Europe's nascent solar asset-backed securities (ABS) market passed an important milestone in November 2024 with the closing of the first German--and European--public solar ABS. The event, while welcome, highlights the extent to which the European market lags its U.S. counterpart, where S&P Global Ratings first rated a solar ABS transaction in 2013. And it comes against a backdrop of softer demand for residential solar panels in Germany. In this Credit FAQ, we outline the key characteristics of the German solar ABS portfolio and the primary components of our analysis. We conclude by evaluating the challenges facing solar ABS and their potential as the market matures.
Frequently Asked Questions
What is the state of Germany's solar energy development?
As part of its broader commitment to sourcing 80% of its electricity from renewable sources, Germany's solar industry is experiencing rapid growth and is on track to meet a government target of 215 gigawatts (GW) of photovoltaic capacity by 2030, up from approximately 60GW in 2022. The country plans to install an average of 19GW of new capacity every year to reach its target by 2030. This is an increase from the 13GW target in 2024 and up from the 9GW goal for 2023 (when 14.1GW was installed), as per figures provided by the German government. Despite that progress, and the still ambitious green transition targets, Germany's solar industry has faced challenges. A recessionary period, which began in 2023, has weakened political support for the green agenda. At the same time, a phasing out of solar subsidies for households and rising financing costs have weighed on demand for panels, while strong competition has driven some suppliers to downsize and others into bankruptcy.
Why is Germany's first solar ABS transaction significant?
November 2024 marked a significant milestone for the solar energy industry in both Germany and Europe, with the closure of the first German publicly placed solar ABS. The deal suggests that the industry in Germany has taken the lead in Europe, emerging as the most dynamic jurisdiction in terms of financing--even though it remains largely driven by the private market.
We believe other public solar ABS could soon be issued; notably as various private warehouse facilities' assets reach the size required to support public securitization. The creation of hybrid "solar panel/heat pump" portfolios should facilitate that growth and offset weaker consumer demand for solar panels.
How is the German solar market evolving?
The German solar market is highly fragmented with small companies collectively controlling a majority share, leaving larger firms with a minority. That said, there are signs of consolidation on the horizon. That fragmentation can be challenging for customers, who must often manage separate solar panel sellers, installers, financing companies, and administrative services. Those difficulties have encouraged the development of a "one-stop-shop" business model, whereby highly digitalized companies support customers throughout the entire process, from an initial feasibility study, through installation, and post-installation assistance.
What are the typical characteristics of the collateral portfolios for German solar ABS?
Loan-based collateral: The collateral portfolios typically consist of loans originated to fund the purchase of solar panels for private use. This is a recent development, which emerged with the industry's transition to a loan-based model from its previous leasing base. That shift that has been motivated by the simplicity of the legal frameworks for ABS loan transactions.
Long tenors: Solar loans' tenors typically range from 20 to 25 years, which is long compared to other asset classes. That is driven by the marketing of solar panels, with longer loans facilitating reduced monthly payments, which enable solar loans to be promoted as a cheaper alternative to standard utility bills.
Type of borrowers: Typical borrowers are homeowners of detached or semi-detached houses, and usually prime borrowers with good credit scores.
Warranties: Borrowers normally benefit from a range of warranties provided by installers or original equipment manufacturers. The most common is a five-year warranty from installers, covering malfunctions resulting from a faulty installation. Additionally, manufacturers often provide warranties of 20 to 25 years, which cover defects or issues with the panels themselves.
What are the major factors we consider in our analysis of solar ABS?
Homeownership: Homeownership and housing type (detached or semi-detached) are reliable indicators of borrowers' good credit worthiness and typically prerequisites for solar loans. In Germany, the prime residential sector provides large amounts of data that demonstrate remarkably low default rates. We would expect a higher default rate in a solar ABS pool, compared with a typical residential mortgage-backed securities pool, not least because homeowners can easily switch back to grid-provided electricity should they default on a solar loan.
