NREL is a national laboratory of the U.S. Department of Energy

Office of Energy Efficiency & Renewable Energy

Operated by the Alliance for Sustainable Energy, LLC

This report is available at no cost from the National Renewable Energy

Laboratory (NREL) at www.nrel.gov/publications.

Contract No. DE-AC36-08GO28308

Credit Enhancements and 

Capital Markets to Fund Solar 

Deployment: Leveraging Public 

Funds to Open Private Sector 

Investment

Michael Mendelsohn and Marley Urdanick

National Renewable Energy Laboratory

John Joshi

Capital Fusion Markets

Technical Report

NREL/TP-6A20-62618

February 2015
NREL is a national laboratory of the U.S. Department of Energy

Office of Energy Efficiency & Renewable Energy

Operated by the Alliance for Sustainable Energy, LLC

This report is available at no cost from the National Renewable Energy

Laboratory (NREL) at www.nrel.gov/publications.

Contract No. DE-AC36-08GO28308

National Renewable Energy Laboratory

15013 Denver West Parkway

Golden, CO 80401

303-275-3000 • www.nrel.gov

Credit Enhancements and 

Capital Markets to Fund Solar 

Deployment: Leveraging 

Public Funds to Open Private 

Sector Investment 

Michael Mendelsohn and Marley Urdanick

National Renewable Energy Laboratory

John Joshi

Capital Fusion Markets

Prepared under Task No. SM13.1030

Technical Report

NREL/TP-6A20-62618

February 2015
NOTICE

This report was prepared as an account of work sponsored by an agency of the United States government. 

Neither the United States government nor any agency thereof, nor any of their employees, makes any warranty, 

express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of 

any information, apparatus, product, or process disclosed, or represents that its use would not infringe privately 

owned rights. Reference herein to any specific commercial product, process, or service by trade name, 

trademark, manufacturer, or otherwise does not necessarily constitute or imply its endorsement, recommendation, 

or favoring by the United States government or any agency thereof. The views and opinions of authors 

expressed herein do not necessarily state or reflect those of the United States government or any agency thereof.

This report is available at no cost from the National Renewable Energy

Laboratory (NREL) at www.nrel.gov/publications.

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Cover Photos: (left to right) photo by Pat Corkery, NREL 16416, photo from SunEdison, NREL 17423, photo by Pat Corkery, NREL 

16560, photo by Dennis Schroeder, NREL 17613, photo by Dean Armstrong, NREL 17436, photo by Pat Corkery, NREL 17721.

NREL prints on paper that contains recycled content. 
iii

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Acknowledgements

The authors wish to thank the U.S. Department of Energy (DOE) for the sponsorship and 

guidance on this work. We also appreciate the critical reviews by the following individuals 

which greatly improved and informed the analysis contained herein: 

Elizabeth Bellis, Energy Programs Consortium 

Brad Copithorne, Environmental Defense Fund 

Jeffrey Logan, National Renewable Energy Laboratory (NREL) 

Travis Lowder, NREL 

Ammar Qusaibaty, DOE 

Lang Reynolds, NREL 

Mary Rottman, Rottman-Associates

Paul Schwabe, NREL 
iv

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Executive Summary

Broader penetration of solar energy requires development of consistently-available and lowercost capital for project finance. This can be achieved by accessing the capital markets and its 

broad investor base through financial structures such as asset-backed securities (ABS), yieldcos, 

project bonds, and various other debt products. The transition to such innovative financial 

structures, however, is not guaranteed. Perceived risks of the solar asset class—including those 

related to technology, offtaker creditworthiness, and regulatory policy—can increase the required 

yield, increase probability of investor loss of interest and/or principal, or both. In many cases, 

this is a cyclical phenomenon: risk perception is fed by lack of historical knowledge, which is in 

turn fed by risk perception. Therefore, successful access to capital market investment in order to 

spur low-cost solar deployment depends on the success of this initial fledgling period. 

In order to gain wide-scale access to capital markets, the solar industry must first demonstrate 

that the asset performs as expected and provides the projected investment return for the buyers, 

issuers, and market-maker handlers of the securities. This can be particularly true for hard-toreach consumers such as multi-tenant commercial, low or moderate income housing, and nonprofit or government sectors. But without any extensive history, it can be very difficult to gain 

market trust. 

To gain the critical initial footing, credit enhancements offer a viable tool to faciliate the 

transition to frequent and growing access to capital market investment. Credit enhancements can 

take numerous forms but are generally designed to act as support structures that enable investor 

confidence in a financial or physical asset—i.e., they enhance the asset’s credit quality, thereby 

reducing its risk profile and thus its cost of capital and even its liquidity. This paper explores the 

range of credit enhancement mechanisms utilized by both the private and public sectors and 

delves into mechanisms designed to pool project portfolios called “warehouses.” 

Credit enhancements for various debt products, whether direct loans or securitized assets, can 

take on a wide variety of forms but can generally be distinguished by whether they are internal or 

external to the debt or securitization. Examples of credit enhancements include subordination of 

credit tranching, excess spread, overcollateralization, and reserve accounts. Overcollateralization 

was applied in the 2013 and 2014 SolarCity securitizations, or issuances, the details of which are 

explained in Table ES-1 (Standard & Poor’s 2013; Standard & Poor’s 2014). 
v 

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Table ES-1. Details of SolarCity’s 2013 and 2014 Issuances ($ millions)

November 2013 April 2014 July 2014 Improving?

Yield 4.80% 4.59% 4.32%1 Yes

Bond Size $54.4 mm $70.2 mm $201.5 mm Yes

ADSAB

(PV of cash flows) $87.8 mm $106.2 mm $276.0 mm Yes

Overcollateralization 38% 34% 27% Yes

Advance Rate 

(Bond size as % of ADSAB) 62% 66% 73% Yes

1 July 2014 yield is a weighted average based on the size of two tranches offered.

ADSAB = Aggregated Discounted Solar Asset Balance

Importantly, the various aspects of the SolarCity securitizations have been improving as the 

market becomes more comfortable with solar as an asset class. ADSAB, or the Aggregated

Discounted Solar Asset Balance, represents the present value of the cashflows from the pooled 

assets in each security. That value has increased steadily along the SolarCity securitizarions.

Also, the size of the asset pool, or bond size, has been increasing. And perhaps the metric most 

valuable, the ratio of debt raised against those bond sizes – known as the advance rate – has been 

increasing. These are valuable trends on the path to wide-scale access to capital market 

investment. 

