Keith Rodwell,
CEO,
The Alta Group's Asia-Pacific Region

Uncertainty is a consistent theme running through the commentary on energy transition and climate finance. The body of work on trends, technological developments, future needs and opportunities, as well as the costs and risks associated with the energy transition, continues to grow. Debate is passionate because things are new, and the future is uncertain. With consequential outcomes from strategic decisions, learning is critical. As with any new product, history is lacking, but equipment finance leaders can glean valuable insights by observing markets and regions where green assets are being adopted at a rapid rate.

One such example can be found in Australia, which leads the world in rooftop solar penetration, at nearly 30% of houses versus 3% in the U.S.¹ What can be learned from this Australian experience and applied to other climate-related finance segments in the commercial finance world?

AN AUSTRALIAN CONTEXT
Australia has a landmass similar in size to the continental U.S., but it is a very flat landscape with shallow topsoil. It is the driest inhabited continent in the world, resulting in poor soil quality and unreliable rainfall. As a result, Australia is uniquely positioned in the world with one of the lowest levels of population density and one of the highest levels of urbanization (90% of the population occupying 0.22% of the land area with 87% of the population living within 35 miles of the coast).²

Like many other countries, Australia has experienced climate events that would broadly fit into the category of “strange.” Bush fires, floods and droughts are expected in Australia, but recent events have been regarded as unprecedented in frequency and magnitude. There has also been widespread concern about the impact of introduced plant and animal species, extinction of native animal species and the bleaching of the Great Barrier Reef.³ This has all driven an increasing proportion of Australians to lean towards environmentally friendly policies and products.

Australia is exposed to the same global pressures and international treaties as the U.S. It also faces many competing interests that influence the climate finance debate. Localized pressure builds, as the impact of changes in the economy are different based on population age, skillset, geography and mobility. Understandably, regional centers dependent on coal mining are much more concerned about a movement away from coal. Policy response to climate change and the energy transition has reflected both changing views of the population and respective ideologies of different political parties and special-interest advocacy groups.

The last federal election saw the loss of several previously safe conservative seats to “Teal” candidates that combined conservative economic values with progressive climate views. The new Senate saw the successful Labour Party needing agreement of both the Greens and at least three of the other nine independents to pass legislation. This clearly increases the political power of the Greens and special-interest parties.

PRIVATE FINANCING HAS DRIVEN SOLAR ADOPTION
Given Australia’s natural conditions and population dynamics, it is easy to see why renewable energy — in particular, solar investment — would be a focus. According to the International Energy Agency, Australia ranks No. 1 in the world in installed solar per capita, producing 1,166 watts per capita and accounting for 11% of Australia’s electricity supply.

The technological advancements in solar panels have led to cost reduction over time, and the uptake of rooftop solar has been assisted by various incentives from the government. Solar also provides an economic alternative for remote households where access to the power grid is expensive to provide.

Like other forms of clean-energy assets, the upfront investment in rooftop solar is an impediment for adoption. Importantly, the financing of rooftop solar has been readily available from private capital, and this has been a major reason for its success.

Considering rooftop solar from a financing perspective, it fits neatly into traditional consumer-lending practices:

1. Cashflow / Debt Servicing: The servicing of a loan for rooftop solar equipment is offset by the reduction in energy costs associated with grid electricity. In effect, the investment is self-servicing. A consumer who defaults on a rooftop solar installation would still need to pay for electricity from the grid. Under stress, a homeowner would have a preference to default on credit cards or other loans before defaulting on a rooftop solar loan.

2. Collateral Support: Whilst the solar panels do not offer great independent equipment security, the borrower is a property owner. Australian mortgage laws differ from those in the U.S. in that an owner remains responsible for any shortfall following a default. Property values have risen consistently, and homeowners tend to have sufficient equity in their home to cover rooftop solar debt. In unsecured consumer lending portfolios, the loss outcomes for homeowners consistently perform better than other borrower types.

Given these dynamics, funding for a portfolio of consumer rooftop solar panel loans fits into standard securitization funding models. This means financiers and debt investors benefit from predictable
performance from a portfolio of small-ticket, rooftop solar loans.

