Item 1. Business.
To power energy independence.
In the case of leases and PPAs, we also currently receive tax benefits and other incentives from federal, state and local governments, a portion of which we finance through tax equity, tax credit sales, non-recourse debt structures and hedging arrangements in order to fund our upfront costs, overhead and growth investments. We have an established track record of attracting capital from diverse sources. From our inception through December 31, 2020, we have raised more than $6.7 billion in total capital commitments from equity, debt and tax equity investors.
While many of our competitors maintain a large, geographically diverse base of employees in local markets, including a direct sales force comprised of home improvement installers, we limit the cost associated with that structure by primarily utilizing a network of local, independent dealers and contractors to market, sell and install solar energy systems, and energy storage systems, home generators and certain other products and services on our behalf. Our dealers and contractors typically reside and work within the markets they serve and provide a localized, customer-focused marketing, installation and servicing process. These dealers and contractors are often leading local solar installation companies, electrical services companies or companies that serve customers who are actively searching for solar power, backup power or who were referred by existing customers. When entering new markets, our dealer model immediately provides scale by enabling us to develop relationships with existing local businesses and avoiding the delay and expense required to establish new sales and installation offices. Similarly, because we do not typically maintain local offices, we can quickly refocus our origination efforts and capital deployment strategy to different markets in response to changing dynamics and regulatory developments. Furthermore, because of the low marginal cost to maintain relationships with individual dealers in currently unfavorable markets, we can maintain a strategic presence in anticipation of future developments that may make the economics of distributed residential solar energy in those markets more attractive.
operate. Our dealers and contractors reach potential customers through various means, including online, telemarketing, in-store sales, cross-marketing with complementary products and door-to-door canvasing. Using our technology platform and proprietary pricing tool, the dealerdealer/contractor and the customer select one of our standard-form solar service agreements for the relevant market and the dealer
For the years ended December 31, 20202023 and 2019,2022, Trinity Solar, Inc. ("Trinity") accounted for approximately 28%10% and 41%19% of our net originations, for such periods, respectively. In March 2019,October 2022, we amended our agreement with Trinity pursuant to which Trinity has agreed to perform services or work exclusively for us for four years,sixty-six months to March 31, 2028 (the "Exclusivity Period"), with certain exceptions, including (a) the sale of solar energy systems, energy storage systems, generators or electric vehicle chargers ("Agreed Products") to individuals on a "cash" basis that do not involve any third-partyprivate financing marketed by Trinity, (b) the sale of solar
energy systems pursuantAgreed Products to customer agreements weindividuals who, based on their credit score(s) and other relevant attributes, Trinity reasonably determines do not elect to acceptqualify under the terms of the arrangementour credit and underwriting standards then in effect and (c) the sale of solar energy systemsAgreed Products pursuant to customer agreements executed prior to the date of the amendment to the dealer agreement. The amendment permits immaterial failures to comply with the foregoing exclusivity obligations provided that such failures are inadvertent, made without knowledge and/or intent of Trinity's management, and provided that such failures do not account for more than 2% of Trinity's installations in any single year during the Exclusivity Period. In addition, Trinity may market, sell and install solar energy systemsAgreed Products for our competitors in instances in which Trinity has available installation capacity, and, following notice to us that such competitor has providedcapacity is available, we can either indicate that we do not intend to use such installation capacity or fail to timely respond to the leadsnotice. Trinity's exclusivity obligations do not apply to new roofs or roof replacements, or to Agreed Products sold for such solar energy system customer directly to Trinity.commercial applications. Under this arrangement, we have agreed to provide annual bonuses to Trinity in the amount of $20$12.9 million in year oneduring the six month period ended March 31, 2023 and $10$30.0 million for each year thereafter,of the five subsequent year-long periods. The bonus payments are subject to clawbacka true-up payable by (a) us if minimumTrinity exceeds 120% of its annual origination targets aretarget or (b) Trinity if it does not reached and additional per watt incentive payments if highermeet at least 80% of its annual origination targets are exceeded.target, though we will not owe Trinity a true-up for its first year performance under any circumstances. The minimum and higher originationannual installation targets increase by approximately 15%2.3% to 20%7.1% each year and limits competing work by Trinity to 10% of Trinity's annual gross revenues.year. Unlike most of our dealer agreements, the arrangement with Trinity does not permit the parties to terminate for convenience and only permits termination in specified circumstances including material breach (subject to applicable cure periods), prolonged force majeure events, a change of control, certain insolvency events or mutual agreement. For purposes of the Trinity agreement, "change of control" means (a) the sale of all or substantially all of the assets of a party or (b) any merger, acquisition or other transaction or series of transactions that results in a changeany "person" becoming the "beneficial owner" (as those terms are used in Section 13(d), Rule 13d-3 and Rule 13d-5 of ownershipthe Exchange Act) of more than fifty percent of the voting securities of a party (other than in connection with an initial public offering of either party or a transfer among Trinity's existing owners)(subject to certain exclusions). Additionally, the arrangement provides for a $10 million liquidated damages payment of the greater of $50.0 million or the sum of all remaining annual bonus payments at the time of the termination by the applicable party in the event of termination for material breach, certain insolvency events of or wrongful termination by the other party.
We have similar contractual arrangements with several other key dealers.dealers and third parties. For certain other dealers and third parties, substantially all of the solar servicecustomer agreements originated by such dealers and third parties are Sunnova agreements, although they are under no exclusivity arrangement. During the year ended December 31, 2020, Infinity Energy,2023, Monitronics International Inc. dba Brinks Home ("Brinks Home") and Lennar accounted for 12%30% and 10%, respectively, of our net originations. During the year ended December 31, 2022, Lennar and Windmar PV Energy, Inc ("Windmar Energy") accounted for 15% and 13%, respectively, of our net originations. No dealer or third party other than Brinks Home, Trinity, Lennar and InfinityWindmar Energy Inc. accounted for more than 10% of our net originations during 20202023 or 2019.2022.
PlatformDirect Sales
We have established a direct to market team to sell and install our products and services in limited markets. This sales team is primarily focused on selling solutions, such as Sunnova Protect Services, Sunnova +SunSafe and financing for electric vehicle chargers, generators and other supplements as requested by consumers. In many cases, these services will be directed to a third-party installer in our network, as required, for the installation of Toolsequipment.
Commercial Sector
We have established a division to serve commercial, industrial, agricultural, not-for-profit and public sector customers. This division is primarily focused on offering solutions, such as solar energy systems, energy storage systems and electric vehicle chargers as requested by customers, through a lease agreement, loan agreement or cash purchase.
Grid Services
We have developed relationships with various independent system operators, utilities, community choice aggregators and others, seeking to provide them with specialized grid services so these grid participants can more efficiently conduct their operations. Examples of these services include demand response as well as grid capacity. These grid programs can make use of the solar energy systems, energy storage systems and other technologies installed in customer homes and businesses and managed by us via a centralized platform and internally developed software. By providing grid services, we seek to earn additional revenue, improve grid resiliency and operations where our customers are located, and lower the cost of power to our customers.
Software Platforms
We have created sophisticated cloud-based technology platform forplatforms, streamlining the origination, installation, administration, orchestration and servicing of our solar energy systemssolutions. Our proprietary dealer, customer and energy storage systems. Allmanagement software supports customers, dealers and internal users in the sale, installation and management of our dealers are trained inproducts and use this platform. Our software platform includes a proprietary technology suite, including a contact center to assist dealers in lead generation, project tracking and service obligations, a quoting tool to standardize customer quotes and solar service agreements, and other services to manage payments, billing and monitoring.services. The technology suite also includes tools to streamline the approval process for the design and installation of solar energy systems and energy storage systems and establish a standard process for ongoing service and warranty management. The platform leveragesplatforms leverage cloud-based infrastructure and software capabilities using multiple third-party providers, including Salesforce, Amazon Web Services, Heroku and FinancialForce. It isThe platforms are compatible with multiple end-user device types, including smartphone, tablet and desktop/laptop interfaces.
We have invested in proprietary software systems and technology that have been designed to tie into third-party platforms and applications of our dealers and other systems. Our key software systemsplatforms include:
•Pricing ToolSunnova CatalystTM Dealer Platform: CustomerSunnova Catalyst enables dealers to manage leads, design systems, generate quotes and contracts, and create plan sets and commissioning packages through a combination of web, tablet and mobile device interfaces. As part of the quoting feature set, customer pricing and quoting is delivered by a combination of cloud-based technologies including Genability, PV Watts (a service of the National Renewable Energy Laboratory) and proprietary applications running on Amazon Web Services and Heroku. This collection of tools is made available to us and our dealers through a web, tablet or mobile device interface. We permitenable dealers to generate solar service agreement quotescustomer agreements and proposal documents on demand for presentation to prospective customers. Each completed quote is transferred into Salesforce for solar service agreement generation, customer access and reporting. Sunnova Catalyst also includes features to streamline the approval process for the design and installation of solar energy systems, track install progress and establish a standard process for ongoing service and warranty management.
•MySunnovaSunnova App and Portal: MySunnova isSunnova App and Portal are our online portalmobile and web experiences for customers. The mobile and web apps enable customers that allows them to interact with the Sunnova Adaptive Home. Customers can view their solar energy systems' production history, view energy storage system data,manage devices, pay their bills, manage their online account and contact information, makegenerate referrals and contact our customer service team. Sunnova App is available for both Android and iOS.
•Sunnova SentientTM: Sunnova Sentient is our proprietary platform for energy awareness, intelligence and control. Sunnova Sentient powers Sunnova Adaptive solutions for homes, businesses and communities. We are incorporating Sunnova Sentient into our dealer and customer platforms to recommend customer-specific energy solutions and optimize energy products and services. Sunnova Sentient powers our advanced grid services and carbon reduction programs.
•Salesforce: Salesforce is our central repository and system of record for all contracts, process documentation, customer account information, maintenance information and payment tracking for the life of the solar servicecustomer agreement. This single system allows for integrated and comprehensive reporting for the entire life cycle of the customer, from quote to end of the solar servicecustomer agreement term. Many of our other systems interact with the Salesforce platform.
•FinancialForce: FinancialForce is a cloud-based accounting system built on the Salesforce platform. Because it shares similar architecture to our Salesforce system, FinancialForce allows for integration between our operations and accounting.
Customer Agreements
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Sunnova Service | Agreement Type(s) | Sunnova Plan(s) | Description | Initial Term |
Sunnova Home Solar Service | Lease | Easy PlanTM equipment lease | Lease of solar energy system | 25 years |
LeasePlusTM New Home Solar Plan | 20 or 25 years |
Prepaid LeasePlusTM New Home Solar Plan |
Solar Benefits Agreement | 20 years |
PPA | Easy PlanTM PPA | Sale of solar energy production | 25 years |
Solar 20/20 PlanTM Agreement & Covenants | 20 years |
Fixed Rate Power Purchase Agreement |
Loan | Easy Own PlanTM equipment purchase | Sale of solar energy system | 10, 15 or 25 years |
Sunnova SunSafe® Solar + Battery Storage Service | Lease | Easy PlanTM equipment lease | Lease of solar energy system and energy storage system to be used with a solar energy system | 25 years |
Loan | Easy Own PlanTM equipment purchase | Sale of solar energy system and energy storage system to be used with a solar energy system | 10, 15 or 25 years |
Sunnova +SunSafe® Add-on Battery Service | Loan | Easy Own PlanTM equipment purchase | Sale of energy storage system to be used with | 10, 15 or 25 years |
Standalone Lease | Lease | Easy PlanTM equipment lease | Lease of energy storage system | 10 years |
Sunnova Loan | Loan | Easy Own PlanTM equipment and services | Financing of home improvement products and services (including partial or full roof replacement) independent of a solar energy system | 101 to 11 or 1520 years |
Sunnova Protect Service | Service Plan | Sunnova Protect Service | Monitoring and warranty servicesservice agreements for non-Sunnova solar energy systems | 1, 5, 10 or 20 years |
Sunnova Repair Service | Repair Service | Sunnova Repair Service | Repair service agreements for Sunnova and non-Sunnova solar energy systems | 1 year workmanship warranty |
Accessory Purchase and/or Roof Replacement | Loan | Easy Own PlanTM equipment purchase | Roof replacement (partialHome improvement products and services (including partial or full)full roof replacement) when combined with either a Home Solar Service or Sunnova SunSafeSunSafe® Solar + Battery offering | 10, 15 or 25 years |
We focus on growing a geographically diverse customer base with a strong credit profile. We perceive our recurring customer payments as high-quality assets given the broad and relatively inelastic demand for electricity and because our customers typically have high credit scores. As of December 31, 2020,2023, our customers had, at the time of signing the solar servicecustomer agreement, an average FICO® score of 740.741. The purpose of our stringent credit approval policy is to ensure reliability of collecting payment over the duration of the solar servicecustomer agreements. As of December 31, 2020,2023, approximately 1.0%0.9% of our customers were in default (over 120 days past due) under their solar service agreements.
Most of our solar serviceOur lease and PPA agreements have an initial term of 25 years withtypically include an opportunity for customers to renew for up to an additional 10 years via two five-year or one 10-year renewal periods.options. The customer is obligated to make monthly payments to us, on a monthly basis, and we operate and maintain the solar energy system and energy storage system, if applicable, in good condition throughout the duration of the agreement. Under our lease agreements and PPAs, the customer's monthly payment or price per kilowatt hour ("kWh") is set based on a calculation that takes into account the life of the equipment and/or expected solar energy generation. The customer has an option of choosing a flat rate without an escalator or a lower initial rate with an escalator. As of December 31, 2020,2023, approximately 64%40% of our lease agreements and PPAs contained a price escalator, ranging from 0.9% to 3.0%3.9% annually.
Our home solar servicecustomer agreements are designed to offer the customer energy cost savings and bill stability relative to centralized utility prices, often resulting in an immediate reduction in the customer's overall utility bill, with little or no upfront costs. We provide our services related to solar energy systems and energy storage systems through long-term residential solar service agreements in the following formats:
•Lease Agreements. Under a lease agreement, orthe Easy Plan equipment lease, the customer leases a solar energy system and/or energy storage system from us at a fixed monthly rate that is typically subject to annual escalation. Under the LeasePlus New Home Solar Plan, the customer leases a solar energy system from us at a fixed monthly rate that is typicallynot subject to annual escalation.escalation throughout the term of the lease. Under the Prepaid LeasePlus New Home Solar Plan, the lease is prepaid upfront for the term of the lease. The Solar Benefits Agreement is offered to customers in certain states and like the LeasePlus New Home Solar Plan, the customer leases a solar energy system from us at a fixed monthly rate that is not subject to escalation throughout the term of the lease. We own, operate and maintain the solar energy system under our lease agreements. In most cases, lease agreements include a performance guarantee under which we will refund payments or credit the customer if the solar energy system fails to meet a guaranteed minimum level of power production for specified time periods.
•PPAs. We offer PPAs with variable monthly payments or balanced monthly payments. We own, operate and maintain the solar energy system under our PPAs.
•Easy Plan PPA with variable billing. The customer agrees to pay for all power generated by a solar energy system at a price per kWh that is generally lower than the local utility rate. The monthly payment will vary month to month based on the system's actual production. The monthly rate is generally subject to annual escalation.
•Easy Plan PPA with balanced billing. This is similar to the variable billing option except the customer's payments are levelized over the course of a year based on an annual production estimate so the customer's payments are insulated from monthly fluctuations in energy production subject to a true-up at the end of such period. The fixed monthly rate is typically subject to annual escalation. Should the annual production estimate exceed actual
production, the customer will receive a bill credit at the end of the applicable period and we may decrease the estimated production (and corresponding monthly payments) for the subsequent year. Should actual production exceed the annual estimate, we may apply the overproduction to a subsequent year or increase the estimated annual production and corresponding monthly payments for the subsequent year. The estimated annual production will not increase more than 110% from the estimated annual production for the first year.
•Solar 20/20 Plan Agreement & Covenants. The customer agrees to pay for all power generated by a solar energy system at a price per kWh that is indexed to the local utility rate but is guaranteed to be at least 20% lower than the applicable utility's weighted-average rate that takes into account the customer's estimated production. The monthly payment will vary month to month based on the system's actual production and that month's indexed rate.
•Fixed Rate Power Purchase Agreement. This is similar to the variable billing option except the monthly rate is fixed throughout the term of the agreement and not subject to annual escalation.
•Loan Agreements. Pursuant to an Easy Own Plan equipment purchase agreement, the customer purchases the solar energy system from a dealer using financing provided by us. The customer repays the amount financed plus a finance charge through monthly payments for a term of 10, 15 or 25 years. We purchase the Easy Own Plan equipment purchase agreement from the dealer and agree to operate and maintain the solar energy system. We operate and maintain the solar energy system through our network of dealers. In most cases, Easy Own Plan equipment purchase agreements include a production guarantee under which we will refund payments or credit the customer if the solar energy system fails to meet a guaranteed minimum level of power production for specified time periods. Customers under our Easy Own Plan equipment purchase agreements have the option to prepay outstanding principal amounts, in part or in full, without penalty.
•Energy Storage Systems. Our Sunnova SunSafe program offers customers the option of a solar energy system integrated with a solar storage system. The customer can either choose an Easy Plan equipment lease or Easy Own Plan equipment purchase plan. These are similar to our Easy Plan equipment lease and Easy Own Plan equipment purchase for home solar services but include energy storage systems with the solar energy system. The customer may select a term of 10, 15 or 25 years for the Easy Own Plan equipment purchase. These agreements have a production guarantee for the solar energy system, similar to the home solar service Easy Plan equipment lease and Easy Own Plan equipment purchase plans, except in Guam, Saipan, Hawaii, Puerto Rico, Arkansas and Florida. Additionally, we introduced offer
the Sunnova +SunSafe agreement to new and existing customers in several states and territories, under which the customer purchases thean energy storage system from a dealer using financing provided by us. Under the Sunnova +SunSafe agreement, the customer repays the amount financed plus a finance charge through monthly payments for a term of 10, 15 or 1525 years. In the fourth quarter of 2023, we launched our standalone lease program in several states to new and existing customers, under which the customer can lease an energy storage system with a fixed monthly payment for a term of 10 years.
•Sunnova Loan. We finance energy-related products and services and other sustainable home products sold by our dealers/contractors independent of a solar energy system. We offer customer financing for products including home security and monitoring, home automation, energy management and other smart home devices, upgraded roofing, modern HVAC, generators, water systems, water heaters, main panel upgrades and electric vehicle charging. We have established a niche amongst pure financing competitors by providing energy-related products and services and other sustainable home products with competitive rates and tenors. Where applicable, the financed products come with a standard manufacturer's warranty on equipment. Our Sunnova Loan offering gives our dealers and contractors the flexibility to offer additional products and services to customers outside of a traditional solar loan. Customers may select a pre-defined term ranging from 1 to 20 years.
•Sunnova Protect Services. For solar energy systems not owned or sold by us, our Sunnova Protect Services agreements provide customers maintenance and repairs as well as system monitoring and diagnostics. We provide threetwo levels of service: (a) Basic, which is monitoring only;only and (b) Premium, which is monitoring plus repair and/or replacement of all equipment under a manufacturer's warranty; and (c) Platinum, which is monitoring, repair and/or replacement of all equipment under and outside the manufacturer's warranty and a production guarantee.warranty. The customer may select the level of service and a term of 1, 5, 10 or 20 years. Prior to commencing coverage, we will run a diagnostic evaluation on the customer's solar energy system and will identify any underperforming equipment and estimate production. The customer may elect to repair underperforming equipment, on a time and materials basis, so that it may be included in the coverage going forward. Should the customer decline to repair the underperforming equipment, not be repaired, it will not be covered under the Sunnova Protect Services agreement.
•Roof ReplacementSunnova Repair Services. Our roofThrough our Sunnova Repair Services, we provide repairs to solar energy systems and energy storage systems for out of warranty system repairs or to owners of solar energy systems and energy storage systems not owned or sold by us who do not have a service provider. Additionally, Sunnova Repair Services can address repairs not covered by warranties for both solar energy systems and energy storage systems owned or sold by us and solar energy systems and energy storage systems not owned or sold by us. The variety of repairs that Sunnova Repair Services may provide includes assessment and troubleshooting, warranty administration, warranty fulfillment, preventative maintenance and repair and replacement program offers customers the option to bundle financingof equipment. Additionally, suppliers and financiers procure Sunnova Repair Services for a new roof (partial or full) with a new home solar service or Sunnova SunSafe Solar + Battery Storage Service agreement.repairs on their behalf.
As of December 31, 2020,2023, approximately 31%24% of our customers had lease agreements, approximately 51%24% had PPAs, approximately 37% had loan agreements and approximately 17% had loan agreements. Less than 1% of our customers12% had service plan agreements or roof replacement agreements.
We have developed a standardized protocolprotocols and set of policies to qualify potential customers. During the solar energy system origination phase,customers for different product and service arrangements. For customer agreements, we review the customer's credit application for compliance with our credit standards. Solar servicestandards early in the origination process. Customer agreements that are accepted must comply with our underwriting standards, which emphasize the prospective customer's ability to pay and the value of the customer's estimated savings under the solar energy service agreement compared to traditional utility rates. The customer agreement exceptions are solar service agreements of prospective purchasers of homes subject to the Easy Plan equipment lease, LeasePlus New Home Solar Plan, the Prepaid LeasePlus New Home Solar Plan, the Solar 20/20 Plan Agreement & Covenants and the Fixed Rate Power Purchase Agreement. These customers are not subject to credit checks and these agreements are freely transferable.
We maintain reporting and controls in place to monitor the timeliness of customer payments. As of December 31, 2020,2023, approximately 92%86% of all payments received pursuant to our solar servicecustomer agreements are collected via Automated Clearing House payments (i.e., the funds are deducted automatically on a monthly basis from the customer's bank account), approximately 4%8% are collected via automatic recurring credit card payments and approximately 4%6% are collected through non-recurring means. If a customer becomes delinquent on one or more monthly installment payments, we typically begin a collection process with respect to the customer.
In the event that a customer elects to sell his or her home or business, the customer's solar service agreement may be transferred to the prospective purchaser through prescribed reassignment procedures, subject to certain conditions related to the prospective purchaser's creditworthiness. To initiate the reassignment process, the customer must notify us of the pending sale, after which we will provide a copy of the solar service agreement, including any amendments, to the prospective purchaser. The prospective purchaser
will then be required to complete a customer profile and a credit application. EachWith the exception of customers originated through our homebuilder channel, each prospective purchaser's FICO® Score and Experian TEC Score (Telecommunications, Energy and Cable) Score will be evaluated on the same basis as a customer in a new origination and will be evaluated by our computer auto-decisioning system.
In the event that a prospective purchaser does not meet our credit criteria or elects not to be subject to such credit inquiry, the current customer will be required to prepay the solar service agreement in full or the prospective purchaser will be required to provide a security deposit in cash in accordance with such customer's solar service agreement or our transfer policy prior to the approval of the reassignment. Each such security deposit is held in a separate account until the earlier of (a) the time at which the prospective purchaser satisfies our established credit criteria or (b) upon 12 consecutive months of on-time payments following the date of reassignment.
On a case-by-case basis, we may remove a solar energy system and, if applicable, energy storage system from the property on which it is installed if, among other reasons, the solar service agreement is canceled or otherwise terminated, the customer or solar energy system and energy storage system is relocated, any of the component parts are damaged or the new homeowner rejects the reassignment of the solar service agreement upon home transfer, if applicable.
Monitoring and Maintenance Service and Warranties
Our residential solar servicecustomer agreements typically are accompanied by a warranty and/or monitoring and service agreement. The warranty and monitoring services provided with each type of solar servicecustomer agreement vary but can include operations and maintenance, equipment repairs, monitoring or site power controls and energy management forof both supply and demand. Additionally, our Sunnova Protect program offers monitoring, service and production guaranteesfacilitation of repairs across threetwo tiers of service for solar energy systems owned by the homeownerhome or business owner and installed by a third party.
Regardless of the type ofFor our solar service agreement,customer agreements, we provide ongoing service during the entire term of the customer relationship, including monitoring, maintenance and warranty services of the solar energy system and energy storage system, if applicable. We have an operations and maintenance administration organization consisting of administration staff and a dedicated residential monitoring and production team that evaluates the solar energy systems' and energy storage systems' performance daily. When a performance or operation issue is detected via our monitoring system, we provide or arrange for troubleshooting or field services as necessary. We rely on our dealer networkown personnel and our own personneldealer network to complete the field services required to maintain the solar energy systems. After completion of the resolution steps, the maintenance administration organization verifies remotely the issue has been resolved and the system or energy service is performing as expected. For accessory loan agreements, we do not provide ongoing monitoring, warranties or similar services.
Additionally, customers under our solar service agreements receive a range of warranties on the related solar energy systems and energy storage systems, including warranties for module production and against defects in workmanship and against component or materials breakdown. We also provide the customers with a warranty on roof penetrations of up to 10 years in compliance with applicable state, territorial or local law. Through our agreements with our dealers, the dealer is generally obligated, at its sole cost and expense, to correct defects in its installation work for a period of up to 10 years and provide a roof warranty on roof penetrations of 5 to 10 years. Furthermore, we provide a pass-through of the solar photovoltaic panel manufacturers' warranty coverage to our customers, generally of 25 years, and of the inverter and energy storage system manufacturers' warranty coverage, typically of 10 to 25 years. We typically exercise our rights under the manufacturer's equipment warranties or dealer installation warranties before incurring direct charges or costs. Many service expenses are borne by our dealers and not us directly because of the workmanship warranty provided by the dealers to us. Additionally, many component costs and, in many cases, in and out labor costs, are covered by manufacturer warranties.
Seasonality
The amount of electricity our solar energy systems produce is dependent in part on the amount of sunlight, or irradiation, where the assets are located. Because shorter daylight hours in winter months and poor weather conditions due to cloud cover, rain or snow results in less irradiation, the output of solar energy systems will vary depending on the season or the year. While we expect seasonal variability to occur, the geographic diversity in our assets helps to mitigate our aggregate seasonal variability.
Our Easy Plan PPAs with variable billing, Solar 20/20 Plan Agreements and Fixed Rate Power Purchase Agreements are subject to seasonality because we sell all the solar energy system's energy output to the customer at either a fixed price per kWh or indexed, variable rate per kWh. Our Easy Plan PPAs with balanced billing are not subject to seasonality (from a cash flow perspective or the customer's perspective) within a given year because the customer's payments are levelized on an
annualized basis so we insulate the customer from monthly fluctuations in production. In addition, energy production true-ups and production estimate adjustments for Easy Plan PPAs with balanced billing are calculated over an entire year. However, our Easy Plan PPAs with balanced billing are subject to seasonality from a revenue recognition perspective because, similar to the Easy Plan PPAs with variable billing, we sell all the solar energy system's energy output to the customer. Our lease agreements are not subject to seasonality within a given year because we lease the solar energy system to the customer at a fixed monthly
rate and the reference period for any production guarantee payments is a full year. Finally, our loan agreements are not subject to seasonality within a given year because the monthly installment payments for the financing of the customers' purchase of the solar energy system are fixed and the reference period for any production guarantee is a full year.
In addition, weather may impact our dealers' ability to install solar energy systems and energy storage systems. For example, the ability to install solar energy systems and energy storage systems during the winter months in the Northeastern U.S. is limited. This can impact the timing of when solar energy systems and energy storage systems can be installed and when we can acquire and begin to generate revenue from solar energy systems and energy storage systems.
Intellectual Property
We rely on intellectual property laws, primarily a combination of copyright and trade secret laws in the U.S., as well as license agreements and other contractual provisions, to protect our proprietary technology. We also rely on several registered and unregistered trademarks to protect our brand. In addition, we generally require our employees and independent contractors involved in the development of intellectual property on our behalf to enter into agreements to limit access to, and disclosure and use of, our confidential information and proprietary technology. We also continue to expand our technological capabilities through licensing technology and intellectual property from third parties.
