Lyndon Rive, the loquacious co-founder and chief executive of SolarCity, says his company isn’t desperate for capital.
The largest installer of residential solar systems in the U.S. (SCTY) has already amassed some $325 million selling asset-backed securities to institutional investors—a strategy that has made it a standout in the industry. Every time the company has gone out to the securitization or institutional market, the offerings have always been significantly oversubscribed, Rive said. In all, the company, whose chairman is Tesla Motors and SpaceX CEO Elon Musk, has created funds to finance the installation of about $5 billion in renewable energy assets with investments from large institutions and companies including U.S. Bank and Google (GOOG).
Even if SolarCity had more capital, the company, which has a market cap of $4.3 billion, could not grow any faster without compromising quality, Rive said in an interview with Fortune.
And yet, earlier this week, SolarCity issued $200 million in solar bonds to retail investors—rather than targeting accredited or institutional investors—and launched an online portal to allow customers to buy bonds directly with no added fees. The solar bonds, which will be available online to investors who are at least 18 years old, can be purchased starting at $1,000 with maturities ranging from one to seven years and interest rates between 2% and 4%.
Rive, who founded the company with brother and chief technology officer Peter, sees raising capital through solar bonds as a tool that could revolutionize the nation’s energy infrastructure.
“When you sell these to institutional investors you don’t get anything out of that but money,” Rive said. “To me, it’s really important that we have consumers, homeowners, the American public participate in this transformation. And the best way to participate in this transformation is to get a financial return.”
In the case of SolarCity’s bonds, the financial return will come from the cash flow generated by thousands of long-term leases the company has with home and business owners who pay for electricity produced by its rooftop solar panels. The bonds will operate much like a CD with an interest rate paid over the course of the year for the duration of the bond. When the bond matures, the customer is repaid the principal investment. Payments from its still small energy storage business will also be included in the bond’s interest rate payment.
The solar bonds will also expand SolarCity’s reach from the 15 states it currently operates in to the entire country. Rive envisions a solar-snowball effect of sorts: If customers see a financial return on the bond, they’ll become more educated on solar and in turn, tell their friends about the renewable energy source or look to install themselves.
“Hopefully that will create a larger movement,” said Rive, who sees bond buyers as future customers and ambassadors for solar. More sources of capital will eventually reduce the cost of capital, Rive added.
Customers will be able to invest in the bonds through an online portal, technology made possible by SolarCity’s acquisition of the private company Common Assets in January for an undisclosed sum.
SolarCity’s solar bond issuance is unique because its open to retail investors, conducted directly through an online portal and isn’t based on a specific project or geographic boundary.
“We’ll always be an innovator on financial products; that’s in our DNA,” Rive said about SolarCity, which introduced a solar loan product in early October, issued its third securitization offering in July and partnered with Groupon in May.
Still, SolarCity is not the only company dabbling in the space.
Mosaic, a Calfornia startup, launched a crowdfunding campaign in January 2013 that allowed everyday folks to invest as little as $25 in four rooftop solar projects. Companies like Lending Club and Prosper have created similar online investment platforms. And the broader green bond market, which has been used to finance clean energy and environmental projects, has existed for about seven years.
The first green bond was launched in 2007, but it wasn’t until 2013 that there was a significant rise in issuance, according to Suzanne Buchta, managing director and head of Americas Green Debt Capital Markets at Bank of America Merrill Lynch.
Some $20 billion in green bonds were issued between 2007 and 2013. In just the first eight months of 2014, $30 billion in green bonds were issued.
“In the corporate space, we’ve only seen a handful come to the green bond market. It’s going to take more time before there are more issuers available to retail clients, and some issuers may never decide to target retail investors,” Buchta said.
Bond issuances targeted at retail investors are typically smaller and therefore require a little more work on the part of the issuer, Buchta explained. Companies might take on the extra work and issue bonds to retail investors to build brand awareness or to tap into investor interest.
Interest in the SolarCity’s bonds will come from existing customers who see this an extension of their commitment to solar as well as outsiders with a financial perspective, said Tim Newell, vice president of financial products and the former CEO of Common Assets.
“There’s also interest from those investors who want both,” Newell said. “Impact investors are a rapidly growing pool of investors who don’t want to make a choice. They want to be able to earn good returns on their investments and they want to be able to see their investments serve the goals they believe strongly in such as environmental protection, creating American jobs and other things.”
The rise of impact investing
Some 50 percent of ultra and high-net worth investors consider social and environment impact an important part of investment decision-making, according to a June 2014 report from U.S. Trust, a subsidiary of Bank of America.
Women and millennials are driving some of the demand for social impact investing. Nearly two-thirds of millennials and 63 percent of women feel that their investment decisions are a way to express their social, political and or environmental values. And one-third of ultra high net worth investors are currently invested in or interested in social environment impact investing strategies, including 66 percent of millennials, 40 percent of Generation X and 27 percent of baby boomers, according to the report.
For SolarCity, the solar bond offering is another step towards more vertical integration. In the past year, SolarCity has snapped up installation technology company Zep Solar for $158 million and high efficiency module manufacturer Silevo as well as expanded its operations and rolled out financial products.
In just the past six weeks, the company has broken ground on a massive module manufacturing plant in Buffalo, New York that will have the capacity to produce a gigawatt worth of solar panels a year, introduced its solar loan program and unveiled a new commercial product borne out of its Zep Solar acquisition.
While Rive doesn’t expect the next six weeks to be nearly as active, the company will continue to look at further vertical integration and new market opportunities.
He’s already set his sights beyond the New York gigafactory and says ultimately the company wants to build a five-gigawatt plant.
“Sometime in the next year or two will start looking past the one-gigawatt factory,” Rive said. “The number-one thing to look at is cost of energy and then the logistics around it.”