Solar ABS (Asset Backed Securities): Methods to Determine Fair Market Value of TPO Solar Assets?

Powering the Future: Decoding Residential Solar, Third-Party Ownership, and the Rise of Solar ABS

The residential solar energy market is undergoing a transformation. As homeowners increasingly seek sustainable energy solutions and predictable electricity costs, innovative financing models have emerged to make solar more accessible. Among these, Third-Party Ownership (TPO) – encompassing solar leases and Power Purchase Agreements (PPAs) – is experiencing a significant resurgence. This trend, coupled with the sophisticated financial instrument of Asset-Backed Securities (ABS), is unlocking vast pools of capital to fuel the solar revolution.

This post delves into the relationship between TPO residential solar, its valuation, and its powerful combination with ABS, exploring how these mechanisms are shaping the future of clean energy finance.

The Resurgence of Third-Party Ownership (TPO)

For many homeowners, the upfront cost of purchasing a solar system can be a significant barrier. TPO models address this by allowing homeowners to benefit from solar energy without owning the system itself.

• Solar Leases: The homeowner makes a fixed monthly payment to the TPO provider for the use of the solar system. They then get to use all the electricity produced by the system.

  
  

• Solar Power Purchase Agreements (PPAs): The homeowner pays the TPO provider for the electricity generated by the system at a predetermined rate per kilowatt-hour (kWh), which is often lower than the utility's rate. The TPO provider owns, operates, and maintains the system.

  
  

Recent market data underscores a significant shift back towards TPO. According to a Q1 2025 report from Wood Mackenzie, TPO models captured over half of the U.S. residential solar market share in Q4 2024 for the first time since 2016, averaging 45% for the full year.

This growth is largely attributed to higher interest rates making solar loans less attractive and the availability of certain Investment Tax Credit (ITC) "adders" that benefit TPO providers, who can then pass savings to customers. Wood Mackenzie anticipates TPO will continue to dominate the market through 2026.

This renewed popularity highlights the appeal of TPO: predictable energy costs, no large upfront investment, and freedom from maintenance responsibilities for the homeowner. For the TPO provider, these long-term contracts generate steady, predictable revenue streams – a perfect candidate for securitization.

Determining Fair Market Value: How Are TPO Solar Assets Valued?

Accurately valuing TPO solar assets is crucial, both for the TPO providers and for the investors who eventually buy securities backed by these assets. Several methodologies are employed:

1. Income-Based Methodology (Net Present Value - NPV): This is the most common approach for assets generating long-term cash flows, like PPAs and leases. The core idea is to determine the present value of all future income expected from the solar contract.

   • Calculation: This involves projecting the annual energy production (accounting for panel degradation over, typically, 20-25 years), the PPA rate (which may include an escalator clause), and operating and maintenance (O&M) costs. These future cash flows are then discounted back to their present value using an appropriate discount rate that reflects the risk and time value of money.

   • Significance: NPV provides a clear financial valuation of the contract's worth today, forming a fundamental basis for securitization.

     
     

     Here is an example of determining Net Present Value of a Single Residential Solar Project with size of 7kW, costing approximately $25000. A Discount Rate of 6.5% leads to Net Present Value of $10,326.91, which is pretty good for an investment.

     
     
     
     

     

     
     
     
     

2. System Cost at Installation and Depreciation: This approach considers the original cost to install the system and then applies a depreciation schedule.

   
   

   Relevance: While important for tax purposes (TPO providers can claim depreciation benefits like MACRS – Modified Accelerated Cost Recovery System) and understanding the underlying asset's book value, it's less direct in valuing the contracted cash flows that are the primary interest in a TPO ABS context. However, the initial system cost is a factor in determining the profitability and viability of the PPA/lease rates.

   
   

3. Similar System Comparison (Market Approach): This method involves comparing the subject system and its contract to recent sales or valuations of similar systems in the same market.

   
   

   • Metrics: Comparisons might be based on $/Watt of installed capacity or multiples of revenue.

   • Challenges: Finding truly comparable systems and PPA/lease terms can be difficult, making this approach more of a supplementary or validating tool than a primary valuation method for large TPO portfolios.

     
     

For TPO assets, the income-based NPV approach is paramount because the PPA or lease agreement itself, and the reliable cash flow it represents, is the primary asset being financed and securitized.