In order to further expand the accessability of capital market investment to a wider array of solar 

industry players, the facilitation of “warehouse” vehicles can be a powerful tool to pool projects 

as they are prepared for eventual securitization. A potential warehouse, for example, may build a 

portfolio of projects that meet a set of given criteria established by the financier. The warehouse 

facility plays a crucial role by providing capital liquidity to the developer, allowing further 

project development activities. Warehouse facilities can be combined with credit enhancements 

to assist in leveraging public investment. This report offers three examples of warehouse 

structures and the concept of a partial credit enhancement structures that could possibly open 

untapped markets, such as: low- and moderate-income households; commercial customers that 

lack rated credit; and multi-tenant building structures including retail (i.e., strip malls and indoor 

malls), office complexes, and multi-tenant housing (i.e., apartments and condominiums). 
vi 

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Table of Contents

1 Introduction ........................................................................................................................................... 1

2 Background ........................................................................................................................................... 2

3 Understanding Securitization.............................................................................................................. 6

3.1 The Rating Agency Process............................................................................................................. 7

3.2 How Policy Can Support Capital Market Access............................................................................ 7

4 Credit Enhancements......................................................................................................................... 10

4.1 Internal Credit Enhancements........................................................................................................ 10

4.2 External Credit Enhancements....................................................................................................... 14

5 Warehouse Facilities.......................................................................................................................... 17

6 Example Warehouse/Credit Enhancement Mechanisms ............................................................... 19

7 Conclusion .......................................................................................................................................... 22

References................................................................................................................................................. 23
1 

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1 Introduction

In 2011, the U.S. Department of Energy (DOE) launched the SunShot Initiative, designed to 

lower the cost of solar energy to competitive levels by 2020. In June 2013, the Obama 

administration outlined three major goals related to climate change in “The President’s Climate 

Action Plan:” 

• Cut Carbon Pollution in America 

• Prepare the United States for the Impacts of Climate Change

• Lead International Efforts to Combat Global Climate Change and Prepare for its Impacts

(Executive Office of the President 2013). 

Among the initiatives to cut carbon pollution is to unlock long-term investment in clean energy 

innovation because meeting these goals will require expanded availability of capital for project 

deployment through numerous financial innovations. Since 2013, several innovations—

particularly yieldcos, green bonds, and securitization—have opened new avenues for investment 

in renewable energy (RE) projects, a welcome development for the industry. 

Distributed RE systems, specifically residential and commercial solar assets, represent a 

promising means of increasing U.S. clean energy penetration. Distributed systems are, however, 

currently limited to a narrow band of end-use customers who own their properties (homes and/or 

commercial real estate) and have demonstrably high credit. For the residential sector, these are 

customers with high FICO scores;1 for commercial customers, systems are generally available to 

those who own or have long-term leases on free-standing buildings and have rated credit 

(generally, national brands) or can readily provide investors with a reasonable assurance of 

payback (Lowder and Mendelsohn 2013). The majority of other residential dwellings and 

commercial properties, including multi-tenant housing (apartments, condominiums), retail, and 

office properties, are largely untapped markets, even in states where solar deployment is 

economic and thriving. 

Opening these markets to solar deployment will require specific innovations, or credit 

enhancements, to offset some of the perceived risk of nonpayment. Credit enhancements are 

available from both the private and public sectors and come in many forms. Importantly, credit 

enhancements can leverage relatively small levels of public sector investment to open wide-scale 

private sector capital deployment. 

This paper explores the concept of credit enhancement as a means of leveraging private 

investment in the distributed solar sector. It discusses how these instruments are currently and 

could be further employed in private sector financings and securitizations, as well as in the 

public sector. To conclude, the paper overviews “warehouse”structures designed to aggregate 

solar projects to enable third-party project pooling (typically by large banks) and possibly 

securitization, which previous NREL work has identified as a means to opening low-cost debt to 

a wide array of solar deployment (Lowder and Mendelsohn 2013).

 

1 FICO stands for Fair Isaac Corporation, which is generally referred to as a credit rating available from one of three 

primary entities in the U.S. for all individuals in the country.
2 

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2 Background The solar photovoltaic (PV) industry has been growing at a rapid pace. Since 2007, distributed 

solar—loosely defined as systems deployed “behind the meter” at residential and commercial 

and industrial buildings—have experienced average annual growth of over 40% (see Figure 1). 

This relatively strong growth is expected to continue through 2016, after which there is 

significant uncertainty due to the investment tax credit (ITC) declining from 30% to 10% for 

commercial and third-party owned systems (and complete termination of the ITC for directlyowned residential systems). In 2013, distributed installations required roughly $7.9 billion in 

capital (GTM/SEIA 2014).2

 

Figure 1. United States PV distributed installations by market sector 

Source: Lowder and Feldman 2014

Further deployment growth will require reductions in soft costs, including financing. Unlocking 

long-term investment in clean energy will, in turn, require access to private investment 

historically unavailable to RE project finance: pension funds, mutual funds, and private wealth 

accounts. As shown in Figure 2, of the roughly $100 trillion in global investment assets, the 

majority is managed by pension funds, insurance companies, mutual funds, and managers of 

private wealth (TheCityUK 2013). Global assets are primarily invested in debt and equity 

securities that are liquid, tradable, and priced by the market. Traditionally, renewable energy 

investment is project-financed and does not have these characteristics, which limits the supply 

and raises the cost of investment capital.

 

2 Calculated as the product of the average system price and the installed capacity by market sector, based on 

quarterly statistics.

0

1000

2000

3000

4000

5000

6000

2007 2008 2009 2010 2011 2012 2013 2014P 2015P 2016P

MW

Commercial

Residential
3 

This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications.

Figure 2. Global capital available for investment 

Source: TheCityUK 2013

Access to capital markets—representing the industry that manages and trades such liquid debt 

and equity securities—would provide a steady and diversified source of investment and allow the 

solar sector to grow at scale. Laying the foundations for the solar asset class will be increasingly 

important as the ITC declines to 10% at the end of 2016 for businesses (and terminates 

completely for homeowners who own systems directly), limiting the need for “tax equity.” The 

reduced utilization of, and demand for, tax equity is viewed as both a positive and a negative: 

while the ITC represents a 30% direct reduction in the cost of a solar project, tax equity designed 

to monetize the ITC is both expensive and cumbersome, often negating the opportunity to utilize 

debt or increasing its cost. Tapping capital market investment requires educating a new set of 

investors regarding the technology and credit-related risks of solar assets. The financial industry, 

like many others, is often described as risk-averse and the threshold of investment in a new asset 

class is not easily overcome without demonstration of its success. 