3. Distribution Efficiency: Finance for rooftop solar can be easily distributed via vendors and installers. Removing the upfront capital cost is a major advantage for these distributors; hence, they strongly support the finance offerings as part of their sales process.

Given these dynamics, financing rooftop solar has been attractive for finance companies and investors and allows a compelling finance offer for homeowners.

FOLLOW-ON DISRUPTION FROM ROOFTOP SOLAR SUCCESS
In addition to the installation of rooftop solar, three other key technological developments are combining to increase the speed and the extent of disruption in domestic energy markets.

1. Battery Capacity and Cost: The utility of rooftop solar changes dramatically when combined with battery storage. The ability to draw from the battery at night or during periods of low generation overcomes a key drawback of rooftop solar. Battery costs are reducing rapidly, and government incentives are increasing for behind-the-meter battery installations. Industry forecasts are for rapid growth in battery installations.

2. Two-Way Transmission: The ability for rooftop solar to feed into the electricity grid has allowed homeowners to benefit from excess power capacity during peak generating periods. This two-way transmission is also applicable for electric vehicle batteries, where owners can draw on the car’s battery capacity instead of drawing from the grid. With the development of rapid charging technology and more charging facilities (at no cost), EV charging behavior has changed. Originally, the mindset was to charge at home overnight and use through the day. Now, the mindset is for quick charging top-ups throughout the day. Charging facilities are available at office locations, shopping centers, residential and public parking facilities. The result is homeowners can choose from rooftop solar, behind-the-meter batteries, EV batteries and the grid to get their power.

3. Data Connectivity and Real-Time Pricing of Power: Simultaneously with the rooftop solar and battery developments, significant progress has been made in data connectivity from smart meters and energy transmission equipment that provide the necessary components for real-time pricing of power. On hot, sunny days, the local price of power may become zero or negative. At night, or during long
periods of cloudy weather, local power prices increase. Areas with high penetration of rooftop solar will have different prices than areas of low penetration. Usage data also allows consumers to understand their consumption patterns by appliance and time of day. Consumer behavior can then change to match usage to periods of low power prices.

The ability to manage appliances remotely introduces the opportunity to offer managed services, where a provider can see real-time demand and supply conditions and react accordingly. If a household’s major energy consumption is based on heating, cooling, lighting, pool maintenance and appliances (washing, drying, cooking and refrigeration), there is an opportunity for a power company to take over the ownership and management of that equipment. The power company has the scale and portfolio data to manage usage better than the homeowner. The power company can lower the costs of power to the homeowner and manage capacity and profitability across its network.

A lesson here for commercial financers is to look at the value proposition that has led to such high penetration in the Australian residential market. It’s nothing to do with rooftop solar per se; rather, it’s the fact that the investment in this technology replaces the cost of power in the household budget, with potential benefits of cost-savings and greater control and reliability over power availability and costs. Could owner-operators benefit from a similar investment in rooftop solar, charging infrastructure or batteries? Could landlords garner higher rents by offering their tenants premises with this infrastructure? While the sustainability benefit is often the headline, the decision to invest is ultimately made based on impact to the bottom line.

These successes and continuing opportunities are the result of simultaneous improvements in clean energy generation, battery storage, equipment technology and data connectivity. They are supported by the availability of competitive, private financing. Provided their energy needs are met, consumers have shown an appetite to support the transition to clean energy. Public-sector support may accelerate the transition, but it is not underpinning the sector. The commercial market, however, has different needs.

THE TRANSITION IS COMING
There is a sizeable difference between this experience and the acquisition of clean energy vehicles by small- and medium-sized businesses (SMEs). The financing challenge is substantially different, so the transition has been much slower. Many SMEs are not property owners, and their financial standing is weaker. Equipment financiers offset this higher risk of default through the security over the equipment. Loss given default (LGD) is lowered by the recovery of proceeds through the sale of the equipment. However, the security offered by EVs (whether cars, pick-ups, trucks, forklifts or other assets) is more uncertain given the lack of used sales data.