Government Regulations
While we are not regulated as extensively as a public utility where our business is conducted in the U.S., we are subject to various national, state, territorial and other local regulatory regimes. For example, in California and New York, we are subject to regulations concerning marketing and contracting promulgated by state public utility commissions. In some states, such as Arizona and Florida, we are limited to offering only a lease agreement or a loan agreement to homeowners and are prohibited from offering a PPA, which is deemed a retail sale of electricity in such states and can only be made by a regulated utility. In Puerto Rico, we are subject to regulation as an electric power company by the Puerto Rico Energy BureauPREB and are required to comply with certain filing, certification, reporting and annual fee requirements. Regulation by the Puerto Rico Energy BureauPREB as an electric power company does not currently subject us to centralized utility-like regulation or require the Puerto Rico Energy Bureau'sPREB's approval of charges to customers.
To operate the solar energy systems and energy storage systems, our dealers work with customers to obtain interconnection permission from the applicable local electric distribution utility. In many states and territories, by statute, regulations or administrative order, there are standardized procedures for interconnecting distributed residential solar energy systems and related energy storage systems to the electric utility's local distribution system. In some states, such as New Jersey and Massachusetts, certain utilities, such as municipal utilities or electric cooperatives, are exempt from some interconnection requirements. Provided that the system and energy, if applicable, qualify for the standardized procedures based upon size, use of industry-standard components, location on a suitable local network and other applicable requirements, utilities in somesuch states or territories are required to interconnect qualifying solar energy systems and energy storage systems on an expedited basis relative to non-qualifying systems. Expedited procedures, when available, streamline the installation and interconnection process for solar energy systems and energy storage systems to begin operating. In the U.S. states and territories in which we operate, our dealers typically obtain interconnection permission on behalf of us and our customers using standardized interconnection procedures.
In certain states, such as California, independent solar energy producers who enter into solar servicelease agreements, PPAs or loan agreements with homeownershome and business owners for residential solar energy systems are required to make certain disclosures to the homeownerhome or business owner regarding the solar energy system and the terms of the agreement andand/or record a notice against the title to the real property on which the electricity is generated and against the title to any adjacent real property on which the electricity will be used. The notice does not constitute a title defect, lien or encumbrance against the real property.
In June 2019, the U.S. Environmental Protection Agency ("EPA") issued the final Affordable Clean Energy ("ACE") rule replacing the previous Clean Power Plan, which established standards to limit carbon dioxide emissions from existing power generation facilities and was expected to increase the cost of certain forms of fossil fuel-derived energy. We estimate the power generated by our solar energy systems has displaced more than 1.8 million metric tons of carbon emissions based on approximately 2.5 billion kWh of electricity produced since our inception and applying the EPA's online greenhouse gas equivalencies calculator (https://www.epa.gov/energy/greenhouse-gas-equivalencies-calculator). The ACE rule would establish
emission guidelines for states to develop plans to limit greenhouse gas emissions from existing coal-fired power plants but does not have the expected increase in cost for fossil fuel-derived energy. We cannot predict what effects, if any, the ACE rule may have on photovoltaic solar markets.
Our operations, as well as the operation of our dealers and contractors, are subject to stringent and complex federal, state, territorial and local laws, including regulations governing the occupational health and safety of employees, wage regulations of wages and benefits and environmental protection. For example, we and our dealers aredealers/contractors may be subject to the regulations of the U.S. Department of Labor,Labor's Occupational Safety and Health Administration ("OSHA"), and Wage and Hour Division, the U.S. Department of Transportation ("DOT"), the EPAU.S. Environmental Protection Agency ("EPA") and comparable state and territorial entities that protect and regulate employee health and safety and the environment. These include, for example, regulations regarding the disposal of solid and hazardous wastes from the solar energy systems we own.own and the wages paid to our dealers and contractors. In addition, environmental laws can result in the imposition of liability in connection with end-of-life system disposal, such as in connection with disposal and recycling of batteries.
We and our dealersdealers/contractors are also subject to laws and regulations relatingrelated to interactions with residential consumers, including those pertaining to sales and trade practices, privacy and data security, equal protection, consumer financial and credit
transactions, consumer collections, mortgages and re-financings, home or business improvements, trade and professional licensing, warranties and various means of customer solicitation, as well as specific regulations pertaining to solar installations.
For a discussion of these and other regulatory requirements, see "Risk Factors—Risks Related to Regulations".
Government Incentives
In September 2023, we entered into a loan guarantee arrangement with the U.S. Department of Energy (the "DOE") under Title XVII of the Energy Policy Act of 2005 ("Title XVII") pursuant to which the DOE has agreed, subject to certain conditions, to guarantee up to $3.0 billion of aggregate obligations in a series of intercompany loans between our affiliates made in connection with limited recourse financings, such as the Sunnova Hestia Loan Program. Recipients of Title XVII loan guarantees may be subject to compliance with various additional federal law and contractual requirements, such as the Davis-Bacon Act and the False Claims Act, as well as the statutory and regulatory requirements of Title XVII. In November 2023, we have been conditionally selected by the DOE Grid Deployment Office as part of a $440 million investment from the Puerto Rico Energy Resilience Fund to install rooftop solar energy systems and energy storage systems in vulnerable single-family households across Puerto Rico.
U.S. federal, state, territorial and local governments have established various incentives and financial mechanisms to reduce the cost of solar energy and to accelerate the adoption of solar energy. These incentives come in various forms, including rebates, tax credits and other financial incentives such as payments for renewable energy credits associated with renewable energy generation, exclusion of solar energy systems and energy storage systems from property tax assessments, system performance payments, accelerated depreciation and net energy metering, or net metering, programs. These incentives make solar energy system and energy storage system ownership more attractive to some homeownershome and business owners and enable us to charge our customers lower prices to purchase energy generated by our solar energy systems and energy storage systems or to lease or purchase our solar energy systems and energy storage systems than they would normally be expected to pay for utility-provided energy. These incentives also help catalyze private sector investments in solar energy and efficiency measures, including the installation and operation of residential and commercial solar energy systems and energy storage systems.
Net metering is one of several key policies that have enabled the growth of distributed solar in the U.S., providing significant value to certain customers with solar energy systems for the electricity generated by their systems but not directly consumed on site. Net metering allows a customer to pay the local electric utility only for power usage net of excess production from the customer's solar energy system. Customers receive a credit for the energy an interconnected solar energy system generates in excess of that needed by the home or business, which is provided to the electrical grid. The credit offsets energy usage incurred by the customer at times when the customer requires more electricity than is generated by the solar energy system. In many markets, this credit is equal to the residential retail rate for electricity and in other markets the rate is less than the retail rate and may be based, for example, in whole or in part on the centralized electric utility's "avoided cost" for electricity that it would have had to generate or purchase at wholesale to meet the customer's demand. Furthermore, when coupled with a time of use rate program in certain electric utility territories, a homeownerhome or business owner may offset usage billed at lower rates with net metering credits provided at a higher rate.
For these reasons, net metering credits incentivize consumers to use distributed solar in certain jurisdictions, including some of those in which we operate. In some electric utility territories, any excess credits are rolled over to the next billing period and may also be cashed out later at a rate lower than the retail rate. Most states, the District of Columbia, Puerto Rico and Guam have adopted some form of net metering by statute, regulation, administrative order or a combination thereof, although some of these jurisdictions provide for a credit at less than the retail rate. In some jurisdictions, centralized electric utilities have also adopted net metering on a voluntary basis. Some of the states in which we operate, including New Jersey, Maryland, Massachusetts, Rhode Island, Delaware, Illinois and Hawaii, have in place policies that limit or permit utilities to limit the amount of total electricity generated through net metering and/or solar energy systems, and some of these states, as well as other states or territories, including Pennsylvania, Nevada, New Mexico and Guam, have policies that limit or place conditions on the size of individual solar energy systems.
Net metering and other incentive programs are subject to legislative and regulatory review in many states and territories in which we operate, and the availability and value of these programs could be limited, reduced or phased out. Some states such as Arizona, Nevada, California and Kentucky have reduced their net metering credits. Further reviews by these states and others are
anticipated and the subsequent amount of net metering credits will continue to be assessed over the next few years in states that have net metering policies. For example, net metering rates in California, Connecticut,Colorado, New Jersey, Puerto Rico and South Carolina are up for consideration currently or over the next few years.
In December 2022, the California Public Utility Commission (the "CPUC") approved a successor program (Net Energy Metering 3.0 or "NEM 3.0")to its current net metering program that reduces the value of net metering credits from the retail rate to an avoided cost rate for customers that will have solar energy systems installed on their homes and businesses over the next five years. Customers will also be placed on an electrification rate. Residential customers located in the territories of two of the investor-owned utilities will also receive small adders to the avoided cost rate, while the residential customers in the territory of the third investor-owned utility, as well as new homes and commercial customers in all three of the service territories, do not receive any adders. In addition, it may only be possible for customers to realize savings from installing solar energy systems compared to the utility retail rate by adding storage to their solar energy systems or undersizing them so exports are limited. The decision went into effect in April 2023.
New York is working on developing an alternative to net metering through a Value of Distributed Energy Resources credit that would allow certain customers to receive direct monetary compensation as opposed to a net metering credit. This program was expected to be implemented in 2021 but has been delayed due to not enough utilities having deployed smart meters that would enable an accurate valuation of distributed energy production. New York is keeping net metering in place with a nominal customer benefit charge added for solar customers installingwho have solar energy systems installed after January 1, 2022. Other states such as California have implemented non-bypassable fees for customers enrolled in a net metering program, which requires customers to pay certain fees regardless of whether they are drawing energy from the electrical grid. California has also initiated a proceeding to review its current net metering policies and adopt a successor program by the end of 2021. As a result of the Definitive Restructuring Support Agreement ("DRSA") between the Puerto Rico Electric Power Authority ("PREPA")PREPA and its creditors submitted in May 2019, which is currently pending before the U.S. District Court for the District of Puerto Rico, net metering customers in Puerto Rico may be impacted by transition charges and other requirements. Several legislators publicly oppose the DRSA and negotiations on the DRSA will continue in 2021.continued throughout 2023.
In September 2020, the Federal Energy Regulatory Commission ("FERC") issued Order 2222 directing regional transmission operators ("RTO") and independent system operators ("ISO") to remove barriers to the participation of distributed energy resources ("DERs") in wholesale electricity markets on an aggregated basis. While the FERC's order is subject to challenge as well as further proceedings concerning the implementation of the order's directives in each of the RTOs/ISOs, Order 2222 provides a framework that once implemented will allow for aggregated DERs to be compensated through the wholesale market for the capacity, energy and ancillary services they provide.
In late 2020, Sunnovawe began offering itsour lease storage customers participation in the ConnectedSolutions demand response program through EverSourceEversource and National Grid utilities in Massachusetts. Sunnova expects to expandWe expanded these offerings for itsour Connecticut, Rhode Island and New Hampshire customers in early 2021.2021, including loan storage customers. Our storage customers in California have the option to participate in the demand response market to help California manage its electricity demand, where we manage the battery storage system in response to price signals in the energy market for customers served by Pacific Gas and Electric Company, San Diego Gas & Electric utilities and Southern California Edison to provide demand response and resource adequacy. In late 2023, we expanded our Sunnova Sentient Virtual Power Plant Platform to Puerto Rico to participate in LUMA Energy, LLC's battery energy sharing program. Further, Sunnovawe will seek to participate in market specific opportunities and negotiate bilateral agreements, where appropriate, to enroll systems and customers in energy management and demand response programs.
Many states and territories have adopted renewable portfolio energy production requirements. The majority of states, the District of Columbia and Puerto Rico have adopted a renewable portfolio standard ("RPS") that requires regulated electric utilities to generate or procure a specified percentage of total electricity delivered to customers in the state or territory from eligible renewable energy sources, such as solar energy systems, by a series of specified dates. In addition, several other states have set voluntary goals for renewable generation.
Roughly one-third of states with RPS policies require a minimum portion of the RPS be met by electric generation from solar energy systems, with substantial penalties for non-compliance. To demonstrate compliance with such RPS mandates, electric generation providers must submit state renewable energy certificates ("SRECs")SRECs to the applicable authority. One SREC is produced by one megawatt-hour of energy generated by an eligible solar energy system. The specified amount of energy is dependent on system size and when the solar energy system receives a "permission to operate" order. Electric generation providers can either generate their own SRECs through solar energy systems they own or they can purchase SRECs owned by other parties.
SRECs are a distinct product, separate from the electricity generated by solar energy systems. We and our customers apply for and receive SRECs in certain jurisdictions for power generated by the solar energy systems we own. As a distinct product from the electricity generated by solar energy systems, SRECs represent a separate source of cash flow from the sale of electricity. SRECs can be sold with or without the actual electricity associated with the renewable-based generation. Solar energy system owners are typically able to sell SRECs to electric generation providers, such as electric utilities, or in the SREC commodity market. We have hedged a portion of our expected SREC production under fixed price forward contracts. The forward contracts require us to physically deliver the SRECs upon settlement.
Several states have an energy storage mandate or policies designed to encourage the adoption of storage. For example, California offers a cash rebate for storage installations through the Self Generation Incentive Program and Massachusetts and New York offer performance-based financial incentives for storage. Storage installations also are supported in certain states by state public utility commission policies that require utilities to consider alternatives such as storage before they can build new generation. In February 2018, the FERC issued Order 841 directing RTOs and ISOs to remove barriers to the participation of storage in wholesale electricity markets and to establish rules to help ensure storage resources are compensated for the services they provide. An appeal of Order 841 filed by utility trade associations and other parties challenging the extent of the FERC's jurisdiction over storage resources connected to distribution systems was rejected by the U.S. Court of Appeals for the D.C. Circuit in July 2020.
Some state and territorial governments, centralized electric utilities, municipal utilities and co-operative utilities offer a cash rebate or other payment incentive for the installation and operation of a solar energy system or energy storage system or to customers undertaking other energy efficiency measures. Capital cost or "up-front" rebates provide funds to solar customers or developers or solar energy system owners, such as us, based on the cost, size or expected production of a customer's solar energy system. Performance-based incentives and tariff-based incentives provide payments to solar customers or a solar energy system owner based on the energy generated by the solar energy system during a pre-determined period. These rebates and payment incentives, when available, improve the economics of distributed solar to both us and our customers.
The economics of purchasing a solar energy system and energy storage system are also improved by eligibility for accelerated depreciation, which allows for the depreciation of equipment according to an accelerated schedule set forth by the IRS. This accelerated schedule allows a taxpayer to recognize the depreciation of tangible solar property on a five-year basis even though the useful life of such property is greater than five years. The acceleration of depreciation creates a valuable tax benefit that increases the return on investment from a solar energy system and energy storage systems.system. We benefit from accelerated depreciation on the solar energy systems and energy storage systems we own.
The federal government currently provides business investment tax credits under Section 48(a) (the "Section 48(a) ITC") and, for projects that begin construction after December 31, 2024, under Section 48E (the "Section 48E ITC") as well as residential energy credits under Section 25D (the "Section 25D Credit") of the U.S. Internal Revenue Code of 1986, as amended (the "Code"). In December 2020,August 2022, the U.S. enacted the Taxpayer Certainty and Disaster Tax ReliefInflation Reduction Act of 20202022 (the "TCDTR Act""IRA") featuring significantwas signed into law. Among other things, the IRA expanded and extended the tax provisions, includingcredits available to solar energy projects in an effort to achieve President Biden's non-binding target of net-zero emissions by 2050. The IRA extended the investment tax credit for eligible solar energy projects through at least 2033 and, depending on the location of a particular project, its size, its ability to satisfy certain extensionslabor and modificationsdomestic content requirements and the category of consumers it serves, the investment tax credit percentage can range between 6% and 70%. For projects that begin construction after December 31, 2024, the Section 48(a) ITC will be replaced with the Section 48E ITC, a new clean energy investment tax credit, and the Section 48E ITC percentage will be the same as the percentage for the Section 48(a) ITC and subject to the Section 25D Credit. Starting January 1, 2020,same requirements to benefit from the Section 48(a) ITC allows taxpayers to claim a federal tax credit equal tofull 30%. Following passage of the basisIRA, retroactive to the beginning of eligible solar property that began construction before 2020 if placed in service before 2026. Under the TCDTR, the Section 48(a) ITC percentage decreases to 26% for eligible solar property that begins construction during 2020, 2021 or 2022, 22% for 2023 and 10% if construction begins after 2023 or if the property is placed into service after 2025. IRS guidance as to when construction is considered to begin for such purposes includes a safe harbor that may apply when a taxpayer pays or incurs (or in certain cases, a contractor of the taxpayer pays or incurs) 5% or more of the costs of a solar energy system before the end of the applicable year (the "5% ITC Safe Harbor"), even though the solar energy system is not placed in service until after the end of that year. Wewe are also able to claim the Section 48(a) ITC or the Section 48E ITC, as applicable, for energy storage systems installed in conjunction withwhether attached to a solar energy systems as long as they are only charged by on-site solar. A reduced Section 48(a) ITC may be available for energy storage systems charged in part from sources other than on-site solar as long as the solar energy systems are charged at least 75% by on-site solar.system or stand-alone.
Until 2023,The IRA also extended the Section 25D Credit, which allows an individual to claim a federal tax credit equal to 26% of qualified expenditures with respect toqualifying homeowners who purchase a residential solar energy system that is owned byand/or energy storage system to apply up to 30% of the homeowner. This 26% rate was reduced from 30% forcost of installing those systems as a credit against their U.S. federal income taxes, thereby returning a material portion of the purchase price of the residential solar energy systems placed in service priorsystem and/or energy storage system to 2020 and, underhomeowners. Under the TCDTR, is scheduledterms of the current extension, the Section 25D Credit will remain at 30% through the end of 2032, reduce to be reduced26% for 2033, reduce to 22% for solar energy systems placed in service during 2023. The Section 25D Credit2034 and further reduce to 0% after the end of 2034, unless it is scheduled to expire under the TCDTR effective January 1, 2024. The Section 25D Credit reduces the cost of consumer ownership of solar energy systems, such as under loan agreements.extended before that time.
Certain states and territories in which we operate offer a personal and/or corporate investment or production tax credit for solar energy. Further, most of the states and local jurisdictions have established sales and/or property tax incentives for renewable energy systems that include exemptions, exclusions, abatements and credits. For a discussion of these and other governmental incentives, see "Risk Factors—Risks Related to Regulations".
Competition
We believe our primary competitors are centralized electric utilities that supply electricity to our potential customers. We compete with these centralized electric utilities primarily based on price (cents per kWh), predictability of future prices (by providing pre-determined annual price escalations, where applicable), reliability and the ease by which customers can switch to electricity generated by solar energy systems. We believe we compete favorably with centralized electric utilities based on these factors in the states and territories where our solar servicecustomer agreements are offered.
We also compete with retail electric providers and independent power producers that are not regulated like centralized electric utilities but have access to the centralized utilities' electricity transmission and distribution infrastructure pursuant to state, territorial and local pro-competitive and consumer choice policies. Furthermore, we compete with solar companies with vertically integrated business models, such as Sunrun Inc. and Sunlight Financial LLC.SunPower Corporation. In addition, we compete with other solar companies who sell or finance products directly to consumers, inclusive of programs like Property-Assessed Clean Energy, such as Loanpal,Goodleap, LLC and Mosaic, Inc. For example, we face competition from solar installation businesses that seek financing from external parties or utilize competitive loan products or state and local programs. In the future, we may also compete with solar companies that have business models similar to our own, some of which are marketed to potential customers by our
dealers. dealers and contractors. We compete with these companies based on the competitiveness of the products, the overall customer relationship and the commissions we are willing to pay dealers and contractors for the origination of new customers.
Suppliers
The major components of the solar energy systems include (a) solar photovoltaic panels that turn sunlight into direct current ("DC") electricity, (b) inverters that convert solar-generated DC electricity into alternating current ("AC") electricity, the form of energy used by most standard household appliances, (c) racking systems that attach the solar photovoltaic panels to the roof or ground, (d) a remote monitoring system that measures and monitors all energy generated by the solar energy system and provides alerts about system performance and (e) in some cases, an energy storage system that stores excess energy generated by the photovoltaic panels to supplement energy supply during hours when energy consumption exceeds energy produced by the photovoltaic panels.panels or in the event of a grid outage. The solar energy system may also be connected to the electrical grid or other supplemental energy sources, such as fuel cellselectric vehicle chargers, smart load controllers or panels and generators, with additional wiring and electrical hardware.
We require our dealers to choose all major components of the solar energy system or energy storage system from a pre-approved list of manufacturers and models. By allowing dealers to choose from several manufacturers and models without direct supplier obligations, we have greater flexibility to satisfy customer demand, ensure competitive pricing and adequate supply of components and reduce the concentration of warranty risks. We have entered into master contractual arrangements with each vendor on our pre-approved list of vendors that defines the general terms and conditions of our purchases and those of our dealers, including warranties, product specifications, indemnities, delivery and certain other terms. Our dealers typically purchase solar panels and inverters on an as-needed basis from our pre-approved suppliers at then-prevailing prices pursuant to purchase orders having the benefit of our master contractual arrangements. At times, we will also procure equipment directly and sell it to our dealers.
For installations of solar energy systems on new homes or businesses, we negotiate pricing directly with the manufacturers for all components used in the solar energy systems. Based upon our production planning model, we position and deliver the material on a just-in-time basis to our dealers to meet the builder requirements.
We evaluate and qualify our manufacturers and their product offerings based on total cost of ownership, reliability, warranty coverage, credit quality and other factors. All equipment must be listed on the California Energy Commission's SB1 List of Eligible Equipment. All approved solar photovoltaic panels must have a minimum 25-year power warranty and 10-year25-year workmanship warranty. We also require approved solar photovoltaic panels to undergo extended reliability testing as an indication of a 25-year or greater lifetime. Beginning in April 2016, we required all our manufacturers carry a 25-year warranty, or offer a warranty extension to 25 years, on all product offerings to be eligible for inclusion on our approved vendor list. Prior to April 2016, we sourced inverter manufacturers offering a warranty of no less than 10 years. All approved racking systems are required to be solar energy system Fire Class Rated "A" with a Type 1 module per recent California Fire requirements. Additionally, the racking system must have a Professional Engineers stamp as proof of structural analysis and wind speed certification and the racking system must be certified as conforming to the integrated grounding and bonding requirements of UL Subject 2703. All replacement parts and components must meet or exceed the same standards as those of the original installation.
In September 2018, the Office of the United States Trade Representative ("USTR") determined to modify its prior actions in its investigation into certain acts, policies and practices of the government of China related to technology transfer, intellectual property and innovation pursuant to Section 301 of the Trade Act of 1974 by imposing an additional 10% duty on $200 billion worth of products from China, including inverters. In May 2019, the tariffs were increased from 10% to 25% and may be raised by the USTR in the future. If inverter production is not shifted to other countries before any tariff rate increase on these products, the price of inverters could increase. However, the cost of solar photovoltaic panels and inverters generally do not comprise a meaningful portion of our operating expenses. In addition, many of the solar photovoltaic panel and inverter manufacturers on our approved vendor list are from countries other than China, including Canada, the U.S., Mexico, Vietnam and Malaysia. See "Risk Factors—Risks Related to the Solar Industry—Increases in the cost or reduction in supply of our solar energy systemssystem and energy storage system components due to tariffs or trade restrictions imposed by the U.S. government could
have a materialan adverse effect on our business, financial condition and results of operations". These tariffs have not had a material impact on our business or our operations.
For the year ended December 31, 2020, Hanwha Q-Cells and Longi Solar supplied approximately 49% and 20%, respectively, of our solar photovoltaic panels installed and no other supplier represented more than 10% of our solar photovoltaic panels installed. For the year ended December 31, 2019, Hanwha Q-Cells and Yingli Green Energy supplied approximately 50% and 17%, respectively, of our solar photovoltaic panels installed and no other supplier represented more than 10% of our solar photovoltaic panels installed. For the year ended December 31, 2020, Enphase Energy, Inc. and SolarEdge Technologies Inc. accounted for approximately 73% and 27%, respectively, of the inverters used in our solar energy system installations. For the year ended December 31, 2019, Enphase Energy, Inc. and SolarEdge Technologies Inc. accounted for approximately 58% and 42%, respectively, of the inverters used in our solar energy system installations. For the year ended December 31, 2020, Tesla, Inc. and Enphase Energy, Inc. accounted for approximately 82% and 18%, respectively, of our energy storage system purchases. For the year ended December 31, 2019, Tesla, Inc. accounted for 100% of our energy storage
system purchases. Our dealers generally source the additional equipment and parts needed for installation of the solar energy systems, such as fasteners, wiring and electrical fittings, through distributors or direct purchase procurement from manufacturers.
Human Capital ManagementRisks Related to Regulations
Our core company values are service, synergy and sustainability. Our core value of service reflects our belief in providing a better energy service to the communities we serve.Our core value of sustainability reflects our belief we do well by doing good. Our core value of synergy reflects our belief we can achieve more by working together.•We are focused on collectively advancing Sunnova andnot currently regulated as an electric public utility under applicable law but may be subject to regulation as an electric utility in the energy industry through collaboration, integrity, respect and long-term trusted relationships, which includes our relationship with our employees.future.
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OversightElectric utility policies and Management
We recognize the diversity of our customers, employeesregulations, including those affecting electric rates, may present regulatory and communities, and believe in creating an inclusive and equitable environment that represents a broad spectrum of backgrounds and cultures. Working under these principles, our human resources department is tasked with managing employment-related matters, including recruiting and hiring, onboarding and training, retention, employee relations, compensation and benefits planning, performance management and professional development. Our Board of Directors ("Board") and Board committees provide oversight on certain human capital matters, including our inclusion and diversity programs and initiatives.Our management team regularly reportseconomic barriers to the Board regarding programspurchase and initiatives, including compensation, healthcare and other benefits, turnover and retention, as well as our management development and succession planning practices and strategies. Our audit committee works closely with our enterprise risk management function to monitor current and emerging labor and human capital management risks and to mitigate exposure to those risks. Our nominating and corporate governance committee has oversight of our environmental, social and corporate governance practices and procedures and regularly evaluates the effectiveness of our social responsibility policies, goals and programs, which also include employee-related issues.Our compensation committee has oversight of the development, implementation and effectiveness of all pay and benefit programs, as well as succession planning. These reports and recommendations to the Board and its committees and their oversight are part of the broader framework that guides how Sunnova attracts, retains and develops a workforce that aligns with our values and strategies.
We regularly conduct anonymous surveys to seek feedback from our employees on a variety of topics, including but not limited to, confidence in company leadership, competitiveness of our compensation and benefits package, career growth opportunities and improvements on how we could make our company an employer of choice. The results are shared with our employees and reviewed by senior leadership, who analyze areas of progress or deterioration and prioritize actions and activities in response to this feedback to drive meaningful improvements in employee engagement. Our management and cross-functional teams also work closely to evaluate human capital management issues, such as retention, harassment and bullying and safety, as well as to implement measures to mitigate these risks.Our CEO regularly holds townhalls with employees todiscuss operating results, announce important initiatives (for example, our recent adoption of a diversity day) and respond to employee questions.Employees are also encouraged to report compliance and ethics issues through our anonymous hotline if they feel uncomfortable speaking directly to their supervisor or management.
Comprehensive Benefits
We believe in investing in our workforce by offering competitive salaries and wages. We also offer comprehensive and competitive benefits to protect the health, wellbeing and financial security of our employees.To foster a stronger sense of ownership and align the interests of employees with our stockholders, eligible non-executive employees are able to participate in our broad-based stock incentive program.
Training and Support
To help our employees succeed in their roles, we emphasize continuous training and development opportunities.These opportunities are offered throughe-learning, online/classroom training, online performance management and goal setting, one-on-one coaching, individual development planning and group training initiatives.