Two critical elements can speed the education process and expand capital market investment

(Schwabe et al. 2012): 

• Asset and contractual consistency – To the extent possible, asset development, 

documentation, and operation and maintenance (O&M) should be uniform to reduce due 

diligence (i.e., investor analysis) requirements. That is, standardized procedures and 

contracts reduce the number of relevant risk factors so investors can model and fully 

comprehend the potential impact on cash flows and recovery of expected investor returns. 

• Availability of due diligence tools – Regardless of asset class, investors require data to 

gain the confidence necessary to invest and/or reduce the required return on such 

0 5 10 15 20 25 30 35 40 45

Pension funds

Insurance funds

Mutual funds

Sovereign wealth funds

Private equity

Hedge funds

Exchange-traded funds

Private wealth

Global Assets Under Management ($ trillions)

Non-conventional 

Investment Funds

Conventional 

Investment Funds

Hatched bars represent traditional sources of 

investment in U.S. renewable energy projects 
4 

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investment. Solar is a relatively young industry, with the majority of systems only a 

couple of years old, and risks regarding both technology-performance (i.e., will the 

system produce energy) and credit-performance (i.e., will the customer pay the bill, even 

if it is more expensive than utility-based power, etc.) of an investment. 

Together, these items feed a virtuous cycle, represented in Figure 3, which facilitates 

increased liquidity, standardization, a robust market for analytic services, investor 

confidence, and rating agency feedback. 

Figure 3. Elements required to build market confidence

Source: Mendelsohn and Joshi 2014

Liquidity and 

Price 

Transparency

Consistency in 

Cash Flows

Wide Array of 

Analytic 

Capabilities

Investor 

Confidence in 

Asset 

Performance

Feedback from 

Rating Agencies 

and Investors
5 

This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications.

Industry Coordination and Assets to Facilitate Capital Market Investment

As part of the U.S. Department of Energy’s SunShot Initiative, NREL was awarded a threeyear grant to facilitate access to low-cost capital via securitization and other public capital 

vehicles. In turn, NREL formed the Solar Access to Public Capital (SAPC) working group, 

whose members include 450 of the nation’s top development, financial, legal, and analytic 

entities engaged in the solar industry. 

SAPC is currently engaged in several initiatives, including: 

• Standardizing contracts - The group’s suite of contracts, including a residential lease, a 

residential power purchase agreement (PPA), and a commercial PPA, were diligenced by 

dozens of law firms engaged in RE development. The list of standard contracts is 

available at https://financere.nrel.gov/finance/solar_securitization_public_capital_finance. 

• Developing best practices in system installation and O&M protocols. These documents 

are currently in-development, and expected to be issued by early 2015. 

• Building robust datasets of technology performance called the Open Solar Performance 

and Reliability Clearinghouse, or oSPARC. The database is available for stakeholder 

research at http://sunspec.org/osparc/. 

• Filing “mock” securitizations to get a shadow rating from rating agencies to understand 

their risk perceptions. SAPC’s first mock, with detailed term sheets and cash flow 

analyses, is being reviewed by five agencies. The commercial mock portfolio includes a 

novel tandem tax equity and securitized debt structure that could enable both forms of 

capital in the “initial capital stack” could facilitate a lower cost of capital without the need 

to re-finance. The legal structuring documents, which could save securitization issuers 

time and expenses to develop, will be available at https://financere.nrel.gov/finance/. 
6 

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3 Understanding Securitization

Securitization is the transformation of illiquid assets into securities that can provide broader 

liquidity and reduced risk for investors and easier access to capital for sponsors. Securitization 

comes in numerous forms and, in a general sense, includes all capital market investments 

referred to in this paper. 

When investors purchase securities, they are essentially buying a claim on the underlying asset 

or stream of cash flows generated through a contract (Jobst 2008; Lowder and Mendelsohn 

2013). Pooling illiquid financial obligations typically reduces risk by diversifying credit of the 

underlying payments; diversifying geographic and other concentration risks that could impact 

credit or performance; managing performance and reporting over a larger asset base; and 

standardizing payment, transfer, and other terms so as to make the resulting collateral pool and 

securities issued more easily tradable. Traditional securitization assets include consumer loans, 

leases, mortgages, credit card debt, auto loans, and other esoteric assets. 

In its simplest form, securitization is a two-step process. First, a lender, developer, or other entity

“originates” loans or leases to homeowners, businesses, or other counterparties. Working with 

capital market groups, including bankers, legal counsel, and rating agencies, the lender/sponsor 

can utilize securitization structures to legally and financially insulate the assets that they 

originated from their own bankruptcy risk (this is critical to the credit quality of the asset pool) 

into a special purpose vehicle (SPV). This is typically achieved by a “true sale” of the loans by 

the sponsor to the SPV, an important legal concept. 

Second, the lender/sponsor works with rating agencies to add credit enhancements (protecting 

the investor from the risk of losses on the assets) to the securitization structure, often by retaining 

a subordinated interest in the pool of securities. The SPV issues various tranches of debt in the 

capital markets that are structured with different credit ratings and maturities (Lowder and 

Mendelsohn 2013).

Securitization can offer issuers several benefits over more direct finance of the issuer’s 

corporation (e.g., commercial debt and tax equity). Among these benefits is risk-transfer and the 

financing opportunities securitization affords by opening a market for illiquid assets that would 

otherwise remain on owner balance sheets and inhibit a company’s ability to originate additional 

business. Other benefits of securitization include: 

• Highly-rated securities can be created at a lower interest rate (coupon) and possibly a longer 

maturity than other borrowing sources

• Access to increased investor base 

• Larger transactions

• Development of capital market history and experience (Lowder and Mendelsohn 2013). 

Of course, securitization carries risk, and is often associated with the financial crisis of 2008-

2009. According to one expert, “competition between mortgage securitizers led to a race to the 

bottom on mortgage underwriting standards that ended in the late 2000s financial crisis”

(Simkovic 2013). Accordingly, diligent underwriting of solar components and installations is 

critical to maintain construction quality and operational consistency, and in turn, investor 
7 

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confidence in the asset class. The solar industry is engaged in numerous activities to facilitate 

these attributes including Qualification Plus, an NREL-led program to ensure module 

manufacturing quality (Kurtz et al. 2014) and SAPC’s development of installation and O&M 

best practices designed to improve the probability installations are well built and maintained. 

