Originally written for EDF Voices by Brad Copithorne, director of financial innovation for Environmental Defense Fund’s energy group.
A few weeks ago, Honda Motor Co Ltd (ADR) (NYSE:HMC) announced an innovative financing partnership with Solar City, a major solar installer. (Full disclosure: My wife works for Solar City). Under the terms of the deal, the car maker will use $65 million its own money to pay for its customers and dealers to install solar panels on their properties and reduce their future electric bills.
The money involved is not a big deal in terms of corporate finance, so why do I think this announcement is a big deal? Because it could, if other companies follow Honda Motor Co Ltd (ADR) (NYSE:HMC)’s lead, be the key to providing the investment dollars the solar industry needs to make rapid inroads throughout the country.
What’s holding up the solar industry?
The cost to install solar energy is declining rapidly — panel prices fell by 41% in the fourth quarter of 2012 compared to the previous year. This helped solar installations in the United States to grow rapidly in 2012, from 1,855 megawatts (MW) in 2011 to 3,300 MW. (The average coal plant in the U.S. has a capacity of about 650 MW). Even better, annual installations are projected to climb to an estimated 9,000 MW in 2016.
Right now, a lack of investment capital may be the biggest barrier to the industry’s continued growth. Bloomberg New Energy Finance forecasts that the industry will need $3.1 billion of equity investment in 2013, compared to $1.8 billion in 2012. This need for investment comes at a time when American corporations – excluding financial firms — are sitting on $1.7 trillion, some of which could easily be invested in the solar industry, earning substantial returns, in dollars and good will, for corporate lenders.
Investing in solar energy is beneficial for all
Investing in solar projects can be a highly visible way to for a company to increase its commitment to sustainability. Most forward thinking companies are already working to increase their sustainable practices by reducing energy usage, recycling their waste and encouraging their employees to carpool or use public transportation. Investing in solar energy is a cost-effective tool to add to the list.
In the case of Honda Motor Co Ltd (ADR) (NYSE:HMC), the program will make car customers eligible for discounts on a solar installation. This is a great way for Honda to create a longstanding, positive relationship with its customers and dealers. But the company isn’t being purely altruistic. Thanks to the tax benefits enjoyed by the solar industry, it also stands to make a healthy profit on its investment.
Look at the numbers. Solar investments often yield more than a 10% return on investment—once the tax benefits are figured in. By comparison, a two-year Treasury note might pay 1%. Even the average ‘junk’ bond pays only about 5.5%. And the same investments will also spur economic development, create American jobs (somebody has to install and service all those solar arrays), move the nation toward energy independence and reduce our carbon footprint.