Safety
We take our responsibility to ensure the health and safety of our employees very seriously. Our objective is for all employees and contractors to be free of work-related injuries, which are costly and often preventable. It is our goal every person goes home each day free from accidents and injuries. To that end, we have developed a detailed safety program that includes,
but is not limited to, working at heights and roof safety protocols, motor vehicle safe driving operations, electric shock mitigation procedures and pre-storm weather hazard monitoring in the areas in which we operate.
With respect to the COVID-19 pandemic and as a designated essential service, we have adopted safety guidelines and practices that have enabled us to maintain business continuity and keep our employees safe. These practices have included retaining the services and assistance of a reputable health, safety and security advisory consulting firm,ongoing safety and health training for existing and new employees, remote working, adjusted attendance policies, health screening of employees for reported exposure or symptoms, enforcing mandatory periods of self-isolation, contact tracing, provisions for mask wearing, modifications to the in-office work environment, social distancing, increased sanitation stations and increased cleaning of offices and workstations. Please refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations—Company Overview—Recent Developments" for additional information regarding our response to the COVID-19 pandemic.
Employee Base
As of December 31, 2020, we had 394 full-time employees and 398 total employees. We also engage independent contractors and consultants. We are not party to any collective bargaining agreements and have not experienced any strikes or work stoppages.
Insurance
We maintain the types and amounts of insurance coverage we believe are consistent with customary industry practices. Our insurance policies cover employee and contractor-related accidents and injuries, property damage, business interruption, storm damage, inventory, vehicles, fixed assets, facilities, cyber risk, crime and general liability deriving from our activities. Our insurance policies also cover directors, officers, employment practices and fiduciary liabilities. We may also be covered for certain liabilities by insurance policies owned by third parties, including, but not limited to, our dealers and vendors.
Available Information
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act. The Securities and Exchange Commission ("SEC") maintains a website at www.sec.gov that contains reports, proxy and information statements and other information we file with the SEC electronically. Copies of our reports on Form 10-K, Form 10-Q, Form 8-K and amendments to those reports may also be obtained, free of charge, electronically on the investor relations page on our website located at investors.sunnova.com as soon as reasonably practical after we file such material with, or furnish it to, the SEC.
We also use the investor relations page on our website as a channel of distribution for important company information. Important information, including press releases, analyst presentations and financial information regarding us, as well as corporate governance information, is routinely posted and accessible on the investor relations page on our website. Information on or that can be accessed through our website is not part of this Annual Report on Form 10-K and the inclusion of our website address is an inactive textual reference only.
Item 1A. Risk Factors.
Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this Annual Report on Form 10-K, including the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our consolidated financial statements and related notes, before deciding to invest in our common stock. We may experience additional risks and uncertainties not currently known to us; or, as a result of developments occurring in the future, conditions that we currently deem to be immaterial may also materially and adversely affect our business, financial condition, cash flows and results of operations. If any of the risks actually occur, they may materially and adversely affect our business, financial condition, cash flows and results of operations. In this event, the trading price of our common stock could decline and you could lose all or part of your investment in us.
Risks Related to Our Business
The ongoing COVID-19 pandemic could adversely affect our business, financial condition and results of operations.
The ongoing COVID-19 pandemic continues to be a rapidly evolving situation. The COVID-19 pandemic and efforts to respond to it have resulted in and may continue to result in widespread adverse impacts on the global economy. We have experienced some resulting disruptions to our business operations as the COVID-19 pandemic has continued to spread through the states and U.S. territories in which we operate. For example, social distancing guidelines, stay-at-home orders and similar government measures associated with the COVID-19 pandemic, as well as actions by individuals to reduce their potential exposure to the virus, contributed to a decline in origination, with new contract origination, net of cancelations, declining in each of March and April 2020 from the previous month. This decline reflected an inability by our dealers to perform in-person sales calls based on the stay-at-home orders in some locations.
We and our dealers modified certain business and workforce practices (including those related to new contract origination, installation and servicing of solar energy systems and employee work locations) to conform to government restrictions and best practices encouraged by governmental and regulatory authorities. As a result, new contract origination, net of cancelations, increased in May through November 2020, with each of the monthsthat may significantly reduce demand for electricity from June 2020 to November 2020 exceeding the number of new contracts originated, net of cancelations, in February 2020. Such modifications have allowed our dealers to continue to install and us to continue to service solar energy systems but may also disrupt our operations, impede productivity or otherwise be ineffective in the future. If there are additional outbreaks of the COVID-19 virus or other viruses or more stringent health and safety guidelines are adopted, our and our dealers' ability to continue performing installations and service calls may be adversely impacted. A significant or extended decline in new contract origination may have a material adverse effect on our business, cash flows, liquidity, financial condition and results of operations.
Our future success also depends on our ability to raise capital from third-party investors and commercial sources. In the initial weeks of the COVID-19 pandemic, we saw access to capital markets reduced generally. By June 2020, the terms of and access to capital had improved significantly and by the fourth quarter of 2020, capital market conditions had reached levels comparable to those prior to the COVID-19 pandemic. However, if we are unable to continue accessing the capital markets or are unable to raise funds through our tax equity and warehouse financing transactions at competitive terms, it would adversely impact our ability to finance the deployment of our solar energy systems and energy storage systems and may have a material adverse effect on our business, cash flows, liquidity, financial condition and results of operations.
There is considerable uncertainty regarding the extent and duration of governmental and other measures implemented to try to slow the spread of the COVID-19 virus, such as large-scale travel bans and restrictions, border closures, quarantines, shelter-in-place orders and business and government shutdowns. Some states that had begun taking steps to reopen their economies experienced a subsequent surge in cases of COVID-19, causing these states to cease such reopening measures in some cases and reinstitute restrictions in others. Restrictions of this nature have caused, and may continue to cause, us and our dealers to experience operational delays and may cause milestones or deadlines relating to our exclusivity arrangements to be missed. To date, we have not received notices from our dealers regarding performance delays resulting from the COVID-19 pandemic; however, we have seen delays in most jurisdictions from whom we must receive permission to operate for our solar energy systems to be placed in service. Worsening economic conditions could result in less favorable outcomes over time, which would impact our future financial performance. Further, the effects of the economic downturn associated with the COVID-19 pandemic may increase unemployment and reduce consumer credit ratings and credit availability, which may adversely affect new customer origination and our existing customers' ability to make payments on their solar service agreements. Periods of high unemployment and a lack of availability of credit may lead to increased delinquency and default rates. If existing economic conditions continue for a prolonged period of time or worsen, delinquencies on solar service agreements could increase, which would also negatively impact our future financial performance and the price of our common stock. Finally, if supply chains become significantly disrupted due to additional outbreaks of the COVID-19 virus or other viruses or more stringent health and safety guidelines are implemented, our ability to install and service solar energy systems could become adversely impacted.
We cannot predict the full impact the COVID-19 pandemic or the significant disruption and volatility currently being experienced in the capital markets will have on our business, cash flows, liquidity, financial condition and results of operations at this time due to numerous uncertainties. The ultimate impact will depend on future developments, including, among other things, the ultimate duration of the COVID-19 virus, the distribution, acceptance and efficacy of the vaccine, the depth and duration of the economic downturn and other economic effects of the COVID-19 pandemic, the consequences of governmental and other measures designed to prevent the spread of the COVID-19 virus, actions taken by governmental authorities, customers, dealers and other third parties, our ability and the ability of our customers, potential customers and dealers to adapt to operating in a changed environment and the timing and extent to which normal economic and operating conditions resume.
Historically, we have incurred operating and net losses and we may be unable to achieve or sustain profitability in the future.
We incurred operating losses of $35.8 million, $22.3 million and $13.7 million and net losses of $307.8 million, $133.4 million and $68.4 million for the years ended December 31, 2020, 2019 and 2018, respectively. These historical operating and net losses were due to a number of factors, including increased expenses to fund our growth and related financing needs. We expect to incur significant expenses as we finance the expansion of our operations and implement additional internal systems and infrastructure to support our growth. In addition, as a public company, we incur significant additional legal, accounting and other expenses we did not incur as a private company. We do not know whether our revenue will grow rapidly enough to absorb these costs. Our ability to achieve profitability depends on a number of factors, including:
• growing our customer base and originatingoriginate new solar service agreementsagreements.
•We rely on economic terms;
• maintaining or lowering our cost of capital;
• reducing operating costs by optimizing our operationsnet metering and maintenance processes;
• maximizing the benefits of our dealer network;
• finding additional tax equity investors and other sources of institutional capital; and
• the continued availability of various governmental incentives for the solar industry.
Even if we do achieve profitability, we may be unablerelated policies to sustain or increase our profitability in the future.
If our allowance for credit losses is not enoughoffer competitive pricing to cover actual credit losses from our customer notes receivable portfolio, our results of operations and financial condition could be negatively affected.
We maintain an allowance for credit losses, which is a reserve that represents our best estimate of actual credit losses we may experience in our existing customer notes receivable portfolio. The level of the allowance reflects our continuing evaluation of factors including the financial asset type, customer credit rating, contractual term, vintage, volume and trends in delinquencies, nonaccruals, write-offs and present economic, political and regulatory conditions. The determination of the appropriate level of the allowance for credit losses inherently involves subjectivity in our modeling and requires us to make estimates of current credit risks and future trends, all of which may undergo material changes or vary from our historical experience. Deterioration in economic conditions affecting our customers new information regarding existing loans and other factors, both within and outsidein most of our control, may require an increase in the allowance for credit losses. Furthermore, if write-offs in future periods exceed the allowance for credit losses we will need to increase the allowance for credit losses in future periods. Any increases in the allowance for credit losses will result in an increase in net loss and could have a material adverse effect on our business, financial condition and results of operations.
We adopted Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses, in January 2020, which requires entities to use a forward-looking expected loss approach, referred to as the current expected credit loss ("CECL") methodology in place of the previously-used incurred loss model. This resulted in an increase to the allowance for credit losses of $9.9 million. In future periods, CECL may result in increased reserves during or in advance of an economic downturn. If we are required to materially increase our level of allowance for credit losses for any reason, such increase could have a material adverse effect on our business, financial condition and results of operations.
Certain of our key operational metrics, including estimated gross contracted customer value, are based on various assumptions and estimates we make that cover an extended period of time. Actual experience may vary materially from these estimates and assumptions and therefore undue reliance should not be placed on these metrics.
Our key operational metrics include a number of assumptions and estimates we make that cover an extended period of time (up to 35 years) and may not prove accurate. In calculating estimated gross contracted customer value, we estimate projected monthly customer payments over the remaining life of our solar service agreements, which are typically 10, 15 or 25 years in length with an opportunity for customers to renew for up to an additional 10 years, and from the future sale of related SRECs. These estimated future cash flows depend on various factors including but not limited to solar service agreement type, contracted rates, customer loss rates, expected sun hours and the projected production capacity of the solar equipment installed. Additionally, in calculating estimated gross contracted customer value we also estimate cash distributions to tax equity fund investors and operating, maintenance and administrative expenses associated with the solar service agreements, including expenses related to accounting, reporting, audit, insurance, maintenance and repairs over the remaining life of our solar service agreements.
Furthermore, in calculating estimated gross contracted customer value, we discount our future net cash flows at 6% based on industry practice and at 4%, which is based in part on the interest rate on certain recent securitizations. This discount rate might not be the most appropriate discount rate based on interest rates in effect from time to time and industry or company-specific risks associated with these cash flows and the appropriate discount rate for these estimates may change in the future due to the level of inflation, rising interest rates, our cost of capital, customer default rates and consumer demand for solar energy systems, among other things. We also assume customer losses of 0% in calculating these metrics even though we expect to have some minimal level of customer losses over the life of our contracts. To illustrate the way in which actual results may change, we present sensitivities around the discount rate and the rate of customer losses, although these sensitivities may not capture the most appropriate discount rate or the rate of customer losses we will experience. For a discussion of estimated gross contracted customer value and the related discount rate and such sensitivities, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Financial and Operational Metrics—Estimated Gross Contracted Customer Value".
PricewaterhouseCoopers LLP has not audited, reviewed, examined, compiled nor applied agreed-upon procedures with respect to these operational metrics or their components. The estimates discussed above are based on a combination of assumptions that may prove to be inaccurate over time. Such inaccuracies could be material, particularly given the estimates relate to cash flows up to 35 years in the future.
Our growth strategy depends on the continued origination of solar service agreements by us and our dealers.
Our growth strategy depends on the continued origination of solar service agreements by us and our dealers. We may be unable to originate additional solar service agreements and related solar energy systems and energy storage systems in the numbers or at the pace we currently expect for a variety of reasons, including, among other things, the following:
• demand for solar energy systems and energy storage systems failing to develop sufficiently or taking longer than expected to develop;
• residential solar energy technology being available at economically attractive prices as a result of factors outside of our control, including utility prices not rising as quickly as anticipated;
• issues related to identifying, engaging, contracting, compensating and maintaining relationships with dealers and the negotiation of dealer agreements;
• issues related to financing, construction, permitting, the environment, governmental approvals and the negotiation of solar service agreements;
• a reduction in government incentives or adverse changes in policy and laws for the development or use of solar energy, including net metering, SRECs and tax credits;
• other government or regulatory actions that could impact our business model;
• negative developments in public perception of the solar energy industry; and
• competition from other solar companies and energy technologies, including the emergence of alternative renewable energy technologies.
If the challenges of originating solar service agreements and related solar energy systems and energy storage systems increase, our pool of available opportunities may be limited, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
If sufficient additional demand for residential solar energy systems does not develop or takes longer to develop than we anticipate, our ability to originate solar service agreements may decrease.
The distributed residential solar energy market is at a relatively early stage of development in comparison to fossil fuel-based electricity generation. If additional demand for distributed residential solar energy systems fails to develop sufficiently or takes longer to develop than we anticipate, we may be unable to originate additional solar service agreements and related solar energy systems and energy storage systems to grow our business. In addition, demand for solar energy systems and energy storage systems in our targeted markets may not develop to the extent we anticipate. As a result, we may be unsuccessful in broadening our customer base through origination of solar service agreements and related solar energy systems and energy storage systems within our current markets or in new markets we may enter.
Many factors may affect the demand for solar energy systems, including the following:
• availability, substance and magnitude of solar support programs including government targets, subsidies, incentives, renewable portfolio standards and residentialchanges to net metering rules;
• the relative pricing of other conventional and non-renewable energy sources, such as natural gas, coal, oil and other fossil fuels, wind, utility-scale solar, nuclear, geothermal and biomass;
• performance, reliability and availability of energy generated by solar energy systems compared to conventional and other non-solar renewable energy sources;
• availability and performance of energy storage technology, the ability to implement such technology for use in conjunction with solar energy systems and the cost competitiveness such technology provides to customers as compared to costs for those customers reliant on the conventional electrical grid; and
• general economic conditions and the level of interest rates.
The residential solar energy industry is constantly evolving, which makes it difficult to evaluate our prospects. We cannot be certain if historical growth rates reflect future opportunities or whether growth anticipated by us will be realized. The failure of distributed residential solar energy to achieve, or its beingpolicies may significantly delayed in achieving, widespread adoption could have a material adverse effect on our business, financial condition and results of operations.
If we fail to manage our operations and growth effectively, we may be unable to execute our business plan, maintain high levels of customer service or adequately address competitive challenges.
We have experienced significant growth in recent periods measured by our number of customers and we intend to continue our efforts to expand our business within existing and new markets. This growth has placed, and any future growth may place, a strain on our management, operational and financial infrastructure. Our growth requires our management to devote a significant amount of time and effort to maintain and expand our relationships with customers, dealers and other third parties, attract new customers and dealers, arrange financing for our growth and manage our expansion into additional markets.
In addition, our current and planned operations, personnel, information technology and other systems and procedures might be inadequate to support our future growth and may require us to make additional unanticipated investments in our infrastructure. Our success and ability to further scale our business will depend, in part, on our ability to manage these changes in a cost-effective and efficient manner.
If we cannot manage our operations and growth, we may be unable to meet our expectations regarding growth, opportunity and financial targets, take advantage of market opportunities, execute our business strategies, meet our tax equity financing commitments or respond to competitive pressures. This could also result in declines in quality or customer satisfaction, increased costs, difficulties in introducing new offerings or other operational difficulties. Any failure to effectively manage our operations and growth could adversely impact our reputation, business, financial condition, cash flows and results of operations.
A material reduction in the retail price of electricity charged by electric utilities or other retail electricity providers would harm our business, financial condition and results of operations.
Decreases in the retail price of electricity from electric utilities or from other retail electric providers, including other renewable energy sources such as larger-scale solar energy systems, could make our offerings less economically attractive. The price of electricity from utilities could decrease as a result of:
• the construction of a significant number of new power generation plants, whether generated by natural gas, nuclear power, coal or renewable energy;
• the construction of additional electric transmission and distribution lines;
• a reduction in the price of natural gas or other natural resources as a result of increased supply due to new drilling techniques or other technological developments, a relaxation of associated regulatory standards or broader economic or policy developments;
• lessreduce demand for electricity due to energy conservation technologies and public initiatives to reduce electricity consumption or to recessionary economic conditions; and
• development of competing energy technologies that provide less expensive energy.
A reduction in electric utilities' rates or changes to peak hour pricing policies or rate design (such as the adoption of a fixed or flat rate) could also make our offerings less competitive with the price of electricity from the electrical grid. If the cost of energy available from electric utilities or other providers were to decrease relative to solar energy generated from residential solar energy systems or if similar events impacting the economics of our offerings were to occur, we may have difficulty attracting new customers or existing customers may default or seek to terminate, cancel or otherwise avoid the obligations under their solar service agreements. For example, large utilities in California have started transitioning customers to time-of-use rates and also have adopted a shift in the peak period for time-of-use rates to later in the day. Unless grandfathered under a different rate, residential customers with solar energy systems are required to take service under time-of-use rates with the later
peak period. Moving utility customers to time-of-use rates or the shift in the timing of peak rates for utility-generated electricity to include times of day when solar energy generation is less efficient or non-operable could also make our offerings less competitive. Time-of-use rates could also result in higher costs for our customers whose electricity requirements are not fully met by our offerings during peak periods.
Additionally, the price of electricity from utilities may grow less quickly than the escalator feature in certain of our solar service agreements, which could also make our solar energy systems less competitive with the price of electricity from the electrical grid and result in a material adverse effect on our business, financial condition and results of operations.
Our growth is dependent on our dealer network and our failure to retain or replace existing dealers or to grow our dealer network could adversely impact our business.
Our dealer network is an integral component of our business strategy and serves as the means by which we are able to originate solar service agreements and related solar energy systems and energy storage systems in existing and prospective markets. Poor performance by our dealers in originating solar service agreements could have a material adverse effect on our business, financial condition and results of operations. We have in the past had disputes and litigation with certain of our dealers over their performance.
As we grow, particularly in new jurisdictions, we will need to expand our dealer network. We are subject to significant competition for the recruitment and retention of dealers from our competitors and we may not be able to recruit new or replacement dealers in the future. We compete for our dealers with other solar service providers primarily based on the amount and timing of payments for originating solar service agreements, financial ability and our suite of technology tools.
Most of our dealers are not restricted in their ability to work with our competitors and are not obligated to continue working with us. In the past, some of our dealers have chosen to work with competitors of ours or terminated their relationships with us and dealers may reduce or terminate their work with us in the future. The departure of a significant number of our dealers for any reason, or the failure to replace departing dealers in the event of such departures, could reduce our potential origination opportunities and could have a material adverse effect on our business, financial condition and results of operations. As we develop and expand our Sunnova Protect services, dealers may view us as a competitor and choose to end their relationship with us.
systems.
Additionally, dependence on any one dealer or small group of dealers further concentrates our exposure to risks related to termination of the dealer arrangement, poor service provided by such dealer, the deterioration in financial condition of the dealer and other risks inherent in such a relationship. For the years ended December 31, 2020, 2019 and 2018, Trinity accounted for approximately 28%, 41% and 52% of our net originations for such periods, respectively. Although we have entered into a four‑year exclusivity agreement with Trinity, pursuant to which Trinity may only originate solar service agreements for us, there are various exceptions to this obligation. For a discussion of exclusivity arrangements with certain of our dealers, see "•Business—Our Relationships with Our Dealers".
If we or our dealers fail to hire and retain a sufficient number of employees and service providers in key functions, our growth and our ability to timely complete customer projects and successfully manage customer accounts would be constrained.
To support our growth, we and our dealers need to hire, train, deploy, manage and retain a substantial number of skilled employees, engineers, installers, electricians and sales and project finance specialists. Competition for qualified personnel in our industry has increased substantially, particularly for skilled personnel involved in the installation of solar energy systems. We and our dealers also compete with the homebuilding and construction industries for skilled labor. These industries are cyclical and when participants in these industries seek to hire additional workers, it puts upward pressure on our and our dealers' labor costs. Companies with whom our dealers compete to hire installers may offer compensation or incentive plans that certain installers may view as more favorable. As a result, our dealers may be unable to attract or retain qualified and skilled installation personnel. The further unionization of our industry's labor force or the homebuilding and construction industries' labor forces, either in response to the COVID-19 pandemic or otherwise, could also increase our dealers' labor costs. Shortages of skilled labor could significantly delay a project or otherwise increase our dealers' costs. Further, we need to continue to increase the training of our customer service team to provide high-end account management and service to homeowners before, during and following the point of installation of our solar energy systems. Identifying and recruiting qualified personnel and training them requires significant time, expense and attention. It can take several months before a new customer service team member is fully trained and productive at the standards we have established. If we are unable to hire, develop and retain talented customer service or other personnel, we may not be able to grow our business.
We need to obtain substantial additional financing arrangements to provide working capital and growth capital and if financing is not available to us on acceptable terms when needed, our ability to continue to grow our business would be materially adversely impacted.
Distributed residential solar power is a capital-intensive business that relies heavily on the availability of debt and equity financing sources to fund solar energy system purchase, design, engineering and other capital expenditures. From our inception through December 31, 2020, we have raised more than $6.7 billion in total capital commitments from equity, debt and tax equity investors.
Our future success depends in part on our ability to raise capital from third-party investors and commercial sources, such as banks and other lenders, on competitive terms to help finance the deployment of our solar energy systems. We seek to minimize our cost of capital in order to improve profitability and maintain the price competitiveness of the electricity produced by, the payments for and the cost of our solar energy systems. We rely on access to capital, including through tax equity financing and indebtedness in the form of debt facilities and asset-backed securities, to cover the costs related to bringing our solar energy systems and energy storage systems in service, although our customers ultimately bear responsibility for those costs pursuant to our solar service agreements.
To meet the capital needs of our growing business, we will need to obtain additional debt or equity financing from current and new investors. If any of our current debt or equity investors decide not to invest in us in the future for any reason, or decide to invest at levels inadequate to support our anticipated needs or materially change the terms under which they are willing to provide future financing, we will need to identify new investors and financial institutions to provide financing and negotiate new financing terms. In addition, our ability to obtain additional financing through the asset-backed securities market or other secured debt markets is subject to our having sufficient assets eligible for securitization as well as our ability to obtain appropriate credit ratings. If we are unable to raise additional capital in a timely manner, our ability to meet our capital needs and fund future growth may be limited.
Delays in obtaining financing could cause delays in expansion in existing markets or entering into new markets and hiring additional personnel. Any future delays in capital raising could similarly cause us to delay deployment of a substantial number of solar energy systems for which we have signed solar service agreements with customers. Our future ability to obtain additional financing depends on banks' and other financing sources' continued confidence in our business model and the renewable energy industry as a whole. It could also be impacted by the liquidity needs of such financing sources themselves. We face intense competition from a variety of other companies, technologies and financing structures for such limited investment capital. If we are unable to continue to offer a competitive investment profile, we may lose access to these funds or they may only be available to us on terms less favorable than those received by our competitors. For example, if we experience higher customer default rates than we currently experience, it could be more difficult or costly to attract future financing. Any inability to secure financing could lead us to cancel planned installations, impair our ability to accept new customers or increase our borrowing costs, any of which could have a material adverse effect on our business, financial condition and results of operations.
Our ability to provide our solar service offerings to homeowners on an economically viable basis depends in part on our ability to finance these solar energy systems with tax equity investors that depend on particular tax and other benefits.
Historically, there have been a limited number of investors that generate sufficient profits and possess the requisite financial sophistication to benefit from the tax benefits our tax equity vehicles provide, and a lack of depth in this market may limit our ability to complete such tax equity financing. Potential investors seeking tax-advantaged financing must remain satisfied the structures we offer qualify for the tax benefits associated with solar energy systems available to these investors, which depends both on the investors' assessment of tax law and the absence of any unfavorable interpretations of that law. Changes in existing law and interpretations by the IRS and the courts could reduce the willingness of tax equity investors to invest in tax equity vehicles associated with these solar energy system investments or cause these investors to require a larger allocation of customer payments. We are not certain this type of financing will continue to be available to us as the legal and regulatory landscape may shift in a manner that reduces or eliminates the attractiveness of such financing opportunities. For example, a step down of Section 48(a) ITCs is scheduled to occur in 2023. Additionally, we may be unable to identify investors interested in engaging in this type of financing with us. As of December 31, 2020, we have formed eleven tax equity vehicles to which investors such as banks and other large financial investors have committed to invest approximately $789.5 million. The undrawn committed capital for these tax equity vehicles as of December 31, 2020 is approximately $135.8 million. We plan to continue to form new tax equity vehicles as long as existing tax law and regulations make such financing attractive. See "—Risks Related to Regulations—Our business currently depends in part on the availability of rebates, tax credits and other financial incentives. The expiration, elimination or reduction of these rebates, credits or incentives or our ability to monetize them could adversely impact our business".business.
Table•Our business depends in part on the regulatory treatment of Contentsthird-party owned solar energy systems.
•
The contractual terms in certainTechnical and regulatory limitations regarding the interconnection of our tax equity vehicle documents impose conditions onsolar energy systems to the electrical grid may significantly reduce our ability to draw on financing commitmentssell electricity from the tax equity investors, including if an event occurs thatour solar energy systems in certain markets or delay interconnections and customer in-service dates, harming our growth rate, operations and customer satisfaction.
•Our business is subject to complex and evolving privacy and data protection laws. Many of these laws and regulations are subject to change and uncertain interpretation and could reasonably be expected to have a material adverse effect on the tax equity vehicle or on us. The terms and conditionsresult in claims, increased cost of our tax equity vehicles can vary and may require us to alter our products, services or product mix. If we do not satisfy such conditions due to events related to our business or a specific tax equity vehicle or developments in our industryoperations or otherwise harm our business.
•Our business is subject to consumer protection laws. Such laws and as a result weregulatory enforcement policies and priorities are unablesubject to draw on existing commitments, itchange that may negatively impact our business.
•The highly regulated environment in which our capital providers operate could have a materialan adverse effect on our business, financial condition, results of operations and liquidity. In addition to our inability to draw on the investors' commitments, we may incur financial penalties for non-performance, including delays in the installation process and interconnection to the power grid of solar energy systems and other factors. Based on the terms of the tax equity vehicle agreements, we will either reimburse a portion of the tax equity investor's capital or pay the tax equity investor a non-performance fee.business.
Under the terms of certain of our tax equity vehicles, we may be requiredRisks Related to make payments to the tax equity investors if certain tax benefits allocated to such tax equity investors are not realized as expected. Our financial condition may be adversely impacted if a tax equity vehicle is required to make any tax-related payments.
Our tax equity vehicles require that, prior to a date that is at least five years after the last project was placed in service, the tax equity investor receives substantially all the non-cash value attributable to the solar energy systems; however, in all but one of our current funds we receive a majority of the cash distributions. In the event the tax equity investor has tax liability as a result of its investment and the cash distributions payable to the tax equity investor are not sufficient to pay such tax liability, the amount of distributions payable to us will be reduced. The amounts of potential tax liability (and the potential for a reduced distribution to us) depend on the tax benefits that accrue to such investors from the tax equity vehicles' activities and may be impacted by changes in tax law.Taxation
Additionally, we•Our ability to use net operating loss carryforwards ("NOLs") and tax credit carryforwards to offset future income taxes is subject to limitation and the amount of such carryforwards may have payment obligationsbe subject to challenge or reduction.