Enter Asset-Backed Securities (ABS): Fueling Solar Growth

Asset-Backed Securities are financial securities collateralized by a pool of assets, such as loans, leases, or, in this case, residential solar PPA/lease contracts. Solar ABS has become an increasingly mainstream financial product, channeling significant capital into the solar industry.

How TPO Combines with ABS:

1. Origination & Pooling: Solar TPO providers (like Sunrun, Sunnova, and a growing number of other players) sign lease or PPA contracts with thousands of homeowners. These contracts, representing future payment streams, are then bundled together into large, diversified pools.

   
   

2. Valuation (NPV in Action): The NPV of the anticipated cash flows from these pooled contracts is calculated. This often involves sophisticated modeling to account for variables like energy production, potential defaults, servicing costs, and applying a specific discount rate (e.g., a recent Sunrun securitization used a 7.5% discount rate to calculate the Adjusted Discounted Solar Asset Balance, or ADSAB). This ADSAB represents the underlying value against which securities are issued.

   
   

3. Issuance: A Special Purpose Vehicle (SPV) is typically created to purchase these PPA/lease contracts from the TPO provider. The SPV then issues ABS notes to investors (e.g., pension funds, insurance companies, asset managers). The proceeds from the sale of these notes provide upfront capital back to the TPO provider, which they can then use to finance new solar installations.

   
   

4. Cash Flow Distribution: Homeowners continue to make their monthly lease or PPA payments. These payments flow to the SPV, which then distributes principal and interest to the ABS investors according to the seniority and terms of the notes they hold.

   
   

Partnership Structures: A Collaborative Ecosystem

The TPO ABS market thrives on a complex ecosystem of partnerships:

• Solar Developers/TPO Providers: These companies originate the PPA/lease contracts with homeowners, install the systems, and often act as the servicers for the contracts (managing billing, O&M). They are the primary issuers of solar ABS or sell their contracts to aggregators.

  
  

• Tax Equity Investors: Historically crucial, tax equity investors (often large corporations or financial institutions) provide upfront capital for solar projects in exchange for the majority of the federal tax benefits (like the ITC and depreciation). TPO providers often structure their projects within these tax equity partnerships. Securitization can then occur, with the PPA/lease cash flows (net of tax equity investor returns and other expenses) backing the ABS.

  
  

• Investment Banks/Underwriters: These financial institutions help structure the ABS deals, market them to investors, and manage the issuance process.

  
  

• Rating Agencies: Fitch, S&P, Moody's, and KBRA play a critical role in evaluating the credit risk of the solar ABS, assigning ratings that heavily influence investor demand and pricing.

  
  

• ABS Investors: The ultimate providers of capital, these investors purchase the solar-backed notes, seeking returns commensurate with the risk profile of the securities.

  
  

The Road Ahead: Challenges and Opportunities

The combination of TPO and ABS presents immense opportunities for scaling residential solar:

• Increased Capital Availability: ABS markets provide access to a much larger and more diverse investor base than traditional financing, lowering the cost of capital for solar deployment.

  
  

• Standardization: As the market matures, increased standardization of contracts and reporting can further improve liquidity and investor confidence.

  
  

• Consumer Benefits: Ultimately, this efficient financing helps TPO providers offer more competitive PPA/lease rates to homeowners, accelerating solar adoption.

However, challenges remain:

• Servicer Performance and Risk: The long-term performance of the TPO provider (as servicer) is critical. Investor confidence can be impacted by concerns over servicer viability or operational capabilities, as seen with some market players.

  
  

• Interest Rate Sensitivity: Like other fixed-income instruments, solar ABS values can be sensitive to changes in benchmark interest rates.

  
  

• Regulatory and Policy Uncertainty: Changes in energy policy, net metering rules, or tax incentives can impact the underlying economics of solar projects and, consequently, the ABS market.

  
  

• Performance Data History: While growing, the long-term performance data for residential solar ABS, particularly under various economic stresses, is still shorter than for more established ABS asset classes.

  
  

Despite these hurdles, the synergy between residential solar TPO and the ABS market is a powerful engine for growth. By converting long-term PPA and lease contracts into tradable securities, the industry can tap into the deep liquidity of the capital markets, ensuring that more homeowners can embrace cleaner, more affordable energy, paving the way for a brighter, solar-powered future.

If you would like to know more or work with us to understand ABS, financial models within Solar Renewable Energy space, and various valuation strategies, let's chat ! Please email Sanjay Bhatia at sanjay.bhatia@quantiedge.com or call/text us at +1 385-352-6820.