Valuation of Solar Asset-Backed Bonds After Issuance: Did the Inflation Reduction Act Lower Spreads Over Benchmark Treasury?

Abstract

This paper examines whether Solar Asset-Backed Bonds (ABS) consistently trade at differentiated spreads compared to similar non-solar bonds, reflecting more favorable risk perception and investor willingness to pay a “green premium” for cash flow from solar. There is evidence that spreads on Solar ABS narrowed by approximately 200 basis points relative to non-solar ABS leading up to and during the passage of the Inflation Reduction Act (IRA), a key climate policy of the Biden administration. Despite the initial promising results, however, this study shows that the IRA’s impact on solar ABS waned over time – investors had anticipated more from the IRA and revised their valuations downwards upon realizing its muted impact for residential solar. Spreads widened accordingly, even surpassing non-solar bonds by Q4-2024. However, within the sub-sample of solar bonds, the IRA did have differentiated, sustained impacts on lowering solar lease/PPA spreads by 30-40 basis points relative to solar loan spreads pre-IRA. This demonstrates the significance of the IRA’s tax credit transferability mechanism, which made solar credits refundable for leasing companies, but non-refundable for individual homeowners who had taken out loans.