•Changes in tax law could adversely affect our tax equity investors under indemnity obligations contained in those financings. See "business.
•—Risks Related to Taxation—If the IRS or the U.S. Treasury Department makes a determination that the fair market value of our solar energy systems is materially lower than what we have reported in our tax equity vehicles' tax returns, we may have to pay significant amounts to our tax equity vehicles, our tax equity investors, tax credit buyers and/or the U.S. government. Such determinations could have a material adverse effect on our business and financial conditioncondition.
•" and "—Risks Related to Taxation—If our solar energy systems either cease to be qualifying property or undergo certain changes in ownership within five years of the applicable placed in service date, we may have to pay significant amounts to our tax equity vehicles, our tax equity investors, tax credit buyers and/or the U.S. government. Such recapture could have a material adverse effect on our business and financial condition".condition.
DueRisks Related to uncertainties associated with estimating the timingOur Common Stock
•We do not intend to pay, and amounts ofour credit facilities currently prohibit us from paying, cash distributions and allocations of tax benefits to such investors, we cannot determine the potential impactdividends on our cash flows undercommon stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.
•Ownership of our common stock by current or future arrangements. Any significant reductionsstockholders is expected to remain significant.
•The price of our common stock is volatile and may decline in value.
•Provisions of our charter documents and Delaware law may inhibit a takeover, which could limit the price investors might be willing to pay in the future for our common stock.
General Risk Factors
•We are exposed to the credit risk of our customers and payment delinquencies on our accounts receivable.
•Our actual financial results may differ materially from any guidance we may publish from time to time.
•If we are unable to make acquisitions on economically acceptable terms, our future growth and operations could be limited, and any acquisitions we may make may reduce, rather than increase, our cash we expect to receive from these structuresflows.
•Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults or non-performance by financial institutions or transactional counterparties, could adversely affectimpact our business, financial condition.condition and results of operations.
PART I
Item 1. Business.
Mission
To power energy independence.
Overview
We are an industry-leading energy services company focused on making clean energy more accessible, reliable and affordable for homeowners and businesses, serving over 419,000 customers in more than 45 United States ("U.S.") states and territories. Through our adaptive energy platform, we provide a better energy service at a better price to deliver our mission of powering energy independence. Through our energy service offerings, we are disrupting the traditional energy landscape and the way the 21st century customer generates and consumes electricity. Additionally, we believe the renewable energy market in which we operate, and investment in climate solutions more broadly, will continue to grow as the impact of climate change increases. While our core business model seeks to help accelerate a global transition to renewable energy, there are inherent climate-related risks to our business operations including, but not limited to, those discussed under "Risk Factors" and elsewhere in this Annual Report on Form 10-K.
We enter into securitization structures, warehouse financingspartner with local dealers and contractors who originate, design and install our customers' solar energy systems, energy storage systems and related products and services on our behalf, as well as other debt financings that may limitsustainable home solutions, such as home security and monitoring, smart home devices, modern heating, ventilation and air conditioning ("HVAC"), generators, upgraded roofing, water systems, water heaters, main panel upgrades and electric vehicle chargers. Our focus on our abilitydealer and contractor model enables us to leverage our dealers' and contractors' specialized knowledge, connections and experience in local markets to drive customer origination while providing our dealers and contractors with access the cash of our subsidiariesto high quality products at competitive prices, as well as technical oversight and include acceleration events that, if triggered, could adversely impact our financial condition.expertise. We believe this structure provides operational flexibility, reduces exposure to labor shortages and lowers fixed costs relative to true vertically integrated models.
Since April 2017,We offer customers products to power and improve the energy efficiency and sustainability of their homes and businesses with affordable solar energy and related products and services. We are able to offer energy generation savings compared to utility-based retail rates with little to no up-front expense to the customer in conjunction with solar and solar plus energy storage products, and, in the case of the latter, are able to also provide energy resiliency. Our customer agreements typically take the form of a lease, power purchase agreement ("PPA"), loan or cash purchase; however, we also offer service plans for systems we did not originate. We make it possible in some states for a customer to obtain a new roof and/or other sustainable home products as part of their solar loan agreement or as an accessory loan to their lease or PPA. Customers who are not interested in a new solar energy system or energy storage system may also finance a new roof and other sustainable home products via a stand-alone loan from us. We also allow customers originated through our homebuilder channel the option of purchasing the products when the customer closes on the purchase of a new home. Service is an integral part of our agreements and includes operations and maintenance, monitoring, repairs and replacements, equipment upgrades, on-site power optimization for the customer (for both supply and demand), the ability to efficiently switch power sources between the solar energy system and/or energy storage system, and the grid, as appropriate, and also the solar energy system and energy storage system diagnostics. During the life of the contract, we have pooledthe opportunity to integrate related and transferred eligibleevolving servicing and monitoring technologies and other sustainable home products to upgrade the flexibility and reduce the cost of our customers' energy supply.
In the case of leases and PPAs, we also currently receive tax benefits and other incentives from federal, state and local governments, a portion of which we finance through tax equity, tax credit sales, non-recourse debt structures and hedging arrangements in order to fund our upfront costs, overhead and growth investments.
In addition to providing ongoing service as a standard component of our customer agreements, we also offer ongoing energy services to customers who purchased their solar energy system through third parties. Under these arrangements, we agree to provide monitoring, maintenance and/or repair services to these customers for the life of the service contract they sign with us. In addition, we offer one-time repair services to customers who purchased their solar energy systems and the related asset receivables into seven special purpose entities, which sold solar asset-backed notes and solar loan-backed notes to institutional investors, the net proceeds of which were distributed to us.or sustainable home products through third parties that are not otherwise covered by warranty. We intend to monetize additional solar energy systems in the future through contributions to new special purposes entities for cash. There is a risk the institutional investors that have purchased the notes issued by these special purpose entities will be unwilling to make further investments in our solar energy systems at attractive prices. Although the creditors of these special purpose entities have no recourse to our other assets except as expressly set forth in the terms of the notes, the special purpose entities are typically required to maintain a liquidity reserve account, a reserve account for equipment replacements,also offer complementary products as well as in certain cases, reserve accountsnon-solar financing. Specifically, our offerings include a non-solar loan program enabling customers to finance the purchase option/withdrawal right exercises,of products independent of a solar energy system or energy storage system. We believe the quality and scope of our comprehensive energy service offerings, whether to customers that obtained their solar energy system replacementthrough us or payment of liquidated damages for the benefit of the lenders under the applicable series of notes, each of which are funded from initial deposits or cash flows to the levels specified therein.
The securitization structures, warehouse financingsthrough another party, is a key differentiator between us and other debt financings often include certain other features designed to protect investors. The primary feature relates to the availability and adequacy of cash flows in the pool of assets to meet contractual requirements, the insufficiency of which triggers an early repayment of the indebtedness. We refer to this as "early amortization", which may be based on, among other things, a debt service coverage ratio falling or remaining below certain levels. In the event of an early amortization, the notes issuer would be required to repay the affected indebtedness using available collections received from the asset pool. However, the period of ultimate payment would be determined based on the amount and timing of collections received and, in limited circumstances, early amortization may be cured prior to fullour competitors.
repayment. An early amortization event would impair
We continue to expand our liquidityofferings to include additional sustainable home products to our agreements, including non-solar financing. Specifically, we have expanded our offerings to include a non-solar loan program enabling customers to finance the purchase of products independent of a solar energy system or energy storage system. We believe the quality and may requirescope of our expanding sustainable home product offerings, whether to customers that obtained their solar energy system or energy storage system through us or through a third party, is a key differentiator between us and our competitors.
We also enter into leases with third-party owners of pools of solar energy systems to receive such third party's interest in those systems. In connection therewith, we assume the related customer PPA and lease obligations, entitling us to utilize other available contingent liquidityfuture customer cash flows as well as certain credits, rebates and incentives (including solar renewable energy certificates ("SRECs")) under those agreements, in exchange for a lease payment, whether upfront or rely on alternative funding sources,over time, to the third-party owner, which may not be available atmade in the time. Certainform of cash or shares of our common stock. We believe such arrangements enhance our long-term contracted cash flows and are complementary to our overall business model.
We commenced operations in January 2013 and began providing solar energy services under our first solar energy system in April 2013. Since then, our brand, innovation and focused execution have driven significant, rapid growth in our market share and in the number of customers on our platform. We operate one of the securitizations, warehouse financings and other debt financings also contain a "cash trap" feature, which requires excess cash flow to be held in an account based on, among other things, a debt service coverage ratio falling or remaining below certain levels. If the cash trap conditions are not cured within a specified period, then the cashlargest residential fleets of solar energy systems in the cash trap account must be applied to repay the indebtedness. If the cash trap conditions are timely cured, the cash is either released back to the borrower or used to repay the indebtedness at the borrower's option. The indenturesU.S., comprising more than 2,292 megawatts of generation capacity and our securitizations also typically contain customary eventsdiversified offerings of default for solar securitizations that may entitle the noteholders to take various actions, including the accelerationsustainable home solutions serve over 419,000 customers as of amounts due and foreclosure on the issuer's assets. Any significant paymentsDecember 31, 2023. For a discussion of how we may be required to make as a resultdefine number of these arrangements could adversely affect our financial condition. Seecustomers, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—LiquidityOperations—Key Financial and Capital Resources—Financing ArrangementsOperational Metrics"". The following chart illustrates the growth in our number of customers from December 31, 2019 through December 31, 2023.
Servicing our existing debt requires a significant amount of cash. We may not have sufficient cash flow from our business to timely pay our interest and principal obligations and may be forced to take other actions to satisfy our payment obligations.
AsOur Network Model
While many of December 31, 2020, our total indebtedness was approximately $2.0 billioncompetitors maintain a large, geographically diverse base of employees in local markets, including a direct sales force comprised of home improvement installers, we limit the cost associated with that structure by primarily utilizing a network of local, independent dealers and the available borrowing capacity under our credit facilities was $402.4 million. Our abilitycontractors to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness dependsmarket, sell and install solar energy systems, energy storage systems, home generators and certain other products and services on our future performance, which is subject to economic, financial, competitivebehalf. Our dealers and other factors beyondcontractors typically reside and work within the markets they serve and provide a localized, customer-focused marketing, installation and servicing process. These dealers and contractors are often leading local solar installation companies, electrical services companies or companies that serve customers who are actively searching for solar power, backup power or complementary home services.
Origination, Installation, Monitoring and Servicing Processes
Through our control. Our business may not generate cash flow from operations sufficient to service our debt and make necessary capital expenditures to operate our business. Ifnetwork model, we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as slowing or ceasingprovide a streamlined approach for the origination of new solar servicecustomer agreements selling assets, restructuring debt or obtaining additional debt and equity capital on terms that may be onerous or highly dilutive. Our securitizations are structured in that cash flows generated by the poolinstallation of solar energy systems, energy storage systems and related solar service agreements are initially used to repay outstandingother sustainable home products. The principal amounts based on the priority of payments in the agreement. However, should these cash flows decrease below applicable thresholds, all excess cash flows from such asset pool must be applied to pay down the related indebtedness, which would reduce the cash available to otherwise fund our business. Our ability to timely repay or otherwise refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
Furthermore, we and our subsidiaries expect to incur additional debt in the future, subject to the restrictions contained in our debt instruments. Increases in our existing debt obligations would further heighten the debt related risk discussed above. In addition, we may not be able to enter into new debt instruments on acceptable terms or at all. If we were unable to satisfy financial covenants and other terms under existing or new instruments, or obtain waivers or forbearance from our lenders, or if we were unable to obtain refinancing or new financings for our working capital, equipment and other needs on acceptable terms if and when needed, our business would be adversely affected.
We are exposed to the credit riskelements of our customers.origination, installation, monitoring and servicing processes are described below:
Our customers purchase solar energy or lease solar energy systems from us pursuant to one of two types of long-term contracts: a PPA or a lease. The PPA•Customer Origination and lease terms are typically for 25 years. In addition, under our loan agreements the customer finances the purchase of a solar energy system and we agree to operate and maintain the solar energy system throughout the 25-year term of the agreement. Our solar service agreements require the customer to make monthly payments to us throughout the term of the contract, unless prepaid. Because we have long-term, contractual relationships with our customers, we are subject to the credit risk of our customers and screen our customers based upon their credit rating in an attempt to mitigate the risk of customer default. As of December 31, 2020, the average FICO®Consultation. score of ourOur dealers and contractors serve as a local, direct-to-home sales force providing in-person and virtual consultations to source potential customers was 740 at the time of signing the solar service agreement. The accuracy of independent third-party information provided to the credit reporting agency cannot be verified. A FICO® score purports only to be a measurement of the relative degree of risk a borrower represents to a lender, i.e., a borrower with a higher score may be less likely to default in payment than a borrower with a lower score.each geographic market where we
As of December 31, 2020, approximately 1.0% of our customers were in default under their solar service agreements. However, as we grow our business, the risk of customer defaults may increase as credit scores are dynamic and may deteriorate over a 25-year period. During an economic downturn, the risk of customer defaults may increase. In addition, our customers may assign their solar service agreements to other customers who have lower credit scores or we may enter into new solar service agreements in the future with customers who have lower credit scores than our current customers. In addition, future developments, including competition from other renewables, could decrease the attractiveness of our current contracts. Although our solar service agreements grant us the ability to terminate the agreement with the customer and repossess the
defaulting customers'operate. Our dealers and contractors reach potential customers through various means, including online, telemarketing, in-store sales, cross-marketing with complementary products and door-to-door canvasing. Using our technology platform and proprietary pricing tool, the dealer/contractor and the customer select one of our standard-form agreements for the relevant market and product.
•Design andEngineering. We and the dealers work together to design the applicable equipment, such as the solar energy system in certain circumstances, enforcementand energy storage system, if applicable, prior to the dealer's purchase and installation. All of these rights under theour solar energy systems and energy storage systems are designed with equipment from a pre-approved list of manufacturers. We utilize our extensive tools and services platform, standardized procedures and existing databases to help our dealers comply with our pricing requirements, solar best practices, contract terms, and state, territorial and local regulations. For each solar service agreement, may be difficult, expensivean individualized power production estimate is created by analyzing geographic, solar and time-consuming.weather data with the design's proposed orientation, components and shading. We continue to pursue technological innovation to streamline our review of design and engineering, to expedite installation and to lower costs for our dealers.
Restrictive covenants in certain•Installation, Commissioning, Quality Assurance and Interconnection. The installation phase requires the dealer to obtain all necessary permits for installation. For systems requiring commissioning, the dealer must complete our commissioning process for the solar energy system and energy storage system (as applicable), which entails submitting supporting documentation and photographs illustrating the installation of the solar energy system and energy storage system (as applicable) to our debt agreements could limit our growthquality assurance team for review. Following completion of these steps and our abilityapproval of these materials, the dealer submits required paperwork to finance our operations, fund our capital needs, respondthe applicable electric distribution utility to changing conditionsobtain permission to operate the equipment, schedule required regulatory inspections and engagearrange for interconnection of the solar energy system to the electrical grid. In some markets where either permission is not required and/or interconnection is not feasible or practical, we may place the system in other business activities that mayservice without interconnecting to the electrical grid and thereby place the system in service without seeking permission to operate from the applicable electric distribution utility.
•Customer Billing Dates. How soon we will begin billing the customer after the solar energy system or applicable sustainable home product system has been placed in service will vary by product offering. Lease agreements will begin billing on the first cycle date after the solar energy system or applicable sustainable home product system has been placed in service, generally within 30 days. PPAs will begin billing on the first cycle date in the next calendar month after the solar energy system has been placed in service, generally between 15 and 60 days after the solar energy system has been placed in service. Loan agreements require the solar energy system or applicable sustainable home product system must be in service at least 30 days or, where permitted by law, installed for 60 days prior to the date when billing can begin. As a result, billing on loan agreements generally begins with the aligned cycle date in the next calendar month after the solar energy system or applicable sustainable home product system has been installed or placed in service.
•Monitoring and Servicing. Our monitoring systems utilize cellular or internet connections that allow us to confirm the continuing operation of the solar energy system and energy storage system (if applicable) and with that information, solve maintenance issues through our best interests.dealers, third-party service providers or our own personnel. We also collect performance data to improve our pricing, generation estimates and services for our customers.
Our debt agreements impose operatingRelationships With Our Dealers and financial restrictions on us. These restrictions limit our ability and that of our subsidiaries to, among other things:
• incur additional indebtedness;
• make investments or loans;
• create liens;
• consummate mergers and similar fundamental changes;
• make restricted payments;
• make investments in unrestricted subsidiaries;
• enter into transactions with affiliates; and
• use the proceeds of asset sales.Contractors
We maycarefully recruit our dealers and contractors, who must meet and maintain our standards to be prevented from taking advantageapproved. Qualifications to be a dealer/contractor include: experience in the solar industry or success in an applicable sustainable home product industry such as home security, roofing, gas generators, heating, ventilation and air-conditioning, electrical services or water systems, experienced and appropriately certified employees (including multiple installation teams) and possession of business opportunities that arise becauseapplicable licenses. We also perform a review of the limitations imposed on us by the restrictive covenants under certainprospects' financial condition as part of our debt agreements. The restrictions contained inrecruitment process, a background check on the covenants could:principal owners of the organization and a careful review of the businesses online and local reputation. Upon engagement, the dealer/contractor enters into an agreement with us that sets ongoing standards for operations and payment obligations based on different milestones for each project. We provide training, field support and continuing education to help our dealers/contractors operate efficiently. This includes training related to our processes, standards and services platform, sales training and compliance education regarding applicable rules and regulations. We actively review our dealers'/contractors' performance and compliance with our requirements to determine whether to terminate our relationship with any dealer/contractor that is unable to meet our performance standards.
• limit our ability to plan for or react to market conditions, to meet capital needs or otherwise to restrict our activities or business plan; and
• adversely affect our ability to finance our operations, enter into acquisitions or divestitures to engage in other business activities that would be in our interest.
A breach of any of these covenants or our inability to comply with the required financial ratios or financial condition tests could result in a default under our debt agreements that, if not cured or waived, could result in acceleration of all indebtedness outstanding thereunder and cross-default rights under our other debt. In addition, in the event of an event of default under one of the credit facilities, the affected lenders could foreclose on the collateral securing such credit facility and require repayment of all borrowings outstanding thereunder. If the amounts outstanding under the credit facilities or any of our other indebtedness were to be accelerated, our assets may not be sufficient to repay in full the amounts owed to the lenders or to our other debt holders.
Rising interest rates may adversely impact our business.
Rising interest rates will increase our cost of capital. Our future success depends in part on our ability to raise capital from investors and obtain secured lending to help finance the deployment of our solar service agreements. As a result, rising interest rates may have an adverse impact on our ability to offer attractive pricing on our solar service agreements to our customers.
The majority of our cash flows to date have been from solar service agreements monetized under various tax equity fund structures and secured lending arrangements. One of the components of this monetization is the present value of the payment streams from customers who enter into these long-term solar service agreements. If the rate of return required by capital providers, including debt providers, rises as a result of a rise in interest rates, it will reduce the present value of the customer payment stream and consequently reduce the total value derived from this type of monetization. Any measures we could take to mitigate the impact of rising interest rates on our ability to secure third-party financing could ultimately have an adverse impact on the value proposition we offer our customers or our profitability.
The phase-out of the London Interbank Offered Rate ("LIBOR") may adversely affect a portion of our outstanding debt.
In July 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. In November 2020, ICE Benchmark Administration, the administrator of LIBOR, with the support of the United States Federal Reserve and the United Kingdom's Financial Conduct Authority, announced plans to consult on ceasing publication of USD LIBOR on December 31, 2021 for only the one week and two month USD LIBOR tenors, and on June 30, 2023 for all other USD LIBOR tenors. While this announcement extends the transition period to June 2023, the United States Federal Reserve concurrently issued a statement advising banks to stop new USD LIBOR issuances by the end of 2021. In light of these recent announcements, the future of LIBOR at this time is uncertain and any changes in the methods by which LIBOR is determined or regulatory activity related to LIBOR's phaseout could cause LIBOR to perform
differently than inFor the past or cease to exist. Changes in the method of determining LIBOR, or the replacement of LIBOR with an alternative floating borrowing rate, may adversely affect our borrowing costs. Certainyears ended December 31, 2023 and 2022, Trinity Solar, Inc. ("Trinity") accounted for approximately 10% and 19% of our debt instruments have interest ratesnet originations, respectively. In October 2022, we amended our agreement with Trinity pursuant to which Trinity has agreed to perform services or work exclusively for us for sixty-six months to March 31, 2028 (the "Exclusivity Period"), with certain exceptions, including (a) the sale of solar energy systems, energy storage systems, generators or electric vehicle chargers ("Agreed Products") to individuals on a "cash" basis that are LIBORdo not involve private financing marketed by Trinity, (b) the sale of Agreed Products to individuals who, based on their credit score(s) and willother relevant attributes, Trinity reasonably determines do not have maturedqualify under our credit and underwriting standards then in effect and (c) the sale of Agreed Products pursuant to customer agreements executed prior to the phase-out of LIBOR. We cannot predict the effectdate of the potential changesamendment to LIBORthe dealer agreement. The amendment permits immaterial failures to comply with the foregoing exclusivity obligations provided that such failures are inadvertent, made without knowledge and/or intent of Trinity's management, and provided that such failures do not account for more than 2% of Trinity's installations in any single year during the Exclusivity Period. In addition, Trinity may install Agreed Products for our competitors in instances in which Trinity has available installation capacity, and, following notice to us that such capacity is available, we can either indicate that we do not intend to use such installation capacity or fail to timely respond to the notice. Trinity's exclusivity obligations do not apply to new roofs or roof replacements, or to Agreed Products sold for commercial applications. Under this arrangement, we have agreed to provide bonuses to Trinity in the amount of $12.9 million during the six month period ended March 31, 2023 and $30.0 million for each of the five subsequent year-long periods. The bonus payments are subject to a true-up payable by (a) us if Trinity exceeds 120% of its annual target or (b) Trinity if it does not meet at least 80% of its annual target, though we will not owe Trinity a true-up for its first year performance under any circumstances. The annual installation targets increase by approximately 2.3% to 7.1% each year. Unlike most of our dealer agreements, the arrangement with Trinity does not permit the parties to terminate for convenience and only permits termination in specified circumstances including material breach (subject to applicable cure periods), prolonged force majeure events, a change of control, certain insolvency events or mutual agreement. For purposes of the Trinity agreement, "change of control" means (a) the sale of all or substantially all of the assets of a party or (b) any merger, acquisition or other transaction or series of transactions that results in any "person" becoming the "beneficial owner" (as those terms are used in Section 13(d), Rule 13d-3 and Rule 13d-5 of the Exchange Act) of more than fifty percent of the voting securities of a party (subject to certain exclusions). Additionally, the arrangement provides for a liquidated damages payment of the greater of $50.0 million or the establishmentsum of all remaining annual bonus payments at the time of the termination by the applicable party in the event of termination for material breach, certain insolvency events of or wrongful termination by the other party.
We have similar contractual arrangements with several other key dealers and third parties. For certain other dealers and third parties, substantially all of the customer agreements originated by such dealers and third parties are Sunnova agreements, although they are under no exclusivity arrangement. During the year ended December 31, 2023, Monitronics International Inc. dba Brinks Home ("Brinks Home") and Lennar accounted for 30% and 10%, respectively, of our net originations. During the year ended December 31, 2022, Lennar and Windmar PV Energy, Inc ("Windmar Energy") accounted for 15% and 13%, respectively, of our net originations. No dealer or third party other than Brinks Home, Trinity, Lennar and Windmar Energy accounted for more than 10% of our net originations during 2023 or 2022.
Direct Sales
We have established a direct to market team to sell and install our products and services in limited markets. This sales team is primarily focused on selling solutions, such as Sunnova Protect Services, Sunnova +SunSafe and financing for electric vehicle chargers, generators and other supplements as requested by consumers. In many cases, these services will be directed to a third-party installer in our network, as required, for the installation of equipment.
Commercial Sector
We have established a division to serve commercial, industrial, agricultural, not-for-profit and public sector customers. This division is primarily focused on offering solutions, such as solar energy systems, energy storage systems and electric vehicle chargers as requested by customers, through a lease agreement, loan agreement or cash purchase.
Grid Services
We have developed relationships with various independent system operators, utilities, community choice aggregators and others, seeking to provide them with specialized grid services so these grid participants can more efficiently conduct their operations. Examples of these services include demand response as well as grid capacity. These grid programs can make use of alternative floating borrowing rates on the portionsolar energy systems, energy storage systems and other technologies installed in customer homes and businesses and managed by us via a centralized platform and internally developed software. By providing grid services, we seek to earn additional revenue, improve grid resiliency and operations where our customers are located, and lower the cost of power to our customers.
Software Platforms
We have created sophisticated cloud-based technology platforms, streamlining the origination, installation, administration, orchestration and servicing of our outstanding debt that is LIBOR based. Challengesenergy solutions. Our proprietary dealer, customer and energy management software supports customers, dealers and internal users in changing to a different borrowing rate may result in less favorable pricing on certainthe sale, installation and management of our debt instrumentsproducts and could have an adverse effect on our financial resultsservices. The platforms leverage cloud-based infrastructure and cash flows.software capabilities using multiple third-party providers, including Salesforce, Amazon Web Services, Heroku and FinancialForce. The platforms are compatible with multiple end-user device types, including smartphone, tablet and desktop/laptop interfaces.
Our business has benefited from the declining cost of solar energy system components and our business may be harmed to the extent the cost of such components stabilize or increase in the future.key software platforms include:
Our business has benefited from•Sunnova CatalystTM Dealer Platform: Sunnova Catalyst enables dealers to manage leads, design systems, generate quotes and contracts, and create plan sets and commissioning packages through a combination of web, tablet and mobile device interfaces. As part of the declining costquoting feature set, customer pricing is delivered by a combination of cloud-based technologies including Genability, PV Watts (a service of the National Renewable Energy Laboratory) and proprietary applications running on Amazon Web Services and Heroku. We enable dealers to generate customer agreements and proposal documents on demand for presentation to prospective customers. Each completed quote is transferred into Salesforce for agreement generation, customer access and reporting. Sunnova Catalyst also includes features to streamline the approval process for the design and installation of solar energy systems, track install progress and establish a standard process for ongoing service and warranty management.
•Sunnova App and Portal: Sunnova App and Portal are our mobile and web experiences for customers. The mobile and web apps enable customers to interact with the Sunnova Adaptive Home. Customers can view their energy systems' production history, manage devices, pay bills, manage account and contact information, generate referrals and contact our customer service team. Sunnova App is available for both Android and iOS.
•Sunnova SentientTM: Sunnova Sentient is our proprietary platform for energy awareness, intelligence and control. Sunnova Sentient powers Sunnova Adaptive solutions for homes, businesses and communities. We are incorporating Sunnova Sentient into our dealer and customer platforms to recommend customer-specific energy solutions and optimize energy products and services. Sunnova Sentient powers our advanced grid services and carbon reduction programs.
•Salesforce: Salesforce is our central repository and system componentsof record for all contracts, process documentation, customer account information, maintenance information and payment tracking for the life of the customer agreement. This single system allows for integrated and comprehensive reporting for the life cycle of the customer, from quote to end of the customer agreement term. Many of our other systems interact with the Salesforce platform.
•FinancialForce: FinancialForce is a cloud-based accounting system built on the Salesforce platform.