3.1 The Rating Agency Process

Rating agencies represent critical gatekeepers to accessing capital market investment. A poor 

rating by a rating agency on a given security (perhaps a portfolio of commercial solar projects) 

can result in far more expensive capital, reduced demand for the security, or both. 

Rating agencies assess a wide range of issues including: asset portfolio statistics; legal structure 

of the transaction; financial performance; experience of the originator; cash flow structure and 

liquidity; controls and procedures; credit protections, such as guarantors; sovereign and legal 

risks; and counterparty risks (Mendelsohn 2014b). 

Public rating agencies have issued ratings (referred to as pre-sale reports) and published articles 

regarding securitization of residential and commercial solar leases and PPAs (KBRA 2012; Fitch 

Ratings 2012; Standard & Poor’s 2013; Standard & Poor’s 2014). These articles outline the 

various business and risk factors that need to be addressed to rate a public securitization 

transaction. The key risk factors identified by the rating agencies include: 

• A lack of historical information of both technology and credit performance for solar as an 

investment asset class.

• A limited number of experienced O&M providers. 

• The uncertainty around the future cost of utility-provided electric energy, and the regulations 

and laws that oversee net metering, demand charges, and other relevant potential factors. 

• Solar energy production, which can be unpredictable due to variability in weather, panel 

degradation, or other inputs, and may cause in variability in cash flows.

• The costs and expenses associated with managing the solar asset portfolio, which may be 

hard to predict over time. 

• Customers that can purchase utility-provided power or lower-cost solar systems may seek 

renegotiated agreements before the contract term ends that would result in reduced cash 

flows (Standard & Poor’s 2014). 

3.2 How Policy Can Support Capital Market Access

Federal, state, and local government support for renewable energy investments comes in a 

variety of investment incentives: 

• Tax credits

• Grants, loans, and guarantees

• Accelerated depreciation

• Nontax environmental incentives 

• Renewable portfolio standards (RPS). 
8 

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Government policy incentives—including the ITC and accelerated depreciation schedule known 

as Modified Accelerated Cost Recovery Schedule, or MACRS—are designed to encourage 

investments in renewable energy sources. These incentive structures have encouraged primarily 

specialized tax equity investment (Mendelsohn and Harper 2012). Looking forward, wider-scale 

“public” capital will be required to support the scope and scale of investment in renewable 

energy projects to meaningfully reduce greenhouse gas emissions and garner other benefits. The 

securitization of cash flows from renewable energy projects is an important tool that can bridge 

the capital investment gap, and financial policy initiatives which do not require specialized tax 

equity investment will encourage development of these more flexible financial structures. 

However, a securitization solution would require offering credit enhancements to senior 

investors in the form of loss reserves, subordinate debt, or some other structure to keep default 

risk (and therefore interest rates on securitization transactions) low enough to attract capital 

markets debt funding sources for solar energy. 

In the United States, many credit enhancements are offered at the local, state, and federal levels 

to spur energy system manufacturing and deployment. Federal entities that offer credit 

enhancements to open investment and trade include the Overseas Private Investment Corporation 

(OPIC), the Export-Import (Ex-Im) Bank, and the Department of Energy. 

One recent trend worth noting is state green banks. According to the Coalition for Green Capital, 

an organizational entity of U.S. green banks, a green bank “is a public or quasi-public financing 

institution that provides low-cost, long-term financing support to clean, low-carbon projects by 

leveraging public funds through the use of various financial mechanisms to attract private 

investment so that each public dollar supports multiple dollars of private investment” (Coalition 

for Green Capital 2014). 

At time of publication, state green banks were in operation in Connecticut, New York, and New 

Jersey. Connecticut’s Clean Energy Finance and Investment Authority (CEFIA), also known as 

Connecticut Green Bank, was initiated in 2011 and has been written about extensively.3 The 

New York Green Bank (NYGB) is a more recent entrant, initiated in 2013 and opened for 

business in early 2014. Legislation enacting Hawaii’s Green Bank passed in 2013 (Center for 

American Progress 2015). 

According to NYGB, the primary objectives of the entity are to: 

• “Provide a bridge to self-sustaining, efficient financing markets for clean energy and energy 

efficiency.

• Leverage private sector capital to develop sustainable clean energy financing markets.

• Increase the amount of clean energy deployed for every dollar of State money spent or 

invested in the clean energy sector.

 

3 See, for example, Berlin, K.; Hundt, R.; Muro, M.; Saha, D. (2012). “State Clean Energy Finance Banks: New 

Investment Facilities for Clean Energy Deployment.” http://www.cleanegroup.org/assets/Uploads/State-CleanEnergy-Banks-Sept2012.pdf 
9 

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• Animate capital markets for the clean energy sector, so as to reduce the cost of capital and 

the need for government support. 

• Spur economic development and clean energy jobs across the State.” (NYGB 2014). 

NYGB offers three primary forms of support structures to facilitate investment in renewable 

energy technologies, which represent the general range of non-tax-related policies available: 

1. As a credit enhancement provider (e.g., a reserve account or subordinated debt) 

2. As a lender (e.g., senior, mezzanine, or subordinated) 

3. As a warehouse provider with the potential to be taken out by third parties upon certain 

events (e.g., the aggregation of an agreed upon amount of assets) (NYGB 2014). 

Note that this analysis focuses primarily on credit enhancements and warehouse facilities 

because these instruments offer the potential to leverage a relatively small quantity of public 

investment to garner larger private investment opportunities. 
10 

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4 Credit Enhancements

Credit enhancement represents a variety of financial support structures that are designed to 

reduce or transfer risk and improve the terms on debt and debt-like instruments. Credit 

enhancement typically reduces the required yield/cost of funds of debt, making it more attractive 

to borrowers. Credit enhancement can also improve the liquidity of a security (i.e., its tradability 

in a market context), which is attractive to investors (Lin 1999). Section 4.1 evaluates credit 

enhancements that are internal (incorporated within the allocation of cash flows) and external to 

the debt structure, although the designations are not concrete and the credit enhancements 

described can often fall into either category. 

Key considerations in determining or selecting the form and amount of credit enhancement 

include: the intended investor/purchaser of the security, desired rating level, the credit 

characteristics of the underlying assets (also known as collateral), the availability of capital for 

credit enhancement, and the cost of credit enhancement (Mendelsohn 2014b). Other 

considerations may include the limits or restrictions on the type and amount of credit 

enhancement available. For example, public sector credit enhancements may be subject to 

specific risk limitations or design requirements associated with enacting legislation or other 

statutes. 

