street is putting billions into residential solar financing. Image source: SunPower.

Where Wall Street puts its solar moneyFinancing comes in many forms in the solar industry. The most simple is project financing, which companies like SunPower and First Solar use to build utility scale projects. This financing is similar to other asset backed debt financing for power plants and was where traction really began in the financing market.

Recently, more complex financing structures have been used to grow solar, particularly in the U.S. SolarCity , Vivint Solar , and SunPower all use tax equity financing to finance residential systems that are leased to homeowners. Banks like Wells Fargo and Bank of America will provide financing for a project and "buy" the system for the first few years of its life so they can take advantage of tax benefits like the 30% investment tax credit and accelerated depreciation. Once these tax benefits have been utilized, the system usually then reverts back to the company that built it.

Projects like SunPower Solar Star wouldn't be possible without debt financing. Image source: SunPower.

This is big business for banks. GTM Research says the residential solar financing market was $1.3 billion in 2012 and predicts it will be $5.7 billion in 2016 alone. Wells Fargo has provided $4 billion in various financing structures for renewable energy projects since 2006. Bank of America has a $220 million financing deal with SunPower and just signed a $400 million deal with SolarCity. This is just scratching the surface of the money Wall Street is putting into solar.

One option that's new to the solar industry is securitization. Since solar systems provide predictable cash flows, residential and commercial systems will be bundled together and the cash flows will be securitized and sold to investors, similar to how mortgages are securitized. SolarCity is the leader in this type of financing, offering its third securitized offering earlier this year of $201.5 million. Securitizations will likely expand as investors become more comfortable with the predictability of cash flows from solar systems and the industry moves toward solar loans.

Why Wall Street loves solarThese financing options are attractive to Wall Street because it's relatively easy to predict how much electricity a solar project will generate and therefore the cash flows each year. Predictable cash flows make for easier financing and in an environment where other forms of energy are growing in risk, the risk profile of solar is falling.

The availability of financing and falling rates are good for solar installers too. Lower financing costs effectively lower the cost per kW-hr of energy, making solar energy even more competitive with the grid. It's a positive reinforcing loop, which is driving growth for the industry.

Image source: SunPower.

What about the little guys?Wall Street is beginning to understand solar, which is good for big projects and big distributed installers like SolarCity, SunPower, and Vivint Solar. But smaller banks have yet to learn enough to understand solar energy's risk profile, leaving small commercial or utility projects unfunded.

I recently talked to small solar project developer JJR Power's CEO John Jaffrey about this dynamic and he said that funding for smaller projects is a constant battle. A 500kW system isn't big enough for a Wall Street bank to care about and a regional bank doesn't understand the industry enough to take on the credit risk.

This will change long term, but it took years for Wall Street to become comfortable with solar and smaller markets may take even more time.

Fuel for solar energy's growthWall Street's growing acceptance of solar energy will lead to more growth for the industry, both here and abroad. For investors, the opportunity is just starting to show itself and I think we're in for consistent growth in the solar industry for years to come. That may not be possible without a little boost from Wall Street and its newfound love for solar.

The article Why Wall Street Is Learning to Love Solar Energy originally appeared on Fool.com.

Travis Hoiummanages an account that owns shares of SunPower and Wells Fargo and is personally long SunPower. The Motley Fool recommends Bank of America, SolarCity, and Wells Fargo. The Motley Fool owns shares of Bank of America, SolarCity, and Wells Fargo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.