Customer Agreements
| | | | | | | | | | | | | | |
Sunnova Service | Agreement Type(s) | Sunnova Plan(s) | Description | Initial Term |
Sunnova Home Solar Service | Lease | Easy PlanTM equipment lease | Lease of solar energy system | 25 years |
LeasePlusTM New Home Solar Plan | 20 or 25 years |
Prepaid LeasePlusTM New Home Solar Plan |
Solar Benefits Agreement | 20 years |
PPA | Easy PlanTM PPA | Sale of solar energy production | 25 years |
Solar 20/20 PlanTM Agreement & Covenants | 20 years |
Fixed Rate Power Purchase Agreement |
Loan | Easy Own PlanTM equipment purchase | Sale of solar energy system | 10, 15 or 25 years |
Sunnova SunSafe® Solar + Battery Storage Service | Lease | Easy PlanTM equipment lease | Lease of solar energy system and energy storage system | 25 years |
Loan | Easy Own PlanTM equipment purchase | Sale of solar energy system and energy storage system | 10, 15 or 25 years |
Sunnova +SunSafe® Add-on Battery Service | Loan | Easy Own PlanTM equipment purchase | Sale of energy storage system | 10, 15 or 25 years |
Standalone Lease | Lease | Easy PlanTM equipment lease | Lease of energy storage system | 10 years |
Sunnova Loan | Loan | Easy Own PlanTM equipment and services | Financing of home improvement products and services (including partial or full roof replacement) independent of a solar energy system | 1 to 11 or 20 years |
Sunnova Protect Service | Service Plan | Sunnova Protect Service | Monitoring and service agreements for non-Sunnova solar energy systems | 1, 5, 10 or 20 years |
Sunnova Repair Service | Repair Service | Sunnova Repair Service | Repair service agreements for Sunnova and non-Sunnova solar energy systems | 1 year workmanship warranty |
Accessory Purchase and/or Roof Replacement | Loan | Easy Own PlanTM equipment purchase | Home improvement products and services (including partial or full roof replacement) when combined with either a Home Solar Service or Sunnova SunSafe® Solar + Battery offering | 10, 15 or 25 years |
We focus on growing a geographically diverse customer base with a strong credit profile. We perceive our recurring customer payments as high-quality assets given the broad and relatively inelastic demand for electricity and because our customers typically have high credit scores. As of December 31, 2023, our customers had, at the time of signing the customer agreement, an average FICO® score of 741. The purpose of our stringent credit approval policy is to ensure reliability of collecting payment over the duration of the customer agreements. As of December 31, 2023, approximately 0.9% of our customers were in default (over 120 days past due) under their agreements.
Our lease and PPA agreements typically include an opportunity for customers to renew for up to an additional 10 years via two five-year or one 10-year renewal options. The customer is obligated to make monthly payments to us, and we operate and maintain the solar energy system and energy storage system, if applicable, in good condition throughout the duration of the agreement. Under our lease agreements and PPAs, the customer's monthly payment or price per kilowatt hour ("kWh") is set based on a calculation that takes into account the life of the equipment and/or expected solar energy generation. The customer has an option of choosing a flat rate without an escalator or a lower initial rate with an escalator. As of December 31, 2023, approximately 40% of our lease agreements and PPAs contained a price escalator, ranging from 0.9% to 3.9% annually.
Our customer agreements are designed to offer the customer energy cost savings and bill stability relative to centralized utility prices, often resulting in an immediate reduction in the customer's overall utility bill, with little or no upfront costs. We provide our services related to solar energy systems and energy storage systems through long-term agreements in the following formats:
•Lease Agreements. Under the Easy Plan equipment lease, the customer leases a solar energy system and/or energy storage system from us at a fixed monthly rate that is typically subject to annual escalation. Under the LeasePlus New Home Solar Plan, the customer leases a solar energy system from us at a fixed monthly rate that is not subject to escalation throughout the term of the lease. Under the Prepaid LeasePlus New Home Solar Plan, the lease is prepaid upfront for the term of the lease. The Solar Benefits Agreement is offered to customers in certain states and like the LeasePlus New Home Solar Plan, the customer leases a solar energy system from us at a fixed monthly rate that is not subject to escalation throughout the term of the lease. We own, operate and maintain the solar energy system under our lease agreements. In most cases, lease agreements include a performance guarantee under which we will refund payments or credit the customer if the solar energy system fails to meet a guaranteed minimum level of power production for specified time periods.
•PPAs. We offer PPAs with variable monthly payments or balanced monthly payments. We own, operate and maintain the solar energy system under our PPAs.
•Easy Plan PPA with variable billing. The customer agrees to pay for all power generated by a solar energy system at a price per kWh that is generally lower than the local utility rate. The monthly payment will vary month to month based on the system's actual production. The monthly rate is generally subject to annual escalation.
•Easy Plan PPA with balanced billing. This is similar to the extentvariable billing option except the customer's payments are levelized over the course of a year based on an annual production estimate so the customer's payments are insulated from monthly fluctuations in energy production subject to a true-up at the end of such costs stabilize, declineperiod. The fixed monthly rate is typically subject to annual escalation. Should the annual production estimate exceed actual production, the customer will receive a bill credit at the end of the applicable period and we may decrease the estimated production (and corresponding monthly payments) for the subsequent year. Should actual production exceed the annual estimate, we may apply the overproduction to a subsequent year or increase the estimated annual production and corresponding monthly payments for the subsequent year. The estimated annual production will not increase more than 110% from the estimated annual production for the first year.
•Solar 20/20 Plan Agreement & Covenants. The customer agrees to pay for all power generated by a solar energy system at a slowerprice per kWh that is indexed to the local utility rate but is guaranteed to be at least 20% lower than the applicable utility's weighted-average rate that takes into account the customer's estimated production. The monthly payment will vary month to month based on the system's actual production and that month's indexed rate.
•Fixed Rate Power Purchase Agreement. This is similar to the variable billing option except the monthly rate is fixed throughout the term of the agreement and not subject to annual escalation.
•Loan Agreements. Pursuant to an Easy Own Plan equipment purchase agreement, the customer purchases the solar energy system from a dealer using financing provided by us. The customer repays the amount financed plus a finance charge through monthly payments for a term of 10, 15 or increase,25 years. We purchase the Easy Own Plan equipment purchase agreement from the dealer and agree to operate and maintain the solar energy system. We operate and maintain the solar energy system through our future growth ratenetwork of dealers. In most cases, Easy Own Plan equipment purchase agreements include a production guarantee under which we will refund payments or credit the customer if the solar energy system fails to meet a guaranteed minimum level of power production for specified time periods. Customers under our Easy Own Plan equipment purchase agreements have the option to prepay outstanding principal amounts, in part or in full, without penalty.
•Energy Storage Systems. Our Sunnova SunSafe program offers customers the option of a solar energy system integrated with a solar storage system. The customer can either choose an Easy Plan equipment lease or Easy Own Plan equipment purchase plan. These are similar to our Easy Plan equipment lease and Easy Own Plan equipment purchase for home solar services but include energy storage systems with the solar energy system. The customer may select a term of 10, 15 or 25 years for the Easy Own Plan equipment purchase. These agreements have a production guarantee for the solar energy system, similar to the home solar service Easy Plan equipment lease and Easy Own Plan equipment purchase plans, except in Guam, Saipan, Hawaii, Puerto Rico, Arkansas and Florida. Additionally, we offer
the Sunnova +SunSafe agreement to new and existing customers in several states and territories, under which the customer purchases an energy storage system from a dealer using financing provided by us. Under the Sunnova +SunSafe agreement, the customer repays the amount financed plus a finance charge through monthly payments for a term of 10, 15 or 25 years. In the fourth quarter of 2023, we launched our standalone lease program in several states to new and existing customers, under which the customer can lease an energy storage system with a fixed monthly payment for a term of 10 years.
•Sunnova Loan. We finance energy-related products and services and other sustainable home products sold by our dealers/contractors independent of a solar energy system. We offer customer financing for products including home security and monitoring, home automation, energy management and other smart home devices, upgraded roofing, modern HVAC, generators, water systems, water heaters, main panel upgrades and electric vehicle charging. We have established a niche amongst pure financing competitors by providing energy-related products and services and other sustainable home products with competitive rates and tenors. Where applicable, the financed products come with a standard manufacturer's warranty on equipment. Our Sunnova Loan offering gives our dealers and contractors the flexibility to offer additional products and services to customers outside of a traditional solar loan. Customers may select a pre-defined term ranging from 1 to 20 years.
•Sunnova Protect Services. For solar energy systems not owned or sold by us, our Sunnova Protect Services agreements provide customers maintenance and repairs as well as system monitoring and diagnostics. We provide two levels of service: (a) Basic, which is monitoring only and (b) Premium, which is monitoring plus repair and/or replacement of all equipment under a manufacturer's warranty. The customer may select the level of service and a term of 1, 5, 10 or 20 years. Prior to commencing coverage, we will run a diagnostic evaluation on the customer's solar energy system and will identify any underperforming equipment and estimate production. The customer may elect to repair underperforming equipment, on a time and materials basis, so that it may be negatively impacted. The declining costincluded in the coverage going forward. Should the customer decline to repair the underperforming equipment, it will not be covered under the Sunnova Protect Services agreement.
•Sunnova Repair Services. Through our Sunnova Repair Services, we provide repairs to solar energy systems and energy storage systems for out of warranty system repairs or to owners of solar energy system componentssystems and energy storage systems not owned or sold by us who do not have a service provider. Additionally, Sunnova Repair Services can address repairs not covered by warranties for both solar energy systems and energy storage systems owned or sold by us and solar energy systems and energy storage systems not owned or sold by us. The variety of repairs that Sunnova Repair Services may provide includes assessment and troubleshooting, warranty administration, warranty fulfillment, preventative maintenance and repair and replacement of equipment. Additionally, suppliers and financiers procure Sunnova Repair Services for repairs on their behalf.
As of December 31, 2023, approximately 24% of our customers had lease agreements, approximately 24% had PPAs, approximately 37% had loan agreements and approximately 12% had service plan agreements.
We have developed protocols and policies to qualify potential customers for different product and service arrangements. For customer agreements, we review the customer's credit application for compliance with our credit standards early in the origination process. Customer agreements that are accepted must comply with our underwriting standards, which emphasize the prospective customer's ability to pay and the raw materials necessaryvalue of the customer's estimated savings under the solar service agreement compared to manufacture themtraditional utility rates. The customer agreement exceptions are solar service agreements of prospective purchasers of homes subject to the Easy Plan equipment lease, LeasePlus New Home Solar Plan, the Prepaid LeasePlus New Home Solar Plan, the Solar 20/20 Plan Agreement & Covenants and the Fixed Rate Power Purchase Agreement. These customers are not subject to credit checks and these agreements are freely transferable.
We maintain reporting and controls in place to monitor the timeliness of customer payments. As of December 31, 2023, approximately 86% of all payments received pursuant to our customer agreements are collected via Automated Clearing House payments (i.e., the funds are deducted automatically on a monthly basis from the customer's bank account), approximately 8% are collected via automatic recurring credit card payments and approximately 6% are collected through non-recurring means. If a customer becomes delinquent on one or more monthly installment payments, we typically begin a collection process with respect to the customer.
In the event a customer elects to sell his or her home or business, the customer's agreement may be transferred to the prospective purchaser through prescribed reassignment procedures, subject to certain conditions related to the prospective purchaser's creditworthiness. To initiate the reassignment process, the customer must notify us of the pending sale, after which we will provide a copy of the agreement, including any amendments, to the prospective purchaser. The prospective purchaser
will then be required to complete a customer profile and a credit application. With the exception of customers originated through our homebuilder channel, each prospective purchaser's FICO® Score and Experian TEC (Telecommunications, Energy and Cable) Score will be evaluated on the same basis as a customer in a new origination and will be evaluated by our computer auto-decisioning system.
In the event a prospective purchaser does not meet our credit criteria or elects not to be subject to such credit inquiry, the current customer will be required to prepay the agreement in full or the prospective purchaser will be required to provide a security deposit in cash in accordance with such customer's agreement or our transfer policy prior to the approval of the reassignment. Each such security deposit is held in a separate account until the earlier of (a) the time at which the prospective purchaser satisfies our established credit criteria or (b) upon 12 consecutive months of on-time payments following the date of reassignment.
Monitoring and Maintenance Service and Warranties
Our customer agreements typically are accompanied by a warranty and/or monitoring and service agreement. The warranty and monitoring services provided with each type of customer agreement vary but can include operations and maintenance, equipment repairs, monitoring or site power controls and energy management of both supply and demand. Additionally, our Sunnova Protect program offers monitoring, service and facilitation of repairs across two tiers of service for solar energy systems owned by the home or business owner and installed by a third party.
For our customer agreements, we provide ongoing service during the entire term of the customer relationship, including monitoring, maintenance and warranty services of the solar energy system and energy storage system, if applicable. We have an operations and maintenance administration organization consisting of administration staff and a dedicated monitoring and production team that evaluates the solar energy systems' and energy storage systems' performance daily. When a performance or operation issue is detected via our monitoring system, we provide or arrange for troubleshooting or field services as necessary. We rely on our own personnel and our dealer network to complete the field services required to maintain the solar energy systems. After completion of the resolution steps, the maintenance administration organization verifies remotely the issue has been resolved and the system or energy service is performing as expected. For accessory loan agreements, we do not provide ongoing monitoring, warranties or similar services.
Additionally, customers under our agreements receive a key driverrange of warranties on the related solar energy systems and energy storage systems, including warranties for module production and against defects in workmanship and against component or materials breakdown. We also provide the customers with a warranty on roof penetrations of up to 10 years in compliance with applicable state, territorial or local law. Through our agreements with our dealers, the dealer is generally obligated, at its sole cost and expense, to correct defects in its installation work for a period of up to 10 years and provide a roof warranty on roof penetrations of 5 to 10 years. Furthermore, we provide a pass-through of the solar photovoltaic panel manufacturers' warranty coverage to our customers, generally of 25 years, and of the inverter and energy storage system manufacturers' warranty coverage, typically of 10 to 25 years. We typically exercise our rights under the manufacturer's equipment warranties or dealer installation warranties before incurring direct charges or costs. Many service expenses are borne by our dealers and not us directly because of the workmanship warranty provided by the dealers to us. Additionally, many component costs and, in many cases, in and out labor costs, are covered by manufacturer warranties.
Seasonality
The amount of electricity our solar energy systems produce is dependent in part on the amount of sunlight, or irradiation, where the assets are located. Because shorter daylight hours in winter months and poor weather conditions due to cloud cover, rain or snow results in less irradiation, the output of solar energy systems will vary depending on the season or the year. While we expect seasonal variability to occur, the geographic diversity in our assets helps to mitigate our aggregate seasonal variability.
Our Easy Plan PPAs with variable billing, Solar 20/20 Plan Agreements and Fixed Rate Power Purchase Agreements are subject to seasonality because we sell all the solar energy system's energy output to the customer at either a fixed price per kWh or indexed, variable rate per kWh. Our Easy Plan PPAs with balanced billing are not subject to seasonality (from a cash flow perspective or the customer's perspective) within a given year because the customer's payments are levelized on an annualized basis so we insulate the customer from monthly fluctuations in production. In addition, energy production true-ups and production estimate adjustments for Easy Plan PPAs with balanced billing are calculated over an entire year. However, our Easy Plan PPAs with balanced billing are subject to seasonality from a revenue recognition perspective because, similar to the Easy Plan PPAs with variable billing, we sell all the solar energy system's energy output to the customer. Our lease agreements are not subject to seasonality within a given year because we lease the solar energy system to the customer at a fixed monthly
rate and the reference period for any production guarantee payments is a full year. Finally, our loan agreements are not subject to seasonality within a given year because the monthly installment payments for the financing of the customers' purchase of the solar energy system are fixed and the reference period for any production guarantee is a full year.
In addition, weather may impact our dealers' ability to install solar energy systems and energy storage systems. For example, the ability to install solar energy systems and energy storage systems during the winter months in the priceNortheastern U.S. is limited. This can impact the timing of when solar energy systems and energy storage systems can be installed and when we can acquire and begin to generate revenue from solar energy systems and energy storage systems.
Intellectual Property
We rely on intellectual property laws, primarily a combination of copyright and trade secret laws in the U.S., as well as license agreements and other contractual provisions, to protect our proprietary technology. We also rely on several registered and unregistered trademarks to protect our brand. In addition, we generally require our employees and independent contractors involved in the development of intellectual property on our behalf to enter into agreements to limit access to, and disclosure and use of, our confidential information and proprietary technology. We also continue to expand our technological capabilities through licensing technology and intellectual property from third parties.
Government Regulations
While we are not regulated as extensively as a public utility where our business is conducted in the U.S., we are subject to various national, state, territorial and other local regulatory regimes. For example, in California and New York, we are subject to regulations concerning marketing and contracting promulgated by state public utility commissions. In some states, such as Arizona and Florida, we are limited to offering only a lease agreement or a loan agreement to homeowners and are prohibited from offering a PPA, which is deemed a retail sale of electricity in such states and can only be made by a regulated utility. In Puerto Rico, we are subject to regulation as an electric power company by the PREB and are required to comply with certain filing, certification, reporting and annual fee requirements. Regulation by the PREB as an electric power company does not currently subject us to centralized utility-like regulation or require the PREB's approval of charges to customers.
To operate the solar energy systems and energy storage systems, our dealers work with customers to obtain interconnection permission from the applicable local electric distribution utility. In many states and territories, by statute, regulations or administrative order, there are standardized procedures for interconnecting distributed solar energy systems and related energy storage systems to the electric utility's local distribution system. In some states, such as New Jersey and Massachusetts, certain utilities, such as municipal utilities or electric cooperatives, are exempt from some interconnection requirements. Provided that the system and energy, if applicable, qualify for the standardized procedures based upon size, use of industry-standard components, location on a suitable local network and other applicable requirements, utilities in such states or territories are required to interconnect qualifying solar energy systems and energy storage systems on an expedited basis relative to non-qualifying systems. Expedited procedures, when available, streamline the installation and interconnection process for solar energy systems and energy storage systems to begin operating. In the U.S. states and territories in which we operate, our dealers typically obtain interconnection permission on behalf of us and our customers using standardized interconnection procedures.
In certain states, independent solar energy producers who enter into lease agreements, PPAs or loan agreements with home and business owners for solar energy systems are required to make certain disclosures to the home or business owner regarding the solar energy system and the terms of the agreement and/or record a notice against the title to the real property on which the electricity is generated and against the title to any adjacent real property on which the electricity will be used. The notice does not constitute a title defect, lien or encumbrance against the real property.
Our operations, as well as the operation of our dealers and contractors, are subject to stringent and complex federal, state, territorial and local laws, including regulations governing the occupational health and safety of employees, regulations of wages and benefits and environmental protection. For example, we and our dealers/contractors may be subject to the regulations of the U.S. Department of Labor's Occupational Safety and Health Administration ("OSHA") and Wage and Hour Division, the U.S. Department of Transportation ("DOT"), the U.S. Environmental Protection Agency ("EPA") and comparable state and territorial entities that protect and regulate employee health and safety and the environment. These include, for example, regulations regarding the disposal of solid and hazardous wastes from the solar energy systems we own and the prices charged for electricitywages paid to our dealers and customer adoption of solar energy. Solar energy system component and raw material prices may not continue to decline at the same rate as they have over the past several years or at all.contractors. In addition, growthenvironmental laws can result in the imposition of liability in connection with end-of-life system disposal, such as in connection with disposal and recycling of batteries.
We and our dealers/contractors are also subject to laws and regulations related to interactions with consumers, including those pertaining to sales and trade practices, privacy and data security, equal protection, consumer financial and credit
transactions, consumer collections, mortgages and re-financings, home or business improvements, trade and professional licensing, warranties and various means of customer solicitation, as well as specific regulations pertaining to solar industryinstallations.
For a discussion of these and the resulting increase in demand for solar energy system components and the raw materials necessary to manufacture them may also put upward pressure on prices. An increase of solar energy system components and raw materials prices could slow our growth and cause our business and results of operations to suffer. Further, the cost of solar energy system components and raw materials has increased and could increase in the future due to tariff penalties, duties, the loss of or changes in economic governmental incentives or other factors. Seeregulatory requirements, see "Risk Factors—Increases in the cost of our solar energy systems dueRisks Related to tariffs imposed by the U.S. government could have a material adverse effect on our business, financial condition and results of operationsRegulations".
We do not directly control certain costs related to our business, which could put us at a disadvantage relative to companies who have a vertically integrated business model.Government Incentives
We do notIn September 2023, we entered into a loan guarantee arrangement with the U.S. Department of Energy (the "DOE") under Title XVII of the Energy Policy Act of 2005 ("Title XVII") pursuant to which the DOE has agreed, subject to certain conditions, to guarantee up to $3.0 billion of aggregate obligations in a series of intercompany loans between our affiliates made in connection with limited recourse financings, such as the Sunnova Hestia Loan Program. Recipients of Title XVII loan guarantees may be subject to compliance with various additional federal law and contractual requirements, such as the Davis-Bacon Act and the False Claims Act, as well as the statutory and regulatory requirements of Title XVII. In November 2023, we have direct control overbeen conditionally selected by the costsDOE Grid Deployment Office as part of a $440 million investment from the Puerto Rico Energy Resilience Fund to install rooftop solar energy systems and energy storage systems in vulnerable single-family households across Puerto Rico.
U.S. federal, state, territorial and local governments have established various incentives and financial mechanisms to reduce the cost of solar energy and to accelerate the adoption of solar energy. These incentives come in various forms, including rebates, tax credits and other financial incentives such as payments for renewable energy credits associated with renewable energy generation, exclusion of solar energy systems and energy storage systems from property tax assessments, system performance payments, accelerated depreciation and net energy metering, or net metering, programs. These incentives make solar energy system and energy storage system ownership more attractive to some home and business owners and enable us to charge our suppliers charge for the components ofcustomers lower prices to purchase energy generated by our solar energy systems and energy storage systems or the costs to our dealers of installing and marketing such products. This may lead us to charge higher prices forlease or purchase our solar energy systems and energy storage systems than our competitors with a vertically integrated business model, causing usthey would normally be expected to be unable to maintain or increase market share.
We may be unsuccessfulpay for utility-provided energy. These incentives also help catalyze private sector investments in introducing new servicesolar energy and product offerings,efficiency measures, including our distributedthe installation and operation of residential and commercial solar energy storage servicessystems and energy storage management systems.
We intendNet metering is one of several key policies that have enabled the growth of distributed solar in the U.S., providing significant value to introduce new offeringscertain customers with solar energy systems for the electricity generated by their systems but not directly consumed on site. Net metering allows a customer to pay the local electric utility only for power usage net of servicesexcess production from the customer's solar energy system. Customers receive a credit for the energy an interconnected solar energy system generates in excess of that needed by the home or business, which is provided to the electrical grid. The credit offsets energy usage incurred by the customer at times when the customer requires more electricity than is generated by the solar energy system. In many markets, this credit is equal to the residential retail rate for electricity and productsin other markets the rate is less than the retail rate and may be based, for example, in whole or in part on the centralized electric utility's "avoided cost" for electricity that it would have had to both newgenerate or purchase at wholesale to meet the customer's demand. Furthermore, when coupled with a time of use rate program in certain electric utility territories, a home or business owner may offset usage billed at lower rates with net metering credits provided at a higher rate.
For these reasons, net metering credits incentivize consumers to use distributed solar in certain jurisdictions, including some of those in which we operate. In some electric utility territories, any excess credits are rolled over to the next billing period and existingmay also be cashed out later at a rate lower than the retail rate. Most states, the District of Columbia, Puerto Rico and Guam have adopted some form of net metering by statute, regulation, administrative order or a combination thereof, although some of these jurisdictions provide for a credit at less than the retail rate. In some jurisdictions, centralized electric utilities have also adopted net metering on a voluntary basis. Some of the states in which we operate, including New Jersey, Maryland, Massachusetts, Rhode Island, Delaware, Illinois and Hawaii, have in place policies that limit or permit utilities to limit the amount of total electricity generated through net metering and/or solar energy systems, and some of these states, as well as other states or territories, including Pennsylvania, Nevada, New Mexico and Guam, have policies that limit or place conditions on the size of individual solar energy systems.
Net metering and other incentive programs are subject to legislative and regulatory review in many states and territories in which we operate, and the availability and value of these programs could be limited, reduced or phased out. Some states such as Arizona, Nevada, California and Kentucky have reduced their net metering credits. Further reviews by these states and others are anticipated and the subsequent amount of net metering credits will continue to be assessed over the next few years in states that have net metering policies. For example, net metering rates in Colorado, New Jersey, Puerto Rico and South Carolina are up for consideration currently or over the next few years.
In December 2022, the California Public Utility Commission (the "CPUC") approved a successor program (Net Energy Metering 3.0 or "NEM 3.0")to its current net metering program that reduces the value of net metering credits from the retail rate to an avoided cost rate for customers that will have solar energy systems installed on their homes and businesses over the next five years. Customers will also be placed on an electrification rate. Residential customers located in the territories of two of the investor-owned utilities will also receive small adders to the avoided cost rate, while the residential customers in the future, including home automation productsterritory of the third investor-owned utility, as well as new homes and additional home technology solutions. Wecommercial customers in all three of the service territories, do not receive any adders. In addition, it may only be unsuccessfulpossible for customers to realize savings from installing solar energy systems compared to the utility retail rate by adding storage to their solar energy systems or undersizing them so exports are limited. The decision went into effect in significantly broadening our customer base through the addition of these services and products within our current markets or in new markets we may enter. Additionally, we may not be successful in generating substantial revenue from any additional services and products we may introduce in the future and may decline to initiate new product and service offerings.April 2023.
New York is working on developing an alternative to net metering through a Value of Distributed Energy Resources credit that would allow certain customers to receive direct monetary compensation as opposed to a net metering credit. This program was expected to be implemented in 2021 but has been delayed due to not enough utilities having deployed smart meters that would enable an accurate valuation of distributed energy production. New York is keeping net metering in place with a nominal customer benefit charge added for solar customers who have solar energy systems installed after January 1, 2022. As a result of the Definitive Restructuring Support Agreement ("DRSA") between the PREPA and its creditors submitted in May 2019, which is currently pending before the U.S. District Court for the District of Puerto Rico, net metering customers in Puerto Rico may be impacted by transition charges and other requirements. Several legislators publicly oppose the DRSA and negotiations on the DRSA continued throughout 2023.
In September 2020, the Federal Energy Regulatory Commission ("FERC") issued Order 2222 directing regional transmission operators ("RTO") and independent system operators ("ISO") to remove barriers to the participation of distributed energy resources ("DERs") in wholesale electricity markets on an aggregated basis. While the FERC's order is subject to challenge as well as further proceedings concerning the implementation of the order's directives in each of the RTOs/ISOs, Order 2222 provides a framework that once implemented will allow for aggregated DERs to be compensated through the wholesale market for the capacity, energy and ancillary services they provide.
In late 2020, we began offering our lease storage customers participation in the ConnectedSolutions demand response program through Eversource and National Grid utilities in Massachusetts. We face competitionexpanded these offerings for our Connecticut, Rhode Island and New Hampshire customers in early 2021, including loan storage customers. Our storage customers in California have the option to participate in the demand response market to help California manage its electricity demand, where we manage the battery storage system in response to price signals in the energy market for customers served by Pacific Gas and Electric Company, San Diego Gas & Electric utilities and Southern California Edison to provide demand response and resource adequacy. In late 2023, we expanded our Sunnova Sentient Virtual Power Plant Platform to Puerto Rico to participate in LUMA Energy, LLC's battery energy sharing program. Further, we will seek to participate in market specific opportunities and negotiate bilateral agreements, where appropriate, to enroll systems and customers in energy management and demand response programs.
Many states and territories have adopted renewable portfolio energy production requirements. The majority of states, the District of Columbia and Puerto Rico have adopted a renewable portfolio standard ("RPS") that requires regulated electric utilities to generate or procure a specified percentage of total electricity delivered to customers in the state or territory from eligible renewable energy sources, such as solar energy systems, by a series of specified dates. In addition, several other states have set voluntary goals for renewable generation.