4.1 Internal Credit Enhancements

Internal credit enhancements are incorporated specifically into the legal structure of the 

securitization or other investment vehicle. They are generally designed to allocate cash flow 

from the underlying assets to meet the required debt service coverage levels and protect the 

noteholders from losses. Internal credit enhancements include:

Subordination or Credit Tranching

Senior/subordinated structures are designed to carve up cash flows from one pool of 

assets/collateral into multiple classes of securities within one debt offering (Mendelsohn 2014b). 

The securities issued by the SPV are arranged in a hierarchy of classes (or tranches), which are 

ranked by risk, tenor, and other qualities (FDIC 2007). Lower seniority (or subordinated) 

tranches are assigned a lower credit rating and serve as protective layers of the more senior, 

highest-rated tranche. The cash flows are prioritized to pay the most senior tranches first; the 

remaining available cash is then paid to next-highest tranche and continues to the most junior 

tranche or until available cash is exhausted. Losses flow in the opposite direction and applied to 

the junior tranches first and senior tranches last, based on the specifics of any deal (see Figure 4

below).
11 

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Figure 4. Tranching mechanisms facilitate differentiated asset pools and risk/reward options for 

buyers of securities.

Excess Spread

Excess spread is the difference between the interest rate received on the underlying assets, also 

referred to as collateral, and the yield on the issued security. This mechanism is built into a wide 

array of securitizations, particularly for credit cards (FDIC 2007). 

As an example of its use, in February 2014, Riverside County, California issued a securitization 

of Property Assessed Clean Energy (PACE) loans that fund a portfolio of energy efficiency local 

projects. The primary credit enhancement of that securitization, known as the HERO Bond,4 is 

an excess spread whereby the underlying collateral pays an average yield, or coupon, of nearly 

8% and the rate on the securitization note pays 5% to the noteholders.5

 According to Kroll Bond 

Rating Agency (KBRA), which rated the HERO Bond, the difference in incoming and outgoing 

yields represents “an excess spread available to cover losses. Any excess interest cash flows 

from the PACE Bond Portfolio will be available to pay principal should PACE Assessment 

defaults rise.” (KBRA 2014). The HERO Bond pools 5,890 PACE Assessments (i.e., home 

efficiency improvements) and raised $104.4 million dollars. 

PACE Lending

PACE lending, which places a tax lien on the associated property, provides a form of credit 

enhancement by transferring or substituting the security repayment risk to the likelihood of 

recovering amounts owed through property tax assessments. Because of the seniority of the tax 

lien (i.e., by law, taxes are repaid before other types of debt or accounts payable), the HERO 

Bond received an AA rating (KBRA 2014). KBRA, in assessing the portfolio, was primarily 

convinced of the creditworthiness (the likelihood that the principal and interest on the bonds 

would be repaid) based on the ability to tax the underlying real estate value rather than the 

technical performance of the solar systems or the regulatory environment (i.e., including net 

metering) that facilitates the system’s value to the customer. The rating agency indicated, “[i]n 

 

4 The HERO Bond is officially referred to as HERO Funding Class A Notes, Series 2014-1. 5 The HERO Bond also incorporated credit enhancements of a 3% overcollateralization and a 3% reserve margin. 

$

$

$

$

Pooled 

Assets

AAA/Aaa

AA/Aa

A

BBB/Baa

Credit Risk

Last

First

Low

High

Low

High

Payment 

Streams

Loss Position

Yield

$

Investment

Tranches

Tranche Characteristics
12 

This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications.

its analysis, KBRA used historical residential real estate tax default data for the County and 

surrounding counties as a proxy for PACE Assessment defaults. KBRA views this as an 

acceptable proxy, since PACE assessments are equal in priority to other real estate taxes”

(KBRA 2014). 

According to KBRA, in providing the loans that comprise the HERO Bond portfolio, Riverside 

County implemented the following underwriting guidelines to improve the probability of 

repayment: 

• “The property owner(s) must be current on their property taxes 

• The property cannot have had more than one 30-day mortgage late payment over the 

previous twelve months

• Mortgage-related debt on the property must not exceed 90% of the market value of the 

property 

• Proposed improvements must not exceed 15% of the market value of the property and the 

combined mortgage related debt and amount of the PACE assessment must not exceed 

100% of the market value of the property 

• The total annual property tax and assessments, including the contractual assessment, on 

the property must not exceed 5% of the property’s market value” (KBRA 2014.) 

PACE lending for solar deployment is still in its infancy but is often considered a potentially 

valuable source of funds. PACE legislation allowing municipalities to create PACE programs 

has been enacted in 31 states and Washington, D.C. (NCSL 2014). Twelve states and 

Washington, D.C. have active PACE programs. PACE Assessment is relatively unique to energy 

and water efficiency and renewable energy projects, and is therefore not widely recognized as a 

credit enhancement for other asset classes.

Overcollateralization

The expected value of the pooled assets (representing the present value of the remaining cash 

flows) is larger than the debt raised under the securitization. The overcollateralization provides a 

reserve to make principal and interest payments if some of the payments from the underlying 

loans are late or default (FDIC 2007). 

In the SolarCity securitizations of November 2013, April 2014, and July 2014, the securitization 

bond was credit enhanced through overcollateralization (Standard & Poor’s 2013; Standard & 

Poor’s 2014). The three issuances represented a present value of cash flows over the remaining 

life of the contracts (referred to as Aggregated Discounted Solar Asset Balance, or ADSAB) 

from the underlying collateral of $87.8 million, $106.2 million, and $276 million, respectively. 

The securitization debt, sold as notes to the noteholders, was sized far smaller, at $54.4 million, 

$70.2 million, and $201.5 million, respectively. The ratio of the bond size to the total asset cash 

flows is referred to as the advance rate. The overcollateralization equals one minus the advance 

rate.
13 

This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications.

Table 2. Details of SolarCity’s 2013 and 2014 Issuances

November 2013 April 2014 July 2014 Improving?

Yield 4.80% 4.59% 4.32%1 Yes

Bond Size $54.4 mm $70.2 mm $201.5 mm Yes

ADSAB

(PV of cash flows) $87.8 mm $106.2 mm $276.0 mm Yes

Overcollateralization 38% 34% 27% Yes

Advance Rate 

(Bond size as % of ADSAB) 62% 66% 73% Yes

1 July 2014 yield is a weighted average based on the size of two tranches offered.

ADSAB = Aggregated Discounted Solar Asset Balance

Source: Standard & Poor’s 2013; Standard & Poor’s 2014. 

Importantly, the SolarCity transactions show a steadily improving advance rate indicating the 

increased confidence in solar as an asset class in a very short time frame (roughly 8 months). 