Unsecured characteristics: While solar loans have similarities with residential lending, we also consider they share traits with unsecured lending, notably because repossession of solar assets is unlikely to be economically viable for lenders. We thus typically view solar ABS transactions as having limited recoveries for equipment, much like unsecured ABS transactions. Some unsecured recoveries, including from payment plans, could occur but data on that is very limited. Therefore, for now, we typically assume no recoveries on defaulted solar loans.
Legal risks: The growth of one-stop-shops (that provide funding, products, installation and services) could incentivize borrowers to withhold payments on loans in the event of a malfunction (normally covered by a manufacturer's warranty of 20 to 25 years) or faulty installation (covered by an installer's warranty of typically five years). This risk escalates if an installer or a manufacturer declares bankruptcy, creating a greater incentive for borrowers to withhold or offset payments due to the lack of service.
Technology obsolescence: Advancements in solar panel technology have been slow and we do not imminently foresee any major breakthroughs, suggesting we may reach a saturation point for the current technology. However, due to the long loan tenor, there remains a risk that borrowers may cease payments if new technologies do emerge or if they find cheaper electricity generation alternatives.
The regulatory landscape: The German electricity sector's extensive regulation has generally benefited solar loan borrowers, including due to public subsidies, though they have significantly diminished. Shifts in regulation could happen rapidly and with unexpected consequences for borrowers and lenders, including by altering the attractiveness of solar loans and thus affecting borrowers' ability and willingness to meet their payment obligations.
Biased historical data: Historical performance data may be influenced by variations in electricity prices and various forms of financial support. Higher electricity prices may enable borrowers to earn more by selling excess electricity back to the power grid. Additionally, promotional periods might even allow borrowers to sell this excess electricity at rates higher than market prices, significantly contributing to the financial appeal of solar energy and potentially skewing historical default rates. As promotional periods expire, or as electricity prices decrease, borrowers may face greater financial strain, increasing the risk of defaults.
Payment culture: We expect Germany's strong payment culture to play a clearly positive role in solar loans' performance. Furthermore, Germany's residential market is full recourse, meaning borrowers are obligated to repay the their mortgage in full. They cannot simply return the property to the lender and walk away from their mortgage obligations. We therefore believe borrowers are more likely to remain in their homes and commit to their financial obligations, making them more inclined to invest in and maintain their properties. As a result, we believe this positively influences the performance of solar loans since all solar borrowers are homeowners, which reduces the likelihood of them defaulting on their payments.
Payment shock: The German government does not provide tax credits linked to solar loans. That differs from the U.S., where such credits are common and borrowers are incentivized to use them to prepay a large portion of the loan by a certain date. If this does not occur, the monthly payments are often increased, resulting in potential payment shocks for loan holders. The lack of such practices in Germany means we don't consider payment shocks to be a concern.
What obstacles remain for the German Solar ABS market?
The primary challenge in our analysis of the German solar ABS market is the lack of reliable historical data, in particular given the relatively long tenor of solar loans compared to other consumer credit. That stems from the industry's recency, which limits historical performance data. Reliability and availability of data may also be affected by the recent transition from leases to loans in the German solar market, although we anticipate both markets will be comparable.
Given this uncertainty, we currently consider our 'A' rating cap in Germany to be justified. As more data becomes available and the market matures, we will adjust our assumptions accordingly. We may consider assigning higher credit ratings to short-tenor transactions--defined in the criteria as seven years or less--if the risks highlighted in our criteria are mitigated by the shorter duration.
Related Research
- Solar ABS Trends: Partially Cloudy Skies, Oct. 17, 2024
- Economic Outlook U.S. Q4 2024: Growth And Rates Start Shifting To Neutral, Sept. 24, 2024
- Global Methodology For Solar ABS Transactions, July 26, 2024
External Research
- Growth In Renewable Energy In 2023, Bundesnetzagentur, May 1, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Roberto Amato, Frankfurt + 49 69 3399 9161; roberto.amato@spglobal.com |
| Secondary Contact: | Giuseppina Martelli, Milan + 39 02 72 111 274; giuseppina.martelli@spglobal.com |
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