Roughly one-third of states with RPS policies require a minimum portion of the RPS be met by electric generation from solar energy systems, with substantial penalties for non-compliance. To demonstrate compliance with such RPS mandates, electric generation providers must submit SRECs to the applicable authority. One SREC is produced by one megawatt-hour of energy generated by an eligible solar energy system. The specified amount of energy is dependent on system size and when the solar energy system receives a "permission to operate" order. Electric generation providers can either generate their own SRECs through solar energy systems they own or they can purchase SRECs owned by other parties.
SRECs are a distinct product, separate from the electricity generated by solar energy systems. We and our customers apply for and receive SRECs in certain jurisdictions for power generated by the solar energy systems we own. As a distinct product from the electricity generated by solar energy systems, SRECs represent a separate source of cash flow from the sale of electricity. SRECs can be sold with or without the actual electricity associated with the renewable-based generation. Solar energy system owners are typically able to sell SRECs to electric generation providers, such as electric utilities, or in the SREC commodity market. We have hedged a portion of our expected SREC production under fixed price forward contracts. The forward contracts require us to physically deliver the SRECs upon settlement.
Several states have an energy storage mandate or policies designed to encourage the adoption of storage. For example, California offers a cash rebate for storage installations through the Self Generation Incentive Program and Massachusetts and New York offer performance-based financial incentives for storage. Storage installations also are supported in certain states by state public utility commission policies that require utilities to consider alternatives such as storage before they can build new generation. In February 2018, the FERC issued Order 841 directing RTOs and ISOs to remove barriers to the participation of storage in wholesale electricity markets and to establish rules to help ensure storage resources are compensated for the services they provide. An appeal of Order 841 filed by utility trade associations and other parties challenging the extent of the FERC's jurisdiction over storage resources connected to distribution systems was rejected by the U.S. Court of Appeals for the D.C. Circuit in July 2020.
Some state and territorial governments, centralized electric utilities, retail electric providers, independent power producersmunicipal utilities and renewableco-operative utilities offer a cash rebate or other payment incentive for the installation and operation of a solar energy companies.system or energy storage system or to customers undertaking other energy efficiency measures. Capital cost or "up-front" rebates provide funds to solar customers or developers or solar energy system owners, such as us, based on the cost, size or expected production of a customer's solar energy system. Performance-based incentives and tariff-based incentives provide payments to solar customers or a solar energy system owner based on the energy generated by the solar energy system during a pre-determined period. These rebates and payment incentives, when available, improve the economics of distributed solar to both us and our customers.
The economics of purchasing a solar energy system and energy storage system are also improved by eligibility for accelerated depreciation, which allows for the depreciation of equipment according to an accelerated schedule set forth by the IRS. This accelerated schedule allows a taxpayer to recognize the depreciation of tangible solar property on a five-year basis even though the useful life of such property is greater than five years. The acceleration of depreciation creates a valuable tax benefit that increases the return on investment from a solar energy system and energy storage system. We benefit from accelerated depreciation on the solar energy systems and energy storage systems we own.
The federal government currently provides business investment tax credits under Section 48(a) (the "Section 48(a) ITC") and, for projects that begin construction after December 31, 2024, under Section 48E (the "Section 48E ITC") as well as residential energy credits under Section 25D (the "Section 25D Credit") of the U.S. Internal Revenue Code of 1986, as amended (the "Code"). In August 2022, the Inflation Reduction Act of 2022 (the "IRA") was signed into law. Among other things, the IRA expanded and extended the tax credits available to solar energy projects in an effort to achieve President Biden's non-binding target of net-zero emissions by 2050. The IRA extended the investment tax credit for eligible solar energy projects through at least 2033 and, depending on the location of a particular project, its size, its ability to satisfy certain labor and domestic content requirements and the category of consumers it serves, the investment tax credit percentage can range between 6% and 70%. For projects that begin construction after December 31, 2024, the Section 48(a) ITC will be replaced with the Section 48E ITC, a new clean energy investment tax credit, and the Section 48E ITC percentage will be the same as the percentage for the Section 48(a) ITC and subject to the same requirements to benefit from the full 30%. Following passage of the IRA, retroactive to the beginning of 2022, we are able to claim the Section 48(a) ITC or the Section 48E ITC, as applicable, for energy storage systems whether attached to a solar energy system or stand-alone.
The IRA also extended the Section 25D Credit, which allows qualifying homeowners who purchase a residential solar energy system and/or energy storage system to apply up to 30% of the cost of installing those systems as a credit against their U.S. federal income taxes, thereby returning a material portion of the purchase price of the residential solar energy system and/or energy storage system to homeowners. Under the terms of the current extension, the Section 25D Credit will remain at 30% through the end of 2032, reduce to 26% for 2033, reduce to 22% for 2034 and further reduce to 0% after the end of 2034, unless it is extended before that time.
Certain states and territories in which we operate offer a personal and/or corporate investment or production tax credit for solar energy. Further, most of the states and local jurisdictions have established sales and/or property tax incentives for renewable energy industries are both highly competitivesystems that include exemptions, exclusions, abatements and continually evolving as participants strivecredits. For a discussion of these and other governmental incentives, see "Risk Factors—Risks Related to distinguish themselves within their markets and compete with large centralized electric utilities. Regulations".
Competition
We believe our primary competitors are the centralized electric utilities that supply electricity to our potential customers. We compete with these centralized electric utilities primarily based on price (cents per kWh), predictability of future prices (by providing pre-determined annual price escalations)escalations, where applicable), reliability and the ease by which customers can switch to electricity generated by our solar energy systems. We may alsobelieve we compete based on other value-added benefits, such as reliability and carbon-friendly power. If we cannot offer compelling value to our customersfavorably with centralized electric utilities based on these factors in the states and territories where our business may not grow.customer agreements are offered.
Centralized electric utilities generally have substantially greater financial, technical, operational and other resources than we do. As a result, these competitors may be able to devote more resources to the research, development, promotion and sale of their products or services or respond more quickly to evolving industry standards and changes in market conditions than we can. Centralized electric utilities could also offer other value-added products or services that could help them to compete with us even if the cost of electricity they offer is higher than ours. In addition, a majority of utilities' sources of electricity is non-solar, which may allow utilities to sell electricity more cheaply than electricity generated by our solar energy systems. Centralized electric utilities could also offer customers the option of purchasing electricity obtained from renewable energy resources, including solar, which would compete with our offerings.
We also compete with retail electric providers and independent power producers that are not regulated like centralized electric utilities but which have access to the centralized utilities' electricity transmission and distribution infrastructure pursuant to state, territorial and local pro-competitionpro-competitive and consumer choice policies. These retail electric providers and independent power producers are able to offer customers electricity supply-only solutions that are competitive with our solar energy system options on both price and usage of renewable energy technology while avoiding the long-term agreements and physical installations our current business model requires. This may limit our ability to acquire new customers, particularly those who wish to avoid long-term agreements or have an aesthetic or other objection to putting solar panels on their roofs.
We alsoFurthermore, we compete with solar companies with vertically integrated business models, including sales, financing, engineering, manufacturing, installation, maintenancesuch as Sunrun Inc. and monitoring services. If the integrated approach of our competitors is successful, it may limit our ability to originate solar energy systems. Many of our vertically integrated competitors are larger than we are. As a result, these competitors may be able to devote more resources to the research, development, promotion and sale of their products or services or respond more quickly to evolving industry standards and changes in market conditions than we can. Solar companies with vertically integrated business models could also offer other value-added products or services that could help them to compete with us. Larger competitors may also be able to access financing at a lower cost of capital than we are able to obtain.
SunPower Corporation. In addition, we compete with other solar companies who sell or finance products directly to consumers, inclusive of programs like Property-Assessed Clean Energy, financing programs established by local governments.such as Goodleap, LLC and Mosaic, Inc. For example, we face competition from solar installation businesses that seek financing from external parties or utilize competitive loan products or state and local programs.
We In the future, we may also compete with solar companies withthat have business models similar to our own, some of which are marketed to potential customers by our dealers. Somedealers and contractors. We compete with these companies based on the competitiveness of these competitors specialize in the distributed residential solar energy marketproducts, the overall customer relationship and some may provide energy at lower costs thanthe commissions we do. Someare willing to pay dealers and contractors for the origination of our competitors offer or may offer similar services and products as we do, such as leases, PPAs and direct outright sales of and consumer loan products for solar energy systems. Many of our competitors also have significant brand name recognition and have extensive knowledge of our target markets.new customers.
We also compete with solar companies that offer community solar products and utility companies that provide renewable power purchase programs. Some customers might choose to subscribe to a community solar project or renewable subscriber programs instead of installing a solar energy system on their home, which could affect our sales. Additionally, some utility companies (and some utility-like entities, such as community choice aggregators in California) have generation portfolios that are increasingly renewable in nature. In California, for example, due to recent legislation, utility companies and community choice aggregators in that state are required to have generation portfolios comprised of 60% renewable energy by 2030 and state regulators are planning for utility companies and community choice aggregators to sell 100% greenhouse gas free electricity to retail customers by 2045. As utility companies offer increasingly renewable portfolios to retail customers, those customers might be less inclined to install a solar energy system at their home, which could adversely affect our growth.
We have historically provided our services only to residential customers and do not currently intend to expand to commercial, industrial or governmental customers. We compete with companies who sell solar energy systems and services in the commercial, industrial and government markets, in addition to the residential market, in the U.S. and foreign markets. There is intense competition in the residential solar energy sector in the markets in which we operate. As new entrants continue to enter into these markets, we may be unable to grow or maintain our operations and we may be unable to compete with companies that earn revenue in both the residential market and non-residential markets. Further, because we provide our services exclusively to residential customers, we have a less diverse market presence and are more exposed to potential adverse changes in the residential market than our competitors that sell solar energy systems and services in the commercial, industrial, government and utility markets.
As the solar industry grows and evolves, we will also face new competitors and technologies who are not currently in the market. Our industry is characterized by low technological barriers to entry and well-capitalized companies, including utilities and integrated energy companies, could choose to enter the market and compete with us. Our failure to adapt to changing market conditions and to compete successfully with existing or new competitors will limit our growth and will have a material adverse effect on our business, financial condition and results of operations.
Developments in technology or improvements in distributed solar energy generation and related technologies or components may materially adversely affect demand for our offerings.
Significant developments in technology, such as advances in distributed solar power generation, energy storage solutions such as batteries, energy storage management systems, the widespread use or adoption of fuel cells for residential or commercial properties or improvements in other forms of distributed or centralized power production may materially and adversely affect demand for our offerings and otherwise affect our business. Future technological advancements may result in reduced prices to consumers or more efficient solar energy systems than those available today, either of which may result in current customer dissatisfaction. We may not be able to adopt these new technologies as quickly as our competitors or on a cost-effective basis.
Due to the length of our solar service agreements, the solar energy system deployed on a customer's residence may be outdated prior to the expiration of the term of the related solar service agreement, reducing the likelihood of renewal of our solar service agreement at the end of the applicable term and possibly increasing the occurrence of customers seeking to terminate or cancel their solar service agreements or defaults. If current customers become dissatisfied with the price they pay for their solar energy system under our solar service agreements relative to prices that may be available in the future or if customers become dissatisfied by the output generated by their solar energy systems relative to future solar energy system production capabilities, or both, this may lead to customers seeking to terminate or cancel their solar service agreements or higher rates of customer default and have an adverse effect on our business, financial condition and results of operations. Additionally, recent technological advancements may impact our business in ways we do not currently anticipate. Any failure by us to adopt or have access to new or enhanced technologies or processes, or to react to changes in existing technologies, could result in product obsolescence or the loss of competitiveness of and decreased consumer interest in our solar energy services, which could have a material adverse effect on our business, financial condition and results of operations.Suppliers
The value of our solar energy systems at the end of the associated term of the lease or PPA may be lower than projected, which may adversely affect our financial performance and valuation.
We depreciate the costs of our solar energy systems over their estimated useful life of 35 years. At the end of the initial term (typically 10, 15 or 25 years) of the lease or PPA, customers may choose to purchase their solar energy systems, ask us to remove the solar energy system at our cost or renew their lease or PPA. Homeowners may choose to not renew or purchase for any reason, such as pricing, decreased energy consumption, relocation of residence, switching to a competitor product or technological obsolescence of the solar energy system. We are also contractually obligated to remove, store and reinstall the solar energy systems, typically for a nominal fee, if customers need to replace or repair their roofs. Furthermore, it is difficult to predict how future environmental regulations may affect the costs associated with the removal, disposal or recycling of our solar energy systems. If the residual valuemajor components of the solar energy systems is less than we expect atinclude (a) solar photovoltaic panels that turn sunlight into direct current ("DC") electricity, (b) inverters that convert solar-generated DC electricity into alternating current ("AC") electricity, the endform of energy used by most standard household appliances, (c) racking systems that attach the customer contract, after giving effectsolar photovoltaic panels to any associated removalthe roof or ground, (d) a remote monitoring system that measures and redeployment costs, wemonitors all energy generated by the solar energy system and provides alerts about system performance and (e) in some cases, an energy storage system that stores excess energy generated by the photovoltaic panels to supplement energy supply during hours when energy consumption exceeds energy produced by the photovoltaic panels or in the event of a grid outage. The solar energy system may also be requiredconnected to accelerate the recognition of allelectrical grid or some of the remaining unamortized costs. This could materially impair our future results of operations.other supplemental energy sources, such as electric vehicle chargers, smart load controllers or panels and generators, with additional wiring and electrical hardware.
We andrequire our dealers dependto choose all major components of the solar energy system or energy storage system from a pre-approved list of manufacturers and models. By allowing dealers to choose from several manufacturers and models without direct supplier obligations, we have greater flexibility to satisfy customer demand, ensure competitive pricing and adequate supply of components and reduce the concentration of warranty risks. We have entered into master contractual arrangements with each vendor on a limited numberour pre-approved list of vendors that defines the general terms and conditions of our purchases and those of our dealers, including warranties, product specifications, indemnities, delivery and certain other terms. Our dealers typically purchase solar panels and inverters on an as-needed basis from our pre-approved suppliers at then-prevailing prices pursuant to purchase orders having the benefit of our master contractual arrangements. At times, we will also procure equipment directly and sell it to our dealers.
For installations of solar energy systemsystems on new homes or businesses, we negotiate pricing directly with the manufacturers for all components and technologies to adequately meet demand for ourused in the solar energy systems. DueBased upon our production planning model, we position and deliver the material on a just-in-time basis to our dealers to meet the limited number of suppliers in our industry, the acquisition of any of these suppliers by a competitor or any shortage, delay, price change, imposition of tariffs or duties or other limitation in our or our dealers' ability to obtain components or technologies we use could result in sales and installation delays, cancelations and loss of customers.builder requirements.
We relyevaluate and qualify our manufacturers and their product offerings based on our dealers to install solar energy systems and energy storage systems, eachtotal cost of whom has direct supplier arrangements. Our dealers purchase solar panels, inverters, energy storage systemsownership, reliability, warranty coverage, credit quality and other system components and instruments from a limited numberfactors. All equipment must be listed on the California Energy Commission's SB1 List of suppliers,Eligible Equipment. All approved by us, making us susceptible to quality issues, shortages and price changes. For the year ended December 31, 2020, Hanwha Q-Cells and Longi Solar supplied approximately 49% and 20%, respectively, of our solar photovoltaic panels installedmust have a minimum 25-year power warranty and no other supplier represented more than 10% of our25-year workmanship warranty. We also require approved solar photovoltaic panels installed. For the year ended December 31, 2019, Hanwha Q-Cells and Yingli Green Energy supplied approximately 50% and 17%, respectively,to undergo extended reliability testing as an indication of a 25-year or greater lifetime. Beginning in April 2016, we required all our solar photovoltaic panels installed andmanufacturers carry a 25-year warranty, or offer a warranty extension to 25 years, on all product offerings to be eligible for inclusion on our approved vendor list. Prior to April 2016, we sourced inverter manufacturers offering a warranty of no other supplier represented moreless than 10% of our solar photovoltaic panels installed. Yingli Green Energy is currently undergoing a restructuring of its debt. There is no guarantee Yingli Green Energy will honor its existing warranty coverage or will continue10 years. All approved racking systems are required to supply us with solar photovoltaic panels in the future following the completion of this restructuring. For the year ended December 31, 2020, Enphase Energy, Inc. and SolarEdge Technologies Inc. accounted for approximately 73% and 27%, respectively, of the inverters used in ourbe solar energy system installations. ForFire Class Rated "A" with a Type 1 module per California Fire requirements. Additionally, the year ended December 31, 2019, Enphase Energy, Inc.racking system must have a Professional Engineers stamp as proof of structural analysis and SolarEdge Technologies Inc. accounted for approximately 58%wind speed certification and 42%, respectively,the racking system must be certified as conforming to the integrated grounding and bonding requirements of UL Subject 2703. All replacement parts and components must meet or exceed the same standards as those of the inverters used in our solar energy system installations. For the year ended December 31, 2020, Tesla, Inc. and Enphase Energy, Inc. accounted for approximately 82% and 18%, respectively, of our energy storage system purchases. For the year ended December 31, 2019, Tesla, Inc.
accounted for 100% of our energy storage system purchases. If one or more of the suppliers we and our dealers rely upon to meet anticipated demand ceases or reduces production due to its financial condition, acquisition by a competitor or otherwise, is unable to increase production as industry demand increases or is otherwise unable to allocate sufficient production to us and our dealers, it may be difficult to quickly identify alternative suppliers or to qualify alternative products on commercially reasonable terms and our ability and the ability of our dealers to satisfy this demand may be adversely affected. There are a limited number of suppliers of solar energy system components, instruments and technologies. While we believe there are other sources of supply for these products available, a dealer's need to transition to a new supplier may result in additional costs and delays in originating solar service agreements and deploying our related solar energy systems or energy storage systems, which in turn may result in additional costs and delays in our acquisition of such solar service agreements and related solar energy systems and energy storage systems. These issues could have a material adverse effect on our business, financial condition and results of operations.original installation.
There have also been periods of industry-wide shortages of key components and instruments, including batteries and inverters, in times of rapid industry growth. The manufacturing infrastructure for some of these components has a long lead-time, requires significant capital investment and relies onIn September 2018, the continued availability of key commodity materials, potentially resulting in an inability to meet demand for these components. The solar industry is currently experiencing rapid growth and, as a result, shortages of key components or instruments, including solar panels, may be more likely to occur, which in turn may result in price increases for such components. Even if industry-wide shortages do not occur, suppliers may decide to allocate key components or instruments with high demand or insufficient production capacity to more profitable customers, customers with long-term supply agreements or customers other than us, our dealers or other third parties from whom we may originate solar energy systems and our ability to originate solar service agreements and related solar energy systems and energy storage systems may be reduced as a result.
Our supply chain and operations (or those of our dealers) could be subject to natural disasters and other events beyond our control, such as earthquakes, wildfires, flooding, hurricanes, tsunamis, typhoons, volcanic eruptions, droughts, tornadoes, power outages or other natural disasters, the effects of climate change and related extreme weather, public health issues and pandemics, war, terrorism, government restrictions or limitations on trade, and geo-political unrest and uncertainties. Human rights and forced labor issues in foreign countries and the U.S. government's response to them could disrupt our supply chain and our operations could be adversely impacted. For example, proposed legislation in both the U.S. House of Representatives and the Senate seeks to ban the import of all goods from China's Xinjiang Uygur autonomous region, a major producer of polysilicon used by manufacturers of solar panels, over allegations of widespread, state-backed forced labor in the region. Additionally, if the impactsOffice of the coronavirus outbreak, including the accompanying travel restrictionsUnited States Trade Representative ("USTR") determined to modify its prior actions in its investigation into certain acts, policies and business closures, continue for an extended period of time or worsen, the supply and pricing of our inverters and other goods and therefore the ability of our dealers to install new solar energy systems could be adversely affected. The extentpractices of the impactgovernment of the coronavirus on our businessChina related to technology transfer, intellectual property and operations will depend on, among other factors, the duration and severity of the outbreak, travel restrictions and business closures imposed in China or other countries, the ability of our suppliersinnovation pursuant to increase their production of goods in jurisdictions other than China, our ability to contract for supply from other sources on acceptable terms and the willingness of our lenders to permit us to switch suppliers.
Increases in the cost of our solar energy systems due to tariffs imposed by the U.S. government could have a material adverse effect on our business, financial condition and results of operations.
China is a major producer of solar cells and other solar products. Certain solar cells, modules, laminates and panels from China are subject to various U.S. antidumping and countervailing duty rates, depending on the exporter supplying the product, imposed by the U.S. government as a result of determinations that the U.S. was materially injured as a result of such imports being sold at less than fair value and subsidized by the Chinese government. While historically our dealers have purchased a number of these products from manufacturers in China, currently such purchases are immaterial and sourced from manufacturers in other jurisdictions. If these alternative sources are no longer available on competitive terms in the future, we and our dealers may seek to purchase these products from manufacturers in China. In addition, tariffs on solar cells, modules and inverters in China may put upwards pressure on prices of these products in other jurisdictions from which our dealers currently purchase equipment, which could reduce our ability to offer competitive pricing to potential customers.
The antidumping and countervailing duties discussed above are subject to annual review and may be increased or decreased. Furthermore, under Section 301 of the Trade Act of 1974 the U.S. Trade Representative imposed tariffsby imposing an additional 10% duty on $200 billion worth of importsproducts from China, including inverters and certain AC modules and non-lithium-ion batteries, effective September 24, 2018.inverters. In May 2019, the tariffs were increased from 10% to 25% and may be raised by the U.S. Trade RepresentativeUSTR in the future. SinceIf inverter production is not shifted to other countries before any tariff rate increase on these tariffs impactproducts, the purchase price of inverters could increase. However, the cost of solar photovoltaic panels and inverters generally do not comprise a meaningful portion of our operating expenses. In addition, many of the solar products, these tariffs raisephotovoltaic panel and inverter manufacturers on our approved vendor list are from countries other than China, including Canada, the U.S., Mexico, Vietnam and Malaysia. See "Risk Factors—Risks Related to the Solar Industry—Increases in the cost associated with purchasing these solar products from China and reduce the competitive pressure on providersor reduction in supply of solar cells not subjectenergy system and energy storage system components due to these tariffs.tariffs or trade restrictions imposed by the U.S. government could
In addition, in January 2018, the President of the U.S. announced, effective February 7, 2018, the imposition of a global 30% ad valorem tariff, with certain qualifications and exceptions, on certain imported solar cells and modules, which steps down by five percentage points each year and then phases out in 2022. Since such actions increase the cost of imported solar products, to the extent we or our dealers use imported solar products or domestic producers are able to raise their prices for their solar products, the overall cost of the solar energy systems will increase, which could reduce our ability to offer competitive pricing in certain markets.
We cannot predict what additional actions the U.S. may adopt with respect to tariffs or other trade regulations or what actions may be taken by other countries in retaliation for such measures. If additional measures are imposed or other negotiated outcomes occur, our ability or the ability of our dealers to purchase these products on competitive terms or to access specialized technologies from other countries could be further limited, which could adversely affect our business, financial condition and results of operations.
Warranties provided by the manufacturers of equipment for our assets and maintenance obligations of our dealers may be limited by the ability of a supplier and/or dealer to satisfy its warranty or performance obligations or by the expiration of applicable time or liability limits, which could reduce or void the warranty protections or may be limited in scope or magnitude of liabilities and thus, the warranties and maintenance obligations may be inadequate to protect us.
We agree to maintain the solar energy systems and energy storage systems installed on our customers' homes during the length of the term of our solar service agreements, which is typically 10, 15 or 25 years. We are exposed to any liabilities arising from the solar energy systems' failure to operate properly and are generally underhave an obligation to ensure each solar energy system remains in good condition during the term of the agreement. We are the beneficiary of the panel manufacturers' warranty coverage, typically of 10 years for material and workmanship and 25 years for performance, the inverter manufacturers' warranty coverage, typically from 10 to 25 years and the energy storage manufacturers' warranty coverage, typically of 10 years. Furthermore, our dealers provide warranties as to their workmanship. In the event that such warranty providers or dealers file for bankruptcy, cease operations or otherwise become unable or unwilling to fulfill their warranty or maintenance obligations, we may not be adequately protected by such warranties or maintenance obligations. Even if such warranty or maintenance providers or dealers fulfill their obligations, the warranty or maintenance obligations may not be sufficient to protect us against all of our losses. In addition, our warranties are of limited duration, ranging from one year, in the case of certain solar energy system and transformer warranties, to 25 years, in the case of certain panel performance warranties, after the date each equipment item is delivered or commissioned, although the useful life of our solar energy systems is 35 years. These warranties are subject to liability and other limits. If we seek warranty protection and a warranty provider is unable or unwilling to perform its warranty obligations, or if a dealer is unable or unwilling to perform its maintenance obligations, whether as a result of its financial condition or otherwise, or if the term of the warranty or maintenance obligation has expired or a liability limit has been reached, there may be a reduction or loss of protection for the affected assets, which could have a material adverse effect on our business, financial condition and results of operations.
Our failure to accurately predict future liabilities related to material quality or performance expenses could result in unexpected volatility in our financial condition. Because of the long estimated useful life of our solar energy systems, we have been required to make assumptions and apply judgments regarding a number of factors, including our anticipated rate of warranty claims and the durability, performance and reliability of our solar energy systems. We made these assumptions based on the historic performance of similar solar energy systems or on accelerated life cycle testing. Our assumptions could prove to be materially different from the actual performance of our solar energy systems, causing us to incur substantial expense to repair or replace defective solar energy systems in the future or to compensate customers for solar energy systems that do not meet their performance guarantees. Equipment defects, serial defects or operational deficiencies also would reduce our revenue from solar service agreements because the customer payments under such agreements are dependent on solar energy system production or would require us to make refunds under performance guarantees. Any widespread product failures or operating deficiencies may damage our market reputation and adversely impact our financial results. For further discussion of these potential charges and related proposals, see "operations".Management's Discussion and Analysis of Financial Condition and Results of Operations—Components of Results of Operations".
Our operating results and our ability to grow may fluctuate from quarter to quarter and year to year, which could make our future performance difficult to predict and could cause our operating results for a particular period to fall below expectations.
Our quarterly and annual operating results and our ability to grow are difficult to predict and may fluctuate significantly in the future. We have experienced seasonal and quarterly fluctuations in the past and expect to experience such fluctuations in the
future. In addition to the other risks described in this "Risk Factors" section, the following factors could cause our operating results to fluctuate:
• expiration or initiation of any governmental rebates or incentives;
• significant fluctuations in customer demand for our solar energy services, solar energy systems and energy storage systems;
• our dealers' ability to complete installations in a timely manner;
• our and our dealers' ability to gain interconnection permission for an installed solar energy system from the relevant utility;
• the availability, terms and costs of suitable financing;
• the amount, timing of sales and potential decreases in value of SRECs;
• our ability to continue to expand our operations and the amount and timing of expenditures related to this expansion;
• announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital-raising activities or commitments;
• changes in our pricing policies or terms or those of our competitors, including centralized electric utilities;
• actual or anticipated developments in our competitors' businesses, technology or the competitive landscape; and
• natural disasters or other weather or meteorological conditions.
For these or other reasons, the results of any prior quarterly or annual periods should not be relied upon as indications of our future performance.
If we are unable to make acquisitions on economically acceptable terms, our future growth would be limited, and any acquisitions we may make may reduce, rather than increase, our cash flows.
We may make acquisitions of solar energy systems, energy storage systems and related businesses and joint ventures. The consummation and timing of any future acquisitions will depend upon, among other things, whether we are able to:
•identify attractive acquisition candidates;
•negotiate acceptable purchase agreements;
•obtain any required governmental or third party consents;
•obtain financing for these acquisitions on economically acceptable terms, which may be more difficult at times when the capital markets are less accessible; and
•outbid any competing bidders.