Relatively mature industries will enjoy an advance rate of 75%-80%. In contrast, the HERO 

Bond, described above, received a 97% advance rate but – as mentioned – was credit enhanced 

primarily through security of the tax and the excess spread (i.e., the difference between incoming 

and outgoing interest rates) incorporated in the structure rather than overcollateralization. 

Reserve Accounts

A reserve account is created to reimburse the securitization manager—referred to as the issuing 

trust—for various types of losses and temporary shortfalls. Solar systems, for example, may 

require reserve accounts specifically to cover solar-related expenses (e.g., excess O&M and/or 

replacement of inverters) or non-solar-related expenses (e.g., prepayment, default) over the life 

of the security. Reserve accounts may be funded at a fixed amount or be replenishable. They may 

have minimum and maximum levels. If reserves dip below minimum levels because expenses are 

higher than incoming additions, cash is “swept” away or allocated from investor payments to 

reserve funds to ensure these primary services are paid for. Cash sweeps may put noteholders’ 

recovery of principal and interest at risk in the near term but ultimately protect the assets and 

cash flows over the life of the security. 

A reserve account can also be external to the debt securitization funded by an entity associated 

with the debt issuance or an outside party. For example, in March 2014, California established a 

$10 million loss reserve that will backstop residential PACE programs. In the case of foreclosure 

or forced sale, the loan loss reserve (LLR) “will reimburse first-mortgage lenders for any losses 

attributable to PACE loans” (California Office of the Governor 2014). According to the 

California agency6

 that runs the LLR Program, the goal “is to put first mortgage lenders in the 

same position they would be in without a PACE lien,” thereby placating a concern by the Federal 

Housing Financing Authority—the federal entity that oversees Fannie Mae and Freddie Mac 

mortgage insurance programs—that PACE programs place first mortgage holders at additional 

risk. 

 

6 The agency is called the California Alternative Energy and Advanced Transportation Financing Authority.
14 

This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications.

Turboing (Reducing Maturity Risk)

In a turbo structure, excess funds are paid to noteholders as principal, paying down the debt at an 

expedited rate (SIFMA 2014). Turbo structures can shorten the expected life of the debt from 

“legal final maturity,” or the potential maximum duration of the debt. Shortening the security life 

greatly reduces risk because it reduces uncertainty. This is particularly true for solar due to

limited or no long-term asset production data (particularly as module and inverter designs evolve 

over time) and ambiguity with respect to regulatory policy (e.g., net metering), fuel prices, 

technological replacements, and other potential risks perceived by rating agencies and investors 

(Standard & Poor’s 2014). 

Additional features internal to securitized assets that may offer additional credit enhancement 

benefits include: 

Amortization Schedule: Amortization schedule represents the rate at which securities return 

principal to investors. Full amortization repays the principal in full over the life of the loan. 

These loans are designed to closely reflect the repayment characteristics of the underlying loans 

from scheduled interest and principal payments. A controlled amortization repays principal in a 

series of defined periodic payments after a predetermined period during which only interest 

payments are made. 

Bullet Structures: Securities designed to return principal to investors in a single payment. Bullet 

structures can be further delineated by whether the bullet will be paid on the expected maturity 

date (“hard” bullet) or not guaranteed to be paid by that date (“soft” bullet). 

Floating Rate Structures: Securities that have had a floating, rather than a fixed, interest rate. 

The interest rate is or indexed and adjusted periodically. Common indices include the London 

Inter-Bank Offered Rate (LIBOR) and U.S. Treasury bills, plus a fixed margin. This technique 

can help avoid an interest rate mismatch between borrowers and investors. 

4.2 External Credit Enhancements 

External credit enhancements are those that are procured from or provided by a third party and 

used to protect investors or noteholders ability to recover their expected principal and interest. 

The addition of external credit enhancement improves the risk profile of the security to attract 

investors while at the same time lowering the required yield/cost of capital. External credit 

enhancements include: 

Surety Bonds

Surety bonds are insurance policies that reimburse the security for losses related to default or 

unexpected expenses (FDIC 2007). A surety bond (also called a performance bond) guarantees 

the contract will be completed according to its terms and conditions. These bonds are different 

from insurance in that they are constituted by a three-party contract, whereas insurance contracts 

include only two parties (Lowder et al. 2013). Insurers generally provide guarantees only to 

securities of investment-grade quality (BBB/Baa) (SIFMA 2014). An asset-backed security

(ABS) combined with a surety bond can improve the securities ratings equal to that of the surety 

bond’s issuer. Surety bonds only make economic sense to the effect the reduction in interest 
15 

This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications.

costs on the debt is greater than the cost of the surety bond insurance, i.e., the net effect on the 

over-all cost of funds is positive (Mendelsohn 2014b). 

Security Wraps/Third Party or Parental Guarantees

These products represent forms of external insurance. For example, a third party or the parent 

company of the ABS issuer can provide a promise to reimburse the trust for losses up to a 

specified amount. Ex-Im, the United States government’s official export credit agency, offers 

loan guarantees and export credit insurance. The bank’s 100% loan guarantees7 are available to 

qualified international buyers in the public and private sector for up to ten years, and will finance 

up to 30% of local costs (Ex-Im n.d.). Ex-Im’s access to low-interest debt through the U.S. 

Treasury and ability to offer 100% loan guarantees allows the bank to achieve narrow interest 

rate spreads (Chadbourne & Parke 2014). In 2013, Ex-Im approved a $780,000 loan guarantee to 

finance U.S. solar module exports, supplied by Suniva Inc., to a 500 kW rooftop PV installation 

at Grupo Metal Intra’s main production plant in Queretaro, Mexico (Choudhury 2013). 

Letter of Credit (LOC)/Cash Collateral Account (CCA)

A letter of credit is an irrevocable commitment in which a commercial bank or other financial 

institution is paid a fee to stand by with cash to reimburse the trust for any losses actually 

incurred, up to the required credit enhancement amount (FDIC 2007). An LOC is usually an 

alternative to subordinated notes or, if the quality of assets is low, coupled with subordinated 

notes. Funds from the LOC may be drawn upon by the trust if the losses cannot be covered by 

excess interest spread or reserve (Lin 1999). In a cash collateral account (CCA), funds from a 

commercial bank are deposited in an account with the highest available credit quality (e.g., shortterm commercial paper) and available for pre-specified expenses to ensure the creditworthiness 

of the overall security. 

