Home Ownership & Distributed Energy: Two Peas in a Pod

At first blush, home ownership and distributed energy seem about as similar as kale and cheeseburgers. Look a little deeper, though, and a striking similarity emerges, suggesting they may actually be two peas in a pod. That similarity is funding. Where does the money come from for mortgages or distributed energy installations? In the near future, monies for both may come from an identical mechanism.

Ever heard of Fannie Mae or Freddie Mac? If you own a home or have ever worked with or known a mortgage broker, these names may be familiar. Fannie Mae, a friendly nickname for the Federal National Mortgage Association (FNMA), was created in 1938 as part of FDR’s New Deal. The goal was home ownership, and it worked! By creating a secondary market for mortgages, funds became available for home loans – lots of home loans.

But what does that mean – secondary market? In the old days, your neighborhood bank provided passbook savings accounts. They paid you interest in return for holding your money. To pay that interest they put your money to work. By pooling your money and all your neighbors’ monies together, they could do things like make loans. As long as the interest they received on loans exceeded what they were paying on savings accounts they made money. However, they could only loan the money they collected from you and your neighbors. This was very limiting. Few people owned their own homes as a result. Enter Fannie Mae and the secondary market.

Nobody Wants To Be Second

Fannie Mae was established to provide local banks with federal money to finance home mortgages. They accomplished this by creating a secondary market, which sells mortgage-backed securities (MBS) to investors. An MBS is a pool of loans with similar characteristics. An investor buys, or invests in, an MBS because it provides a fixed return over a period of time. This process is called securitization. More importantly, this process expanded the amount of money to lend well beyond what any neighborhood could support. Today investors all over the world invest in US mortgage-backed securities in droves. Over time the primary market, your neighborhood bank, has given way to the scale and efficiency of this secondary market.

Secondary Market

In 1970, Freddie Mac was created to perform the same function as Fannie Mae and provide competition to the deemed monopoly Fannie Mae had become. Like Fannie Mae, Freddie Mac is a friendly nickname for the Federal Home Loan Mortgage Corporation (FHLMC). Together Fannie Mae and Freddie Mac, both government-sponsored enterprises (GSE), have made pervasive home ownership a reality, even for people with poor credit.  But don’t get me started on the sub-prime debacle of the previous decade…

Put the “Fun” in Funding

How is this related to energy? Today if you want to put solar on your rooftop or a wind generator on your property you must pay for the system with money you have saved, or possibly a home equity loan from your local bank, after you fight with your homeowner’s association of course. It’s happening, but locally, and in ones and twos. Widespread adoption of distributed renewable energy is not occurring, even though the economics make tons of sense in many regions today. Like the limitations neighborhood banks placed on home ownership, access to funding is inhibiting widespread adoption. Can securitization of energy help?

Rooftop Solar

It can. And it’s starting. SolarCity Corporation is the poster child for the securitization of energy. A SolarCity customer signs a twenty year agreement for energy services. In return they receive an additional energy bill from SolarCity. Nothing gets paid up front. The combination of their old utility energy bill and their new SolarCity energy bill is generally about 30 percent less than they paid before because a meaningful percentage of their energy needs are met by the sun. The rooftop equipment delivering this solar energy is essentially leased and rolled into the customer’s monthly payment. SolarCity owns the equipment and operates it on the customer’s behalf. But where does SolarCity get the funding to pay for the equipment in the first place? Well, they have a fund. An investor buys, or invests in, the SolarCity fund because it provides a fixed return over a long period. It’s not a mortgage-backed security, but it plays one on TV. Plus, because of the solar Investment Tax Credit (ITC) the fund provides unique benefits to investors with a tax equity appetite. In turn, SolarCity uses this money to pay for the upfront cost of the solar equipment needed to deliver the energy. Returns to the investor are paid from monthly energy payments by customers. Like a mortgage-backed security, the fund aggregates large numbers of rooftop solar installations and customer payments, improving the economics and mitigating risk in the same way a diversified portfolio mitigates risk.

Government Sponsored or Star Trek Enterprise?

SolarCity is a private sector company, although it recently IPO’ed so it is publicly traded as SCTY. It is not, however, a government-sponsored enterprise like Fannie or Freddie, even though it shares many characteristics of a GSE. What would happen if a GSE or two were created as part of a New New Deal, with a goal of widespread distributed energy generation via energy-backed securities and a nickname of Felix? Well then, home ownership and distributed energy would indeed be pod-mates.

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