Additionally, any acquisition involves potential risks, including, among other things:
•mistaken assumptions about assets, revenues and costs of the acquired company, including synergies and potential growth;
•an inability to secure adequate customer commitments to use the acquired systems or facilities;
•an inability to successfully integrate the assets or businesses we acquire;
•coordinating geographically disparate organizations, systems and facilities;
•the assumption of unknown liabilities for which we are not indemnified or for which our indemnity is inadequate;
•mistaken assumptions about the acquired company's suppliers or dealers or other vendors;
•the diversion of management's and employees' attention from other business concerns;
•unforeseen difficulties operating in new geographic areas and business lines;
•customer or key employee losses at the acquired business; and
•poor quality assets or installation.
If we consummate any future acquisitions, our capitalization, results of operations and future growth may change significantly and our stockholders will not have the opportunity to evaluate the economic, financial and other relevant information we will consider in deciding to engage in these future acquisitions, which may not improve our results of operations or cash flow to the extent we projected.
The solar energy systems we own or may originate have a limited operating history and may not perform as we expect.
Many of the solar energy systems we currently own or may originate in the future These tariffs have not commenced operations, have recently commenced operations or otherwise havehad a limited operating history. Of the solar energy systems we owned as of December 31, 2020, 24%, 15% and 12% were placed into service in 2020, 2019 and 2018, respectively. The ability of our solar energy systems to perform as we expect will also be subject to risks inherent in newly constructed renewable energy assets,
including breakdowns and outages, latent defects, equipment that performs below our expectations, system failures and outages. As a result, our assumptions and estimates regarding the performance of these solar energy systems are, and will be, made without the benefit of a meaningful operating history, which may impair our ability to accurately assess the potential profitability of the solar energy systems and, in turn, our results of operations, financial condition and cash flows.
The cost of maintenance or repair of solar energy systems or energy storage systems throughout the term of the associated solar service agreement or the removal of solar energy systems at the end of the term of the associated solar service agreement may be higher than projected today and adversely affect our financial performance and valuation.
If we incur repair and maintenance costs on our solar energy systems or energy storage systems after the individual component warranties have expired and if they then fail or malfunction, we will be liable for the expense of repairing these solar energy systems or energy storage systems without a chance of recovery from our suppliers. In addition, we typically bear the cost of removing the solar energy systems at the end of the term of the lease or PPA if the customer does not renew his or her agreement or elect to purchase the solar energy system at the end of its term. Furthermore, it is difficult to predict how future environmental regulations may affect the costs associated with the repair, removal, disposal or recycling of our solar energy systems. This could materially impair our future operating results.
Problems with performance of our solar energy systems may cause us to incur expenses, may lower the value of our solar energy systems and may damage our market reputation and adversely affect our business.
Our long-term leases and loan agreements contain a performance guarantee in favor of the customer. Solar service agreements with performance guarantees require us to provide a bill credit (or in limited cases, refund money) to the customer if the solar energy system fails to generate the minimum amount of electricity, as specified in the solar service agreement, in a given term, beginning with the first three year period after execution of the solar service agreement and annually thereafter. We may also suffer financial losses associated with such credit and refunds if significant performance guarantee payments are triggered. For a description of our performance guarantee obligations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Components of Results of Operations—Revenue".
We and our dealers are subject to risks associated with installation and other contingencies.
Our dealers design and install solar energy systems and energy storage systems on our behalf. Because the solar service agreement is entered into between us and the customer, we may be liable to our customers for any damage our dealers cause to our customers' homes, belongings or property during the installation of our solar energy systems and energy storage systems or otherwise.
For example, dealers may penetrate our customers' roofs during the installation process and we may incur liability for the failure to adequately weatherproof such penetrations following the completion of installation of solar energy systems. In addition, because our solar energy systems and energy storage systems are high-voltage energy systems, we may incur liability for a dealer's failure to comply with electrical standards and manufacturer recommendations. Furthermore, prior to obtaining permission to operate our solar energy systems and energy storage systems, the solar energy systems and energy storage systems must pass various inspections. Any delay in passing, or inability to pass, such inspections, would adversely affect our results of operations. Because our profit on a particular solar service agreement and related solar energy system and energy storage system, if applicable, is based in part on assumptions as to the ongoing cost of the related solar energy system and energy storage system, if applicable, cost overruns, delays or other execution issues may cause us to not achieve our expected results or cover our costs for that solar service agreement and related solar energy system and energy storage systems, if applicable.
Product liability claims against us or accidents could result in adverse publicity and potentially significant monetary damages.
It is possible our solar energy systems or energy storage systems could injure our customers or other third parties or our solar energy systems or energy storage systems could cause property damage as a result of product malfunctions, defects, improper installation, fire or other causes. Any product liability claim we face could be expensive to defend and may divert management's attention. The successful assertion of product liability claims against us could result in potentially significant monetary damages, potential increases in insurance expenses, penalties or fines, subject us to adverse publicity, damage our reputation and competitive position and adversely affect sales of solar energy systems or energy storage systems. In addition, product liability claims, injuries, defects or other problems experienced by other companies in the residential solar industry could lead to unfavorable market conditions to the industry as a whole and may have an adverse effect on our ability to expand
our portfolio of solar service agreements and related solar energy systems and energy storage systems, thus affecting our business, financial condition and results of operations.
Inflation could result in decreased value from future contractual payments and higher expenses for labor and equipment, which, in turn, could adversely impact our reputation, business, financial condition, cash flows and results of operations.
Any future increase in inflation may adversely affect our costs, including our dealers' cost of labor and equipment, and may result in a decrease in value in our future contractual payments. Many of our solar service agreements, which generally have a term of 10, 15 or 25 years, do not contain any pricing escalators. The pricing escalators we do have may not keep pace with inflation, which would result in the agreement yielding decreased value over time. These factors could adversely impact our reputation, business, financial condition, cash flows and results of operations.
We are not able to insure against all potential risks and we may become subject to higher insurance premiums.
We are exposed to numerous risks inherent in the operation of solar energy systems and energy storage systems, including equipment failure, manufacturing defects, natural disasters such as hurricanes, fires and earthquakes, terrorist attacks, sabotage, vandalism and environmental risks. Furthermore, components of our solar energy systems and energy storage systems, such as panels, inverters and batteries, could be damaged by severe weather, such as tsunamis, hurricanes, tornadoes, hailstorms or lightning. If our solar energy systems or energy storage systems are damaged in the event of a natural disaster beyond our control, losses could be outside the scope of insurance policies or exceed insurance policy limits and we could incur unforeseen costs that could harm our business and financial condition. We may also incur significant additional costs in taking actions in preparation for, or in reaction to, such events.
Our insurance policies also cover legal and contractual liabilities arising out of bodily injury, personal injury or property damage to third parties and are subject to policy limits. We also maintain coverage for physical damage to our solar energy assets.
However, such policies do not cover all potential losses and coverage is not always available in the insurance market on commercially reasonable terms. In addition, we may have disagreements with our insurers on the amount of our recoverable damages and the insurance proceeds received for any loss of, or any damage to, any of our assets may be claimed by lenders under our financing arrangements or otherwise may not be sufficient to restore the loss or damage without a negative impact on our results of operations. Furthermore, the receipt of insurance proceeds may be delayed, requiring us to use cash or incur financing costs in the interim. To the extent we experience covered losses under our insurance policies, the limit of our coverage for potential losses may be decreased or the insurance rates we have to pay increased. Furthermore, the losses insured through commercial insurance are subject to the credit risk of those insurance companies. While we believe our commercial insurance providers are currently creditworthy, we cannot assure you such insurance companies will remain so in the future.
We may not be able to maintain or obtain insurance of the type and amount we desire at reasonable rates. The insurance coverage we do obtain may contain large deductibles or fail to cover certain risks or all potential losses. In addition, our insurance policies are subject to annual review by our insurers and may not be renewed on similar or favorable terms, including coverage, deductibles or premiums, or at all. If a significant accident or event occurs for which we are not fully insured or we suffer losses due to one or more of our insurance carriers defaulting on their obligations or contesting their coverage obligations, it could have a material adverse effect on our business, financial condition and results of operations.
We typically bear the risk of loss and the cost of maintenance, repair and removal on solar energy systems that are owned by our subsidiaries and included in securitization and tax equity vehicles.
We typically bear the risk of loss and are generally obligated to cover the cost of maintenance, repair and removal for any solar energy system we sell to subsidiaries and include in securitization and tax equity vehicles. At the time we enter into a tax equity or securitization transaction, we enter into a maintenance services agreement where we agree to operate and maintain the solar energy system for a fixed fee calculated to cover our future expected maintenance costs. If our solar energy systems require an above-average amount of repairs or if the cost of repairing the solar energy systems were higher than our estimate, we would need to perform such repairs without additional compensation. If our solar energy systems are damaged as the result of a natural disaster beyond our control, losses could exceed or be excluded from our insurance policy limits and we could incur unforeseen costs that could harm our business and financial condition. We may also incur significant costs for taking other actions in preparation for, or in reaction to, such events. We purchase property insurance with industry standard coverage and limits approved by an investor's third-party insurance advisors to hedge against such risk, but such coverage may not cover our losses.
Certain of our solar energy systems are located in, and we conduct business in, Puerto Rico and weakness in the fiscal health of the government and PREPA, the damage caused by Hurricane Maria in September 2017, a series of earthquakes that affected the island in December 2019 and early 2020 and potential tax increases that may increase our cost of conducting business in Puerto Rico, create uncertainty that may adversely impact us. In addition, we are subject to administrative proceedings instituted by the Puerto Rico Energy Bureau.
Puerto Rico is a significant market for our business, representing 15% and 12% of our solar energy systems as of December 31, 2020 and 2019, respectively, and has suffered from significant economic difficulties in recent years. As a result of the continued weakness of the Puerto Rico economy, liquidity constraints and a lack of market access, the credit ratings of the Puerto Rico government's general obligation bonds and guaranteed bonds, as well as the ratings of most of the Puerto Rico public corporations, including PREPA, are non-investment grade by Moody's, S&P and Fitch Ratings.
Puerto Rico has also enacted certain measures that could increase the cost of solar energy systems. In 2015, the Puerto Rico government increased the sales and use tax from 7% to 11.5%. Although leases are currently exempt from such sales and use tax pursuant to Act No. 83-2010, the increase in sales tax is applicable to repair and maintenance services. Additionally, in October 2015, Puerto Rico enacted a 4% sales tax to previously exempt business-to-business transactions. Should our current exemption expire or additional taxes be imposed, the tax increase may impose greater costs on our future and current customers, which may hinder our future origination efforts and adversely impact our business, financial condition, results of operations and future growth. Future changes in Puerto Rico tax law could affect our tax position and adversely impact our business.
Although Puerto Rico had already suffered from economic difficulties in recent years, Hurricanes Irma and Maria in 2017, catastrophic weather events whose effects have been long enduring, earthquakes in the southwest of the island beginning in 2019 and continuing through 2020 and the COVID-19 pandemic have caused significant additional disruption to the island's electric grid and economic activity. The continued weakness of the Puerto Rico economy has strained the fiscal health of the government, which may create uncertainty that may adversely impact us. Furthermore, the future financial condition and prospects of PREPA are uncertain, which could negatively impact the availability and the reliability of Puerto Rico's electrical grid and adversely impact our operations on the island.
In 2018, the government of Puerto Rico enacted legislation that set in motion the privatization of PREPA. Said legislation governs the establishment of public-private partnerships ("P3") with respect to the concession for the distribution and transmission assets, services and facilities of PREPA, including its generation assets. In the summer of 2020, the government of Puerto Rico signed a 15-year P3 agreement with LUMA Energy, LLC to operate, maintain and modernize PREPA's electric transmission and distribution system. Moreover, in November 2020, the government announced that several companies had been qualified as part of the procurement process related to the Request for Qualifications for the management and operation of PREPA's legacy generation assets. The Request for Proposals is currently underway but the awardee has not been announced.
Legislation enacted in April 2019 requires a study of net metering to be completed within five years, which may result in revisions to the existing rules. However, no changes can be made to retail net metering for five years after the date the legislation was enacted. Meanwhile, "true" net metering will continue to apply, meaning the credit for energy exported by net metering clients will equal the value of such energy under the rate applicable to those clients and accordingly, their charges will be based on their net consumption. Customers subject to this regime would be grandfathered for a period of 20 years from the date of their net metering agreements.
Net metering customers in Puerto Rico may be impacted by transition charges and other requirements contemplated in a restructuring agreement between PREPA and its creditors, currently pending before the U.S. District Court for the District of Puerto Rico in bankruptcy-like proceedings under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA"). PROMESA provides PREPA with access to a workout process similar to bankruptcy. In response to the effects of the COVID-19 pandemic, however, the approval of the restructuring agreement has been stayed, and the government announced in December 2020 that it continues to conduct diligence to determine whether, among other things, the terms of the restructuring agreement should be renegotiated and the parameters for doing so.
While we do not currently contract directly with the Puerto Rico government or PREPA, continued weakness in the Puerto Rico economy or the failure of the Puerto Rico government to manage its fiscal challenges in an orderly manner could result in policy decisions we do not anticipate and may directly or indirectly adversely impact our business, financial condition and results of operations. In addition, it is unclear whether the selection of private concessionaires for PREPA's transmission and distribution system and legacy generation assets may have an impact on our business.
The Puerto Rico Energy Bureau has instituted administrative proceedings regarding customer complaints about our Puerto Rican operations, the operations of some of our dealers in Puerto Rico and certain Sunnova policies and procedures relating to contract disclosures and invoice disputes in Puerto Rico. At this time, we are unable to determine whether the Puerto Rico Energy Bureau will seek penalties against us in the future in connection with these proceedings or require a change in our practices and procedures. Based on this matter, the U.S. Better Business Bureau listed Sunnova as not accredited. We have not experienced a material impact as a result of the listing.
Our business is concentrated in certain markets, putting us at risk of region-specific disruptions.
As of December 31, 2020, approximately 22%, 24% and 15% of our solar energy systems were located in New Jersey, California and Puerto Rico, respectively. In addition, we expect much of our near-term future growth to occur in these same markets, further concentrating our customer base and operational infrastructure. Accordingly, our business and results of operations are particularly susceptible to adverse economic, regulatory, political, weather and other conditions in such markets and in other markets that may become similarly concentrated. See "—We are not able to insure against all potential risks and we may become subject to higher insurance premiums" and "—Certain of our solar energy systems are located in, and we conduct business in, Puerto Rico and weakness in the fiscal health of the government and PREPA, the damage caused by Hurricane Maria in September 2017, a series of earthquakes that affected the island in December 2019 and early 2020 and potential tax increases that may increase our cost of conducting business in Puerto Rico, create uncertainty that may adversely impact us. In addition, we are subject to administrative proceedings instituted by the Puerto Rico Energy Bureau". Any of these conditions, even if only in one such market, could have a material adverse effect on our business, financial condition and results of operations. In addition, all of our current solar energy systems are located in the U.S. and its territories, which makes us particularly susceptible to adverse changes in U.S. tax laws. See "—Risks Related to Taxation—Recent tax legislation and future changes in law could adversely affect our business".
Dealer and marketplace confidence in our liquidity and long-term business prospects is important for building and maintaining our business.
Our financial condition, operating results and business prospects may suffer materially if we are unable to establish and maintain confidence about our liquidity and business prospects among dealers, consumers and within our industry. Our dealer network is an integral component of our business strategy and serves as the means by which we are able to rapidly and successfully expand within existing and prospective markets. Dealers and other third parties will be less likely to enter into dealer agreements with us or originate new solar service agreements if they are uncertain we will be able to make payments on time, our business will succeed or our operations will continue for many years.
Our solar energy systems and energy storage systems require ongoing maintenance and support. If we were to reduce operations, even years from now, buyers of our solar energy systems and energy storage systems from years earlier might have difficulty having us provide or arrange repairs or other services to our and their solar energy systems and energy storage systems, which remain our responsibility under the terms of our solar service agreements. As a result, consumers may be less likely to enter into solar service agreements with us if they are uncertain our business will succeed or our operations will continue for many years.
Accordingly, in order to build and maintain our business, we must maintain confidence among dealers, customers and other parties in our liquidity and long-term business prospects. We may not succeed in our efforts to build this confidence.
Damage to our brand and reputation or change or loss of use of our brand could harm our business and results of operations.
We depend significantly on our reputation for high-quality products, excellent customer service and the brand name "Sunnova" to attract new customers and grow our business. If we fail to continue to deliver our solar energy systems or energy storage systems within the planned timelines, if our offerings do not perform as anticipated or if we damage any of our customers' properties or delay or cancel projects, our brand and reputation could be significantly impaired. Future technological improvements may allow us to offer lower prices or offer new technology to new customers; however, technical limitations in our current solar energy systems and energy storage systems may prevent us from offering such lower prices or new technology to our existing customers. The inability of our current customers to benefit from technological improvements could cause our existing customers to lower the value they perceive our existing products offer and impair our brand and reputation.
In addition, given the sheer number of interactions our personnel or dealers operating on our behalf have with customers and potential customers, it is inevitable that some customers' and potential customers' interactions with our company or dealers operating on our behalf will be perceived as less than satisfactory. This has led to instances of customer complaints, some of
which have affected our digital footprint on rating websites and social media platforms. If we cannot manage our hiring and training processes to avoid or minimize these issues to the extent possible, our reputation may be harmed and our ability to attract new customers would suffer.
In addition, if we were to no longer use, lose the right to continue to use or if others use the "Sunnova" brand, we could lose recognition in the marketplace among customers, suppliers and dealers, which could affect our business, financial condition, results of operations and would require financial and other investment and management attention in new branding, which may not be as successful.
The installation and operation of solar energy systems and energy storage systems depends heavily on suitable solar and meteorological conditions. If meteorological conditions are unexpectedly unfavorable, the electricity production from our solar energy systems may be substantially below our expectations and our ability to timely deploy new solar energy systems and energy storage systems may be adversely impacted.
The energy produced and the revenue and cash receipts generated by a solar energy system depend on suitable solar, atmospheric and weather conditions, all of which are beyond our control. Our economic model and projected returns on our solar energy systems require achievement of certain production results from our systems and, in some cases, we guarantee these results to our consumers. If the solar energy systems underperform for any reason, our business could suffer. For example, the amount of revenue we recognize in a given period from our PPAs and the amount of our obligations under the performance guarantees of our solar service agreements are dependent in part on the amount of energy generated by solar energy systems under such solar service agreements. As a result, revenue derived from our standard PPAs is impacted by seasonally shorter daylight hours in winter months. In addition, the ability of our dealers to install solar energy systems and energy storage systems is impacted by weather. For example, the ability to install solar energy systems and energy storage systems during the winter months in the Northeastern U.S. is limited. Such solar, atmospheric and weather conditions can delay the timing of when solar energy systems and energy storage systems can be installed and when we can originate and begin to generate revenue from solar energy systems. This may increase our expenses and decrease revenue and cash receipts in the relevant periods. Furthermore, prevailing weather patterns could materially change in the future, making it harder to predict the average annual amount of sunlight striking each location where we install a solar energy system and energy storage system. This could make our solar energy systems less economical overall or make individual solar energy systems less economical. Any of these events or conditions could harm our business, financial condition and results of operations.
The loss of one or more members of our senior management or key employees may adversely affect our ability to implement our strategy.
We depend on our experienced management team and the loss of one or more key executives could have a negative impact on our business. In particular, we are dependent on the services of our founder and CEO, William J. Berger. We also depend on our ability to retain and motivate key employees and attract qualified new employees. None of our key executives are bound by employment agreements for any specific term. We may be unable to replace key members of our management team and key employees if we lose their services. Integrating new employees into our team could prove disruptive to our operations, require substantial resources and management attention and ultimately prove unsuccessful. An inability to attract and retain sufficient managerial personnel who have critical industry experience and relationships could limit or delay our strategic efforts, which could have a material adverse effect on our business, financial condition and results of operations.
The requirements of being a public company may strain our resources, divert management's attention and affect our ability to attract and retain qualified board members and officers.
As a public company, we are subject to the reporting requirements of the Exchange Act, the listing requirements of the New York Stock Exchange ("NYSE") and other applicable securities rules and regulations. Complying with these rules and regulations has increased and will continue to increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results and maintain effective disclosure controls and procedures and internal control over financial reporting. To maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management's attention may be diverted from other business concerns that could harm our business and operating results. Although we have already hired additional employees to comply with these requirements, we may need to hire more employees in the future that will increase our costs and expenses.
As a public company, our director and officer liability insurance expense increased significantly and we may be required to accept reduced coverage or incur substantially higher costs to maintain coverage. These factors could also make it more
difficult for us to attract and retain qualified executive officers and members of our Board, particularly to serve on our audit committee.
Our inability to protect our intellectual property could adversely affect our business. We may also be subject to intellectual property rights claims by third parties, which are extremely costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies.
Any failure to protect our proprietary rights adequately could result in our competitors offering similar residential solar technology or energy storage services more quickly than anticipated, potentially resulting in the loss of some of our competitive advantage and a decrease in our revenue that would adversely affect our business prospects, financial condition and operating results. Our success depends, at least in part, on our ability to protect our core technology and intellectual property. We rely on intellectual property laws, primarily a combination of copyright and trade secret laws in the U.S., as well as license agreements and other contractual provisions, to protect our proprietary technology and brand. We cannot be certain our agreements and other contractual provisions will not be breached, including a breach involving the use or disclosure of our trade secrets or know-how, or that adequate remedies will be available in the event of any breach. In addition, our trade secrets may otherwise become known or lose trade secret protection.
We cannot be certain our products and our business do not or will not violate the intellectual property rights of a third party. Third parties, including our competitors, may own patents or other intellectual property rights that cover aspects of our technology or business methods. Such parties may claim we have misappropriated, misused, violated or infringed third-party intellectual property rights and if we gain greater recognition in the market, we face a higher risk of being the subject of claims we have violated others' intellectual property rights. Any claim we violated a third party's intellectual property rights, whether with or without merit, could be time-consuming, expensive to settle or litigate and could divert our management's attention and other resources, all of which could adversely affect our business, results of operations, financial condition and cash flows. If we do not successfully settle or defend an intellectual property claim, we could be liable for significant monetary damages and could be prohibited from continuing to use certain technology, business methods, content or brands. To avoid a prohibition, we could seek a license from third parties, which could require us to pay significant royalties, increasing our operating expenses. If a license is not available at all or not available on commercially reasonable terms, we may be required to develop or license a non-violating alternative, either of which could adversely affect our business, results of operations, financial condition and cash flows.
We currently use or plan to use software that is licensed under "open source", "free" or other similar licenses that may subject us to liability or require us to release the source code of our proprietary software to the public.
We currently use open source software that is licensed under "open source", "free" or other similar licenses. Open source software is made available to the general public on an "as-is" basis under the terms of a non-negotiable license. If we fail to comply with these licenses, we may be subject to certain conditions, including requirements that we offer our services that incorporate the open source software for no cost, we make available source code for modifications or derivative works we create based upon incorporating or using the open source software and we license such modifications or alterations under the terms of the particular open source license. We do not plan to integrate our proprietary software with this open source software in ways that would require the release of the source code of our proprietary software to the public. However, our use and distribution of open source software may entail greater risks than use of third-party commercial software. Our authorized developers may contribute to this open source software community but they will be prohibited from providing any proprietary process or proprietarily developed source code of ours. Open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. In addition, if we combine our proprietary software with open source software in a certain manner, we could, under certain open source licenses, be required to release the source code of our proprietary software to the public. This would allow our competitors to create similar offerings with lower development effort and time. We may also face claims alleging noncompliance with open source license terms or infringement or misappropriation of proprietary software.
These claims could result in litigation, require us to purchase a costly license or require us to devote additional research and development resources to change our software, any of which would have a negative effect on our business and operating results. In addition, if the license terms for open source software that we use change, we may be forced to re-engineer our technology platform or incur additional costs.
Although we monitor our use of open source software to avoid subjecting our technology platform to unintended conditions, few courts have interpreted open source licenses and there is a risk these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our business. We cannot guarantee we have incorporated open source
software in our software in a manner that will not subject us to liability or in a manner consistent with our current policies and procedures.
We may be subject to interruptions or failures in our information technology systems.
We rely on information technology systems and infrastructure to support our business. Any of these systems may be susceptible to damage or interruption due to fire, floods, power loss, telecommunication failures, usage errors by employees, computer viruses, cyberattacks or other security breaches or similar events. A compromise of our information technology systems or those with which we interact could harm our reputation and expose us to regulatory actions and claims from customers and other persons, any of which could adversely affect our business, financial condition, cash flows and results of operations. If our information systems are damaged, fail to work properly or otherwise become unavailable, we may incur substantial costs to repair or replace them and we may experience a loss of critical information, customer disruption and interruptions or delays in our ability to perform essential functions.
Disruptions to our solar monitoring systems could negatively impact our revenues and increase our expenses.
Our ability to accurately charge our customers for the energy produced by our solar energy systems primarily depends on the cellular connection for the related monitoring system, which we are responsible for maintaining in a functional state so that we may receive data regarding the solar energy systems' production from their residences. We could incur significant expenses or disruptions of our operations in connection with failures of our solar monitoring systems, including failures of such connections, that would prevent us from accurately monitoring solar energy production. In addition, sophisticated hardware and operating system software and applications we procure from third parties may contain defects in design or manufacture, including "bugs" and other problems that could unexpectedly interfere with the operation of our solar energy systems or energy storage systems. The costs to us to eliminate or alleviate viruses and bugs, or any problems associated with failures of our cellular connections could be significant. We have in the past experienced periods where some of our cellular connections have been unavailable and, as a result, we have been forced to estimate the production of their solar energy systems. Such estimates may prove inaccurate and could cause us to underestimate the power being generated by our solar energy systems and undercharge our customers, thereby harming our results of operations.
Any unauthorized access to or disclosure or theft of personal information we gather, store or use could harm our reputation and subject us to claims or litigation.
We receive, store and use personal information of our customers, including names, addresses, e-mail addresses, credit information, credit card and financial account information and other housing and energy use information. We also store information of our dealers, including employee, financial and operational information. We rely on the availability of data collected from our customers and our dealers in order to manage our business and market our offerings. We take certain steps in an effort to protect the security, integrity and confidentiality of the personal information we collect, store or transmit, but there is no guarantee inadvertent or unauthorized use or disclosure will not occur or third parties will not gain unauthorized access to this information despite our efforts. We also rely on third-party suppliers or vendors to host certain of the systems we use. Although we take precautions to provide for disaster recovery, our ability to recover systems or data may be expensive and may interfere with our normal operations. Also, although we obtain assurances from such third parties they will use reasonable safeguards to secure their systems, we may be adversely affected by unavailability of their systems or unauthorized use or disclosure or our data maintained in such systems. Because techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we, our suppliers or vendors and our dealers may be unable to anticipate these techniques or to implement adequate preventative or mitigation measures.
Cyberattacks in particular are becoming more sophisticated and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions in critical systems, disruption of our customers' operations, loss or damage to our data delivery systems, unauthorized release of confidential or otherwise protected information, corruption of data and increased costs to prevent, respond to or mitigate cybersecurity events. In addition, certain cyber incidents, such as advanced persistent threats, may remain undetected for an extended period.
Unauthorized use, disclosure of or access to any personal information maintained by us or on our behalf, whether through breach of our systems, breach of the systems of our suppliers, vendors or dealers by an unauthorized party or through employee or contractor error, theft or misuse or otherwise, could harm our business. If any such unauthorized use, disclosure of or access to such personal information were to occur, our operations could be seriously disrupted and we could be subject to demands, claims and litigation by private parties and investigations, related actions and penalties by regulatory authorities.