Country-Specific Reserves/Currency Protection Mechanisms

Foreign projects, particularly in developing countries, carry additional risks that often must be 

credit enhanced to garner a high quality credit rating and/or be sellable in the capital markets.

Currency risk is of particular concern and can cause a significant increase in the cost of debt in 

developing countries (Nelson and Gireesh 2014). 

 

7

 Ex-Im provides coverage for medium term and long term transactions, and provides an 85% loan guarantee with a 

15% down payment required by the buyer.
16 

This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications.

Table 3. Selected Credit Enhancement Examples Compared

Local State National International 

California 

Governor’s Office

Connecticut Clean 

Energy Finance and

Investment Authority

US Department of 

Energy U.S. Ex-Im Bank

Credit 

Enhancement

PACE Loan Loss 

Reserve

CT Solar Loan 

Warehouse 

Facility/LLR

Loan Guarantee Loan Guarantee

California Senate 

Bill 96 authorized 

a $10 million 

mortgage loss 

reserve program 

to reimburse firstmortgage lenders 

for PACE 

payments made 

during the 

foreclosure 

period.

$5 million warehouse 

facility seeded by 

(CEFIA), and will be 

leveraged with debt 

from Mosaic to 

originate additional 

loans. LLR was 

formed with 

repurposed ARRA 

funds, which will pay 

off the entire default 

up to $300,000

(Mendelsohn 2014a).

An estimated $4 billion 

in loan guarantees 

and “credit subsidy” 

costs (i.e. essentially 

insurance premiums) 

for innovative RE, 

efficiency, or grid 

applications. DOE has 

identified list of eligible 

projects for 

consideration (Hansen 

2014). 

Ex-Im Bank 

provides an 85% 

loan guarantee 

and requires a 

15% down 

payment from 

buyer. Qualified 

public and private 

sector buyers 

may finance up to 

30% of local 

costs for up to 10 

years.

During the financial crisis of 2008 – 2009, an entire private sector industry, referred to as 

monoline mortgage insurance, was eliminated due to extensive mortgage defaults. This analysis 

is not meant to review the complex breakdown of the mortgage securities market, but suffice to 

say, thorough and consistent due diligence of solar project deployment and maintenance is 

critical to build investor confidence to ensure a high probability the asset will perform as 

expected from both a technological and credit perspective. 
17 

This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications.

5 Warehouse Facilities 

Typical securitizations involve the pooling of assets in “warehouse facilities,” sometimes also 

referred to as “conduit structures,” against which securities are issued prior to the securitization 

being released into the capital markets. These facilities typically feature a “carry/risk-sharing” 

structure where all parties in the warehouse share interest income (carry) as well as the risk of 

the underlying asset defaulting or not being acceptable in the final securitization transaction. 

Warehouse facilities are commonly provided by an investment bank, conditional upon an 

agreement with the issuer to securitize the portfolio once the structure has been arranged. 

Commercial banks have also been active in warehouse finance for other asset classes and it is 

likely they will become active in the solar asset class. The warehouse provider furnishes capital 

(cash) to buy (also referred to as “source”) the assets. In a solar transaction, the assets in the 

warehouse can be the cash flows from a lease or PPA, the physical solar systems themselves, or 

both. Incorporating a credit enhancement from a public entity in this warehouse would spread the 

risk (and income) amongst a greater range of parties and thus reduce the potential cost to the 

issuer in setting up the facility. 

The Warehouse for Energy Efficiency Loans (WHEEL) program was developed by the Energy 

Programs Consortium and the National Association of State Energy Officials (NASEO) in 

partnership with Pennsylvania Treasurer and the banking entity Citi. WHEEL facilitates capital 

market investment in energy efficiency projects by purchasing unsecured residential energy 

efficiency loans written, or originated, in participating programs. The loans are aggregated into 

pools, rated, and sold as asset-backed notes. “Proceeds from those note sales will be used to 

recapitalize WHEEL, allowing it to continue purchasing eligible loans from state and local 

programs for future rounds of bond issuance” (NASEO n.d.). However, future rounds of bond 

issuance depend on whether public sector sponsors “recycle” the project cash flows to support 

more loans. WHEEL is currently active in Pennsylvania, and the program is under consideration 

in Kentucky, Virginia, Nevada, and other states (Mendelsohn 2014c). 

CEFIA also pools project cash-flows into warehouse-like structures. CEFIA offers three products 

to spur residential solar installations, efficiency and other installations: the CT Solar Lease 

(targeted to installers), the CT Solar Loan (targeted to homeowners), and the Smart E-Loan 

(targeted to banks) (Hunter 2014). In total, about $93 million is available for credit enhancement 

from the state.

In 2014, CEFIA partnered with solar loan originator and master servicer, Sungage Financial, and 

solar crowdsourcing investment platform, Mosaic, to launch a new residential financing product 

called the CT Solar Loan (Hunter 2014; Mendelsohn 2014a). To structure this deal, CEFIA 

seeded an SPV with $5 million to finance residential solar PV projects. CEFIA will leverage this 

warehouse facility with debt from Mosaic by lending against the cash flow of the residential 

loans. To re-capitalize the SPV, the loans are pooled into $500,000 tranches and sold to Mosaic 

at 6% yield and 15 year maturity (the term of the loans). The capital raised remains in the SPV to 

leverage against tranches as they come in and to buffer against potential defaults. CEFIA retains 

a first loss position of 20% subordinated debt and Mosaic receives 80% of loan repayment cash 

streams (Mendelsohn 2014a) (see Figure 5).
18 

This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications.

Figure 5. General representation of CT solar loan structure

Source: Hunter 2014

Although the warehouse facility does not necessarily enhance credit directly, it serves to remove 

transaction costs and pool a portfolio of similar assets to tap debt investment. The warehouse 

facility can be combined with a wide array of credit enhancement fixtures described above to 

increase the number of investors interested in the asset class and/or reduce the required yield to 

garner their investment.

Separately, in May 2014, CEFIA announced the securitization of a $30 million portfolio of 

commercial projects (CEFIA 2015). The projects were financed by CEFIA via its Commercial 

PACE program. Connecticut’s Public Finance Authority is the issuer of the bonds, which have 

been purchased by a specialty finance company, the Clean Fund. According to Bert Hunter, 

CEFIA’s Chief Investment Officer, “[t]he sale of this initial portfolio of PACE liens to Clean 

Fund is the latest step in our effort to attract and deploy private [-sector] capital here in 

Connecticut supporting energy efficiency and renewable energy opportunities.” 