Comparing to internal combustion engine alternatives, a loan or lease over an EV involves a higher capital cost and a more uncertain second-hand value for security. The LGD outcomes are therefore assumed to be higher and tighter credit lending criteria applied by lenders to maintain a target expected loss outcome.

Secondary market sales data for batteries and EVs may be limited today but will continue to build. At a point in the future, market values will be more predictable and private lending decisions will be based on better data. We may also see internal combustion engine vehicle values suffer greater LGD, as demand shifts to clean-energy assets, thereby negating the relevance for lenders of historical market resale values.

Until that point is reached, private financing will be cautious, and this will dampen the transition to clean assets. If there is a broader benefit to society from energy transition and achieving emissions reductions, overcoming these impediments requires support from governments or special-purpose investment funds.

Investors support climate or ethical funds because they either believe risk-adjusted returns will be better for investments that follow climate science, or they are happy with standard or low returns provided there is a positive climate outcome. As an example, the Australian government established the Clean Energy Finance Corporation (CEFC) in 2012. CEFC is capitalized to $20 billion to provide debt into activities that reduce emissions. Up until the end of the 2023 fiscal year, the CEFC reported a return of approximately 7.1% on these investments.

It is important to distinguish between public-sector support that improves the relative cost of clean energy equipment and public-sector risk mitigation to facilitate private-sector financing of clean energy. Improving the relative economics of clean energy equipment through investment incentives and tax rebates (such as U.S. Inflation Reduction Act initiatives) will stimulate private-sector decisions to invest in this equipment. However, these do not support an equipment financier’s risk assessment. If financing is the key to energy transition, then public-sector support for risk mitigation is critical. Importantly, the public-sector support does not need to be permanent. Public sector support must bridge the risk gap until private-sector funds have the data and experience to make risk and return decisions.

UNCERTAIN TIMES
There is no doubt we are in a period of substantial change, and this brings uncertainty. Many varied opinions drive consumer, business and government decisions on climate science and energy transition. The transition to more sustainable equipment will be heavily influenced by the availability of equipment finance. Individual financiers will face the conflict between strategy and risk assessment.

Risk management would lean towards Bill Gates’ observation that “people are motivated by loss aversion, which leads to status quo-preserving behavior, and biases people towards keeping things the same.”

However, strategists would suggest remembering Roy Amara from Stanford University in the 1960s, who said, “We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.”

The success of clean-energy equipment penetration will undoubtedly be driven by private capital funding private investors to acquire clean-energy assets that meet their needs. As the example of residential rooftop solar penetration in Australia shows, buyers will invest in this new technology when there is a clear argument that it will not negatively affect the profitability or cashflow of the business.

Equipment financers who wish to enter this market can start by looking for the potential benefits customers could gain by installing sustainable energy equipment or battery storage, especially as the capabilities of this technology improve. The clear risk to the speed of transition is need for secondary-market sales data for clean-energy equipment to allow private financers to assess security. Without some form of mitigation of these risks, the transition will take longer. If the benefits of clean energy accrue to everyone, it is logical and prudent that the public sector play a role by assuming or mitigating some of these risks to accelerate the transition. •

¹ Adisa, Lumi, “The Extraordinary Story of Rooftop Solar in Australia’s National Electricity Market,” PV Magazine, Dec. 6, 2023.
² Hewitt, Maryann, “Where Does 90% of Australia’s Population Live?” NCESC Geographic Fact, June 24, 2024.
³ “State of the Environment Report Shows ‘Shocking’ Decline of Australia’s Wildlife and Natural Ecosystems,” Australian Geographic, July 19, 2022.

Keith Rodwell, CEO of The Alta Group’s Asia-Pacific region, has more than three decades of experience as an executive in global finance companies, with significant expertise in corporate finance, funding, capital management, mergers and acquisitions and risk management and compliance. Rodwell has worked with global leaders in the equipment finance industry, including GE Capital and CIT Group, and has built deep expertise across a wide variety of specialty finance products and distribution strategies including large- and small-ticket equipment finance and leasing, dealer floorplan and vendor finance programs.