Monthly 

Loan 

Payment

Loan 

Agreement

Install

$ Contract

Loan 

Repayments

$ (100%)

$

Loan Repayments Sub Debt

$(20%)

Loan 

Repayment 

$ (80%)

Mosaic

CEFIA

CEFIA 

(CT Solar Loan 

LLC)

Sungage

PV Contractor

Residential PV 

Customer

Debt
19 

This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications.

6 Example Warehouse/Credit Enhancement 

Mechanisms

The following example structures, referred to as Partial Credit Enhancement Structures (PCES), 

combine warehouse conduits, designed to pool the cash flows of similar projects, and credit 

enhancements to offset risk and induce private sector capital investment. The PCES mechanisms 

are offered as potential instruments to support the transition from traditional financing

mechanisms to the application of public capital vehicles. A PCES can provide valuable support 

to a securitization transaction not only as an instrument to mitigate project risk but also to 

provide the necessary additional creditworthiness lenders currently require because of the limited 

availability of performance and credit data. 

The additional credit support of a PCES could substantially improve lending terms, including 

cost of capital, tenor, and maturity while also encouraging risk sharing and providing additional 

leverage. As a simple hypothetical example, consider a PCES in the form of a 5% loss reserve 

that successfully induced private capital 20 times its initial investment. In this example, a 5% 

PCES of $1 million would leverage up to $20 million of private capital. 

As another example, imagine a federal credit enhancement of say 20%, demonstrably less than 

the current 30% that the government pledges to the solar industry in the form of the ITC. 

Importantly, the ITC is essentially always paid out for solar system deployment but a credit 

enhancement is only paid in cases in which noteholders are at risk of recovering scheduled 

principal and interest due to poor system technical performance or off-taker (i.e., power 

purchaser) credit performance. However, the comparative effectiveness of the credit 

enhancement and ITC are not well understood at this time; this analysis assumes that the 

different policy mechanisms will induce reasonably equivalent investments in renewable energy 

on a dollar-for-dollar basis, although policymakers would need to better understand if a credit 

enhancement mechanism would be as effective as the ITC or other policy instruments. 

Nonetheless, the specified credit enhancement represents the upper limit of potential exposure. 

The credit enhancement could be far less expensive than that upper limit, or in fact provide a 

modest return to the public sector entity funding it if cash flows are reasonably consistent with 

initial projections. 

Three potential PCES strategies are: 

• “Warehouse” Reserve. This credit enhancement product is specifically designed to assist in 

the formation of the portfolio during warehousing, which is the period in which projects are 

pooled prior to securitization, perhaps during construction or upon initial commercial 

operation. As represented in Figure 6, a potential warehouse PCES could lay in a mezzanine 

position behind the developer’s equity, meaning that the developer’s interest is written off 

first (consistent with Dodd-Frank regulatory requirements of at least 5% sponsor risk 

retention), protecting the PCES provider’s position. In the example inFigure 6, the warehouse 

reserve is sized between 5% and 20% of the total value of the debt. Thus, at 10% reserve, for 

example, the third-party debt would not incur losses until cash flows limited the first 15% 

(5% developer, 10% PCES) of total cash available for debt service. 
20 

This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications.

Additional credit enhancement could also be provided to this position through the availability 

of excess spread between the interest income earned on the assets in the warehouse facility 

and the actual cost of capital (e.g., in the form of a bank loan in order to pool the assets), 

operational reserves, or other mechanisms. 

Figure 6. PCES program structure: warehouse facility 

(Values are hypothetical percentages of total project investment.)

• “Securitization” Reserve. Like a warehouse reserve, this product would be a mezzanine 

investment, though it would remain in place for the duration of the securitized asset life. The 

securitization reserve mechanism can be structured in a wide variety of formats based on the 

allocation of coupon receipts and principal repayment. See Figure 7. 

Figure 7. PCES program structure: securitized transaction 

(Values are hypothetical percentages of total project investment.)

Third-Party Debt 

75%–90% 

PCES 

Warehouse Reserve

5%–20% 

Developer's 

 Interest 

5%

Senior Bonds

30%–90% 

PCES

Securitization Reserve

5%–20% 

Developer's 

 Interest 

5%
21 

This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications.

• “Warehouse/Securitization Co-Invest” Mezzanine Bond. This structure represents a 

combination of the prior two and supports both the creation and long-term operation of the 

pool. This structure, as pictured in Figure 8, also requires the public credit enhancement and 

the private sector debt to incur losses at the same rate, thereby slowing losses to the credit 

enhancement funds but increasing risk to the senior bondholders. 

Figure 8. Co-invest PCES program structure: transaction

(Values are hypothetical percentages of total project investment.)

Specific details of these structures can be created in innumerable forms, but are generally 

designed by both the structuring entity and the potential noteholders as a seller/buyer negotiation. 

These strategies can greatly reduce the risk perception among investors, reduce yield 

requirements, and provide valuable experience to nascent forms of securitization. Credit 

enhancements can also represent a valuable incentive by which to spur adoption of standardized 

contracts and installation best practices. These might improve a given solar securitization’s 

opportunity for success in the capital markets. 

Public investment in securitized vehicles via PCESs can be a low-risk strategy because 

renewable energy generation projects typically have a contracted revenue stream (e.g., through a 

PPA or lease). They often also carry other guarantees, such as those from the developer, 

equipment manufacturers, and construction entity, which could partially or fully indemnify the 

PCES provider. 

Senior Bonds

30%–90%

Co-Invest 

Mezz Bond

Public / Private

5%–30% 

Developer's 

 Interest 

5%
22 

This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications.

7 Conclusion

Credit enhancement represents a variety of financial support structures that are designed to 

reduce or transfer risk and improve the economics of a debt instrument including debt raised via 

a securitization process. Credit enhancements can improve both the liquidity of a security and the 

required yield/cost of funds of the security, thus improving the attractiveness to both investors 

and borrowers. A wide array of internal and external credit enhancements is available to both 

private and public sector actors interested in expanding investment in renewable energy assets. 

Warehouse facilities facilitate the pooling of assets into portfolios conducive for debt investment. 

Combined, warehouse structures and credit enhancements, particularly from public sector 

sources interested in leveraging large quantities of private capital, can potentially be a powerful 

mechanism to organize solar project cash flows and enable broader access to low-cost debt 

capital. Importantly, any PCES would need to be carefully assessed and designed to effectively 

induce private sector investment and to do so at lowest cost to the public sector. 
23 

This report is available at no cost from the National Renewable Energy Laboratory (NREL) at www.nrel.gov/publications.

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