In addition, we could incur significant costs in notifying affected persons and entities and otherwise complying with the multitude of federal, state and local laws and regulations relating to the unauthorized access to, use of or disclosure of personal information. Finally, any perceived or actual unauthorized access to, use of or disclosure of such information could harm our reputation, substantially impair our ability to expand our portfolio of solar service agreements and related solar energy systems and energy storage systems and have an adverse impact on our business financial condition and results of operations. The COVID-19 pandemic generally is increasing the attack surface available to criminals, as more companies and individuals work remotely and otherwise work online. Consequently, the risk of a cybersecurity incident suffered by us or our vendors or service providers is increased, and our investment in risk mitigations against cybersecurity incidents is evolving as the threat landscape changes. While we currently maintain cybersecurity insurance, such insurance may not be sufficient to cover us against claims, and we cannot be certain that cyber insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim.
Our business is subject to complex and evolving data protection laws. Many of these laws and regulations are subject to change and uncertain interpretation and could result in claims, increased cost of operations or otherwise harm our business.
Consumer personal privacy and data security have become significant issues and the subject of rapidly evolving regulation in the U.S. Furthermore, federal, state and local government bodies or agencies have in the past adopted, and may in the future adopt, more laws and regulations affecting data privacy. For example, the state of California enacted the California Consumer Privacy Act of 2018 ("CCPA") and California voters recently approved the California Privacy Rights Act ("CPRA"). The CCPA creates individual privacy rights for consumers and places increased privacy and security obligations on entities handling the personal data of consumers or households. The CCPA went into effect on January 1, 2020 and it requires covered companies to provide new disclosures to California consumers, provides such consumers, business-to-business contacts and employees new ways to opt-out of certain sales of personal information, and allows for a new private right of action for data breaches. The CPRA modifies the CCPA and imposes additional data protection obligations on companies doing business in California, including additional consumer rights processes and opt outs for certain uses of sensitive data. While the CPRA will not take full effect until January 2023, it establishes a new California privacy regulator before that date. The CCPA and the CPRA may significantly impact our business activities and require substantial compliance costs that adversely affect our business, operating results, prospects and financial condition. To date, we have not experienced substantial compliance costs in connection with fulfilling the requirements under the CCPA or CPRA. However, we cannot be certain that compliance costs will not increase in the future with respect to the CCPA and CPRA or any other recently passed consumer privacy regulation.
Any inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable privacy and data security laws, regulations and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales and adversely affect our business. Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations and policies that are applicable to our business may limit the use and adoption of, and reduce the overall demand for, our solutions. If we are not able to adjust to changing laws, regulations and standards related to privacy or security, our business may be harmed.
We may become involved in the future in legal proceedings that could adversely affect our business.
We may, from time to time, be involved in litigation and claims, such as those relating to employees, customers, our dealers or other third parties with whom we contract, including consumer claims and class action lawsuits. In the ordinary course of business, we have disputes with dealers and customers. In general, litigation claims or regulatory proceedings can be expensive and time consuming to bring or defend against, may result in the diversion of management attention and resources from our business and business goals and could result in injunctions or other equitable relief, settlements, penalties, fines or damages that could significantly affect our results of operations and the conduct of our business. It is impossible to predict with certainty whether any resulting liability would have a material adverse effect on our financial position, results of operations or cash flows.
We intend to expand our operations to include international activities, which will subject us to a number of risks.
Our long-term strategic plans include international expansion, including expansion into jurisdictions that have characteristics similar to those in which we currently operate. Risks inherent to international operations include the following:
• the inability to work successfully with dealers with local expertise to originate international solar service agreements;
• multiple, conflicting and changing laws and regulations, including export and import laws and regulations, economic sanctions laws and regulations, tax laws and regulations, environmental regulations, labor laws and other government requirements, approvals, permits and licenses;
• laws and legal systems less developed or less predictable than those in the U.S.;
• changes in general economic and political conditions in the jurisdictions where we operate, including changes in government incentives relating to power generation and solar electricity;
• political and economic instability, including wars, acts of terrorism, political unrest, boycotts, curtailments of trade and other business restrictions;
• difficulties and costs in recruiting and retaining individuals skilled in international business operations;
• international business practices may conflict with U.S. customs or legal requirements, including anti‑bribery and corruption regulations;
• financial risks, such as longer sales and payment cycles and greater difficulty collecting accounts receivable or executing self-help remedies, if necessary;
• deficient or unreliable records relating to real property ownership;
• potentially lower margins due to a lower average income level;
• fluctuations in currency exchange rates relative to the U.S. dollar; and
• the inability to obtain, maintain or enforce intellectual property rights, including inability to apply for or register material trademarks in foreign countries, which could make it easier for competitors to capture increased market position.
Doing business in foreign markets requires us to be able to respond to rapid changes in market, legal and political conditions in these countries. The success of our business will depend, in part, on our ability to succeed in differing legal, regulatory, economic, social and political environments. We may not be able to develop and implement policies and strategies that will be effective in each location where we do business.
Our future operations may subject us to risks associated with currency fluctuations.
Our future international operations may subject us to risks relating to currency fluctuations. Foreign currencies periodically experience rapid and/or large fluctuations in value against the U.S. dollar. A weakened U.S. dollar could increase the cost of procurement of raw materials, by our suppliers, from foreign jurisdictions and operating expenses in foreign locations, which could have a material adverse effect on our business and results of operations. Our planned international expansion further subjects us to currency risk.
Since the price at which we originate solar energy systems from our dealers is generated in U.S. dollars, we are mostly insulated from currency fluctuations. However, since suppliers of our dealers often incur a significant amount of their costs by purchasing raw materials and generating operating expenses in foreign currencies, if the value of the U.S. dollar depreciates significantly or for a prolonged period of time against these other currencies, this may cause those suppliers to raise the prices they charge us and our dealers, which in turn could harm our business and results of operations. Although the value of the U.S. dollar has been high relative to other currencies in recent periods, there is no guarantee this trend will continue.
Our actual financial results may differ materially from any guidance we may publish from time to time.
We may, from time to time, provide guidance regarding our future performance that represents our management's estimates as of the date such guidance is provided. Any such guidance would be based upon a number of assumptions with respect to future business decisions (some of which may change) and estimates, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies (many of which are beyond our control). Guidance is necessarily speculative in nature and it can be expected some or all the assumptions that inform such guidance will not materialize or will vary significantly from actual results. Our ability to meet any forward-looking guidance is impacted by a number of factors including, but not limited to, the number of our solar energy systems sold versus leased, changes in installation costs, the availability of additional financing on acceptable terms, changes in the retail prices of traditional utility-generated electricity, the availability of rebates, tax credits and other incentives, changes in policies and regulations including net metering and interconnection limits or caps, the availability of solar panels, inverters, batteries and other raw materials, as well as the other risks to our business described in this "Risk Factors" section. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date such guidance is provided. Actual results may vary from such guidance and the variations may be material. Investors should also recognize the reliability of any forecasted financial data diminishes the farther into the future the data is forecast. In light of the foregoing, investors should not place undue reliance on our financial guidance and should carefully consider any guidance we may publish in context.
Terrorist or cyberattacks against centralized utilities could adversely affect our business.
Assets owned by utilities such as substations and related infrastructure have been physically attacked in the past and will likely be attacked in the future. These facilities are often protected by limited security measures, such as perimeter fencing. Any
such attacks may result in interruption to electricity flowing on the grid and consequently interrupt service to our solar energy systems not combined with an energy storage system, which could adversely affect our operations. Furthermore, cyberattacks, whether by individuals or nation states, against utility companies could severely disrupt their business operations and result in loss of service to customers, which would adversely affect our operations.
Risks Related to the Acquisition
We may not be successful in completing the Acquisition.
The consummation of the Acquisition is subject to certain conditions, including the receipt of regulatory approval under the Hart-Scott Rodino Antitrust Improvements Act, which may or may not be obtained. If the conditions to the consummation of the transactions contemplated by the Merger Agreement are not satisfied, or if the Merger Agreement is terminated prior to closing, the Acquisition will not be consummated. In addition, the Acquisition is subject to an outside termination date of September 1, 2021. If the Acquisition is not completed by the outside termination date, it will not be consummated except by mutual agreement of Sunnova and Lenx to extend the outside date.
We expect to incur significant transaction and acquisition-related costs in connection with the Acquisition.
We expect to incur significant costs associated with the Acquisition and combining our existing operations with those of SunStreet. The substantial majority of the expenses resulting from the Acquisition will be composed of transaction costs related to the Acquisition and business integration costs. Additional unanticipated costs may be incurred in the integration of the two businesses. Although we expect that the elimination of duplicative costs, as well as the realization of other efficiencies related to the integration of the businesses, should allow us to offset incremental transaction and acquisition-related costs over time, this net benefit may not be achieved in the near term, or at all.
The success of the Acquisition and our ability to derive our expected benefits from the Acquisition are subject to substantial risks.
The success of the proposed Acquisition and our ability to derive the expected benefits from the Acquisition involves potential risks, including, among other things:
•the validity of our assumptions and projections about the rate of solar adoption in new home construction and our ability to originate in such communities, revenues of the SunStreet business, anticipated capital expenditures and operating costs of SunStreet;
•our ability to successfully market and sell solar service agreements to existing Lennar Corporation customers;
•assumptions about achieving synergies with our existing business, including the solar service agreement origination process;
•the validity of our assessment of the ongoing maintenance and service requirements and costs of existing solar energy systems for which SunStreet continues to hold the ongoing service obligation;
•a failure to realize anticipated benefits, such as enhanced competitive position within the homebuilding space or new customer relationships through the exclusivity arrangements with Lennar Corporation; and
•the incurrence of other significant charges, such as impairment of goodwill or other intangible assets.
The success of the Acquisition will depend, in part, on our ability to realize the anticipated benefits from combining SunStreet and our business, including operational and other synergies that we believe the post-acquisition company will achieve. The anticipated benefits of the Acquisition may not be realized fully or at all, may take longer to realize than expected or could have other adverse effects that we do not currently foresee. Some of the assumptions we have made, such as the achievement of operating synergies, may not be realized.
The Acquisition is subject to substantial integration risks that could adversely affect our financial condition and results of operations.
Integration of SunStreet with our existing business will be a complex, time-consuming and costly process, and we may not be as successful as anticipated. The Acquisition involves numerous operational, strategic, financial, accounting, legal, tax and other risks. Difficulties in integrating SunStreet, particularly during the COVID-19 pandemic, and our ability to manage SunStreet after the closing of the Acquisition, may result in our performing differently than expected, in operational challenges or in the delay or failure to realize anticipated expense-related efficiencies, and could have an adverse effect on our financial
condition, results of operations or cash flows. Potential difficulties that may be encountered in the integration process include, among other things:
•the inability to successfully integrate SunStreet, operationally and culturally, in a manner that permits us to achieve the full anticipated origination benefits from the Acquisition;
•performance shortfalls as a result of integrating SunStreet's operations, which, if such shortfalls were to result in a loss of exclusivity arrangements with Lennar Corporation, would substantially reduce the benefits of the Acquisition to us;
•failure to obtain any necessary permits or licenses in connection with the operation of the SunStreet business;
•performance shortfalls due to the COVID-19 pandemic and related decline in demand for new home construction or solar energy services in new communities;
•complexities associated with managing a larger, more complex, integrated business, including the potential diversion of our management's attention;
•not realizing anticipated operating synergies;
•potential unknown liabilities and unforeseen expenses, delays or regulatory conditions associated with the Acquisition;
•integrating relationships with customers, dealers, homebuilders, vendors and business partners;
•the disruption of, or the loss of momentum in, each company's ongoing business or inconsistencies in standards, controls, procedures and policies;
•the maintenance of an effective system of internal controls and integrating internal controls, compliance under the Sarbanes-Oxley Act of 2002 and other regulatory compliance and corporate governance matters;
•difficulties integrating new technology systems for financial reporting;
•the inability to hire, train or retrain qualified personnel to manage and operate our growing business and assets; and
•an inability to complete other internal growth projects and/or acquisitions.
If we consummate the Acquisition and if any of these risks or unanticipated liabilities or costs were to materialize, then any desired benefits from the Acquisition may not be fully realized, if at all, and our future results of operations could be negatively impacted.
Our results may suffer if we do not effectively manage our expanded operations following the Acquisition.
Following completion of the Acquisition, the size of our business will increase beyond its current size and the nature of our business operations will shift from retrofitting solar energy systems and entering into solar service agreements with existing homeowners to also originating solar service agreements as an integrated step in the homebuilding process. Our future success will depend, in part, on our ability to manage this expanded business, which poses numerous risks and uncertainties, including the need to integrate SunStreet and their operations into our existing business in an efficient and timely manner, to combine systems and management controls and to integrate relationships with customers, dealers, homebuilders, vendors and business partners. Failure to successfully manage SunStreet may have an adverse effect on our financial condition, results of operations or cash flows.
Risks Related to Regulations
•We are not currently regulated as an electric public utility under applicable law but may be subject to regulation as an electric utility in the future.
•Electric utility policies and regulations, including those affecting electric rates, may present regulatory and economic barriers to the purchase and use of solar energy systems that may significantly reduce demand for electricity from our solar energy systems and adversely impact our ability to originate new solar service agreements.
•We rely on net metering and related policies to offer competitive pricing to our customers in most of our current markets and changes to net metering policies may significantly reduce demand for electricity from solar energy systems.
•Our business currently depends in part on the availability of rebates, tax credits and other financial incentives. The expiration, elimination or reduction of these rebates, credits or incentives or our ability to monetize them could adversely impact our business.
•Our business depends in part on the regulatory treatment of third-party owned solar energy systems.
•Technical and regulatory limitations regarding the interconnection of solar energy systems to the electrical grid may significantly reduce our ability to sell electricity from our solar energy systems in certain markets or delay interconnections and customer in-service dates, harming our growth rate, operations and customer satisfaction.
•Our business is subject to complex and evolving privacy and data protection laws. Many of these laws and regulations are subject to change and uncertain interpretation and could result in claims, increased cost of operations or otherwise harm our business.
•Our business is subject to consumer protection laws. Such laws and regulatory enforcement policies and priorities are subject to change that may negatively impact our business.
•The highly regulated environment in which our capital providers operate could have an adverse effect on our business.
Risks Related to Taxation
•Our ability to use net operating loss carryforwards ("NOLs") and tax credit carryforwards to offset future income taxes is subject to limitation and the amount of such carryforwards may be subject to challenge or reduction.
•Changes in tax law could adversely affect our business.
•If the IRS or the U.S. Treasury Department makes a determination that the fair market value of our solar energy systems is materially lower than what we have reported in our tax equity vehicles' tax returns, we may have to pay significant amounts to our tax equity vehicles, our tax equity investors, tax credit buyers and/or the U.S. government. Such determinations could have a material adverse effect on our business and financial condition.
•If our solar energy systems either cease to be qualifying property or undergo certain changes in ownership within five years of the applicable placed in service date, we may have to pay significant amounts to our tax equity vehicles, our tax equity investors, tax credit buyers and/or the U.S. government. Such recapture could have a material adverse effect on our business and financial condition.
Risks Related to Our Common Stock
•We do not intend to pay, and our credit facilities currently prohibit us from paying, cash dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.
•Ownership of our common stock by current stockholders is expected to remain significant.
•The price of our common stock is volatile and may decline in value.
•Provisions of our charter documents and Delaware law may inhibit a takeover, which could limit the price investors might be willing to pay in the future for our common stock.
General Risk Factors
•We are exposed to the credit risk of our customers and payment delinquencies on our accounts receivable.
•Our actual financial results may differ materially from any guidance we may publish from time to time.
•If we are unable to make acquisitions on economically acceptable terms, our future growth and operations could be limited, and any acquisitions we may make may reduce, rather than increase, our cash flows.
•Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults or non-performance by financial institutions or transactional counterparties, could adversely impact our business, financial condition and results of operations.
PART I
Item 1. Business.
Mission
To power energy independence.
Overview
We are an industry-leading energy services company focused on making clean energy more accessible, reliable and affordable for homeowners and businesses, serving over 419,000 customers in more than 45 United States ("U.S.") states and territories. Through our adaptive energy platform, we provide a better energy service at a better price to deliver our mission of powering energy independence. Through our energy service offerings, we are disrupting the traditional energy landscape and the way the 21st century customer generates and consumes electricity. Additionally, we believe the renewable energy market in which we operate, and investment in climate solutions more broadly, will continue to grow as the impact of climate change increases. While our core business model seeks to help accelerate a global transition to renewable energy, there are inherent climate-related risks to our business operations including, but not limited to, those discussed under "Risk Factors" and elsewhere in this Annual Report on Form 10-K.
We partner with local dealers and contractors who originate, design and install our customers' solar energy systems, energy storage systems and related products and services on our behalf, as well as other sustainable home solutions, such as home security and monitoring, smart home devices, modern heating, ventilation and air conditioning ("HVAC"), generators, upgraded roofing, water systems, water heaters, main panel upgrades and electric vehicle chargers. Our focus on our dealer and contractor model enables us to leverage our dealers' and contractors' specialized knowledge, connections and experience in local markets to drive customer origination while providing our dealers and contractors with access to high quality products at competitive prices, as well as technical oversight and expertise. We believe this structure provides operational flexibility, reduces exposure to labor shortages and lowers fixed costs relative to true vertically integrated models.
We offer customers products to power and improve the energy efficiency and sustainability of their homes and businesses with affordable solar energy and related products and services. We are able to offer energy generation savings compared to utility-based retail rates with little to no up-front expense to the customer in conjunction with solar and solar plus energy storage products, and, in the case of the latter, are able to also provide energy resiliency. Our customer agreements typically take the form of a lease, power purchase agreement ("PPA"), loan or cash purchase; however, we also offer service plans for systems we did not originate. We make it possible in some states for a customer to obtain a new roof and/or other sustainable home products as part of their solar loan agreement or as an accessory loan to their lease or PPA. Customers who are not interested in a new solar energy system or energy storage system may also finance a new roof and other sustainable home products via a stand-alone loan from us. We also allow customers originated through our homebuilder channel the option of purchasing the products when the customer closes on the purchase of a new home. Service is an integral part of our agreements and includes operations and maintenance, monitoring, repairs and replacements, equipment upgrades, on-site power optimization for the customer (for both supply and demand), the ability to efficiently switch power sources between the solar energy system and/or energy storage system, and the grid, as appropriate, and also the solar energy system and energy storage system diagnostics. During the life of the contract, we have the opportunity to integrate related and evolving servicing and monitoring technologies and other sustainable home products to upgrade the flexibility and reduce the cost of our customers' energy supply.
In the case of leases and PPAs, we also currently receive tax benefits and other incentives from federal, state and local governments, a portion of which we finance through tax equity, tax credit sales, non-recourse debt structures and hedging arrangements in order to fund our upfront costs, overhead and growth investments.
In addition to providing ongoing service as a standard component of our customer agreements, we also offer ongoing energy services to customers who purchased their solar energy system through third parties. Under these arrangements, we agree to provide monitoring, maintenance and/or repair services to these customers for the life of the service contract they sign with us. In addition, we offer one-time repair services to customers who purchased their solar energy systems or sustainable home products through third parties that are not otherwise covered by warranty. We also offer complementary products as well as non-solar financing. Specifically, our offerings include a non-solar loan program enabling customers to finance the purchase of products independent of a solar energy system or energy storage system. We believe the quality and scope of our comprehensive energy service offerings, whether to customers that obtained their solar energy system through us or through another party, is a key differentiator between us and our competitors.
We continue to expand our offerings to include additional sustainable home products to our agreements, including non-solar financing. Specifically, we have expanded our offerings to include a non-solar loan program enabling customers to finance the purchase of products independent of a solar energy system or energy storage system. We believe the quality and scope of our expanding sustainable home product offerings, whether to customers that obtained their solar energy system or energy storage system through us or through a third party, is a key differentiator between us and our competitors.
We also enter into leases with third-party owners of pools of solar energy systems to receive such third party's interest in those systems. In connection therewith, we assume the related customer PPA and lease obligations, entitling us to future customer cash flows as well as certain credits, rebates and incentives (including solar renewable energy certificates ("SRECs")) under those agreements, in exchange for a lease payment, whether upfront or over time, to the third-party owner, which may be made in the form of cash or shares of our common stock. We believe such arrangements enhance our long-term contracted cash flows and are complementary to our overall business model.
We commenced operations in January 2013 and began providing solar energy services under our first solar energy system in April 2013. Since then, our brand, innovation and focused execution have driven significant, rapid growth in our market share and in the number of customers on our platform. We operate one of the largest residential fleets of solar energy systems in the U.S., comprising more than 2,292 megawatts of generation capacity and our diversified offerings of sustainable home solutions serve over 419,000 customers as of December 31, 2023. For a discussion of how we define number of customers, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Financial and Operational Metrics". The following chart illustrates the growth in our number of customers from December 31, 2019 through December 31, 2023.
Our Network Model
While many of our competitors maintain a large, geographically diverse base of employees in local markets, including a direct sales force comprised of home improvement installers, we limit the cost associated with that structure by primarily utilizing a network of local, independent dealers and contractors to market, sell and install solar energy systems, energy storage systems, home generators and certain other products and services on our behalf. Our dealers and contractors typically reside and work within the markets they serve and provide a localized, customer-focused marketing, installation and servicing process. These dealers and contractors are often leading local solar installation companies, electrical services companies or companies that serve customers who are actively searching for solar power, backup power or complementary home services.
Origination, Installation, Monitoring and Servicing Processes
Through our network model, we provide a streamlined approach for the origination of customer agreements and the installation of solar energy systems, energy storage systems and other sustainable home products. The principal elements of our origination, installation, monitoring and servicing processes are described below:
•Customer Origination and Consultation. Our dealers and contractors serve as a local, direct-to-home sales force providing in-person and virtual consultations to source potential customers in each geographic market where we
operate. Our dealers and contractors reach potential customers through various means, including online, telemarketing, in-store sales, cross-marketing with complementary products and door-to-door canvasing. Using our technology platform and proprietary pricing tool, the dealer/contractor and the customer select one of our standard-form agreements for the relevant market and product.
•Design andEngineering. We and the dealers work together to design the applicable equipment, such as the solar energy system and energy storage system, if applicable, prior to the dealer's purchase and installation. All of our solar energy systems and energy storage systems are designed with equipment from a pre-approved list of manufacturers. We utilize our extensive tools and services platform, standardized procedures and existing databases to help our dealers comply with our pricing requirements, solar best practices, contract terms, and state, territorial and local regulations. For each solar service agreement, an individualized power production estimate is created by analyzing geographic, solar and weather data with the design's proposed orientation, components and shading. We continue to pursue technological innovation to streamline our review of design and engineering, to expedite installation and to lower costs for our dealers.
•Installation, Commissioning, Quality Assurance and Interconnection. The installation phase requires the dealer to obtain all necessary permits for installation. For systems requiring commissioning, the dealer must complete our commissioning process for the solar energy system and energy storage system (as applicable), which entails submitting supporting documentation and photographs illustrating the installation of the solar energy system and energy storage system (as applicable) to our quality assurance team for review. Following completion of these steps and our approval of these materials, the dealer submits required paperwork to the applicable electric distribution utility to obtain permission to operate the equipment, schedule required regulatory inspections and arrange for interconnection of the solar energy system to the electrical grid. In some markets where either permission is not required and/or interconnection is not feasible or practical, we may place the system in service without interconnecting to the electrical grid and thereby place the system in service without seeking permission to operate from the applicable electric distribution utility.
•Customer Billing Dates. How soon we will begin billing the customer after the solar energy system or applicable sustainable home product system has been placed in service will vary by product offering. Lease agreements will begin billing on the first cycle date after the solar energy system or applicable sustainable home product system has been placed in service, generally within 30 days. PPAs will begin billing on the first cycle date in the next calendar month after the solar energy system has been placed in service, generally between 15 and 60 days after the solar energy system has been placed in service. Loan agreements require the solar energy system or applicable sustainable home product system must be in service at least 30 days or, where permitted by law, installed for 60 days prior to the date when billing can begin. As a result, billing on loan agreements generally begins with the aligned cycle date in the next calendar month after the solar energy system or applicable sustainable home product system has been installed or placed in service.
•Monitoring and Servicing. Our monitoring systems utilize cellular or internet connections that allow us to confirm the continuing operation of the solar energy system and energy storage system (if applicable) and with that information, solve maintenance issues through our dealers, third-party service providers or our own personnel. We also collect performance data to improve our pricing, generation estimates and services for our customers.
Our Relationships With Our Dealers and Contractors
We carefully recruit our dealers and contractors, who must meet and maintain our standards to be approved. Qualifications to be a dealer/contractor include: experience in the solar industry or success in an applicable sustainable home product industry such as home security, roofing, gas generators, heating, ventilation and air-conditioning, electrical services or water systems, experienced and appropriately certified employees (including multiple installation teams) and possession of applicable licenses. We also perform a review of the prospects' financial condition as part of our recruitment process, a background check on the principal owners of the organization and a careful review of the businesses online and local reputation. Upon engagement, the dealer/contractor enters into an agreement with us that sets ongoing standards for operations and payment obligations based on different milestones for each project. We provide training, field support and continuing education to help our dealers/contractors operate efficiently. This includes training related to our processes, standards and services platform, sales training and compliance education regarding applicable rules and regulations. We actively review our dealers'/contractors' performance and compliance with our requirements to determine whether to terminate our relationship with any dealer/contractor that is unable to meet our performance standards.
For the years ended December 31, 2023 and 2022, Trinity Solar, Inc. ("Trinity") accounted for approximately 10% and 19% of our net originations, respectively. In October 2022, we amended our agreement with Trinity pursuant to which Trinity has agreed to perform services or work exclusively for us for sixty-six months to March 31, 2028 (the "Exclusivity Period"), with certain exceptions, including (a) the sale of solar energy systems, energy storage systems, generators or electric vehicle chargers ("Agreed Products") to individuals on a "cash" basis that do not involve private financing marketed by Trinity, (b) the sale of Agreed Products to individuals who, based on their credit score(s) and other relevant attributes, Trinity reasonably determines do not qualify under our credit and underwriting standards then in effect and (c) the sale of Agreed Products pursuant to customer agreements executed prior to the date of the amendment to the dealer agreement. The amendment permits immaterial failures to comply with the foregoing exclusivity obligations provided that such failures are inadvertent, made without knowledge and/or intent of Trinity's management, and provided that such failures do not account for more than 2% of Trinity's installations in any single year during the Exclusivity Period. In addition, Trinity may install Agreed Products for our competitors in instances in which Trinity has available installation capacity, and, following notice to us that such capacity is available, we can either indicate that we do not intend to use such installation capacity or fail to timely respond to the notice. Trinity's exclusivity obligations do not apply to new roofs or roof replacements, or to Agreed Products sold for commercial applications. Under this arrangement, we have agreed to provide bonuses to Trinity in the amount of $12.9 million during the six month period ended March 31, 2023 and $30.0 million for each of the five subsequent year-long periods. The bonus payments are subject to a true-up payable by (a) us if Trinity exceeds 120% of its annual target or (b) Trinity if it does not meet at least 80% of its annual target, though we will not owe Trinity a true-up for its first year performance under any circumstances. The annual installation targets increase by approximately 2.3% to 7.1% each year. Unlike most of our dealer agreements, the arrangement with Trinity does not permit the parties to terminate for convenience and only permits termination in specified circumstances including material breach (subject to applicable cure periods), prolonged force majeure events, a change of control, certain insolvency events or mutual agreement. For purposes of the Trinity agreement, "change of control" means (a) the sale of all or substantially all of the assets of a party or (b) any merger, acquisition or other transaction or series of transactions that results in any "person" becoming the "beneficial owner" (as those terms are used in Section 13(d), Rule 13d-3 and Rule 13d-5 of the Exchange Act) of more than fifty percent of the voting securities of a party (subject to certain exclusions). Additionally, the arrangement provides for a liquidated damages payment of the greater of $50.0 million or the sum of all remaining annual bonus payments at the time of the termination by the applicable party in the event of termination for material breach, certain insolvency events of or wrongful termination by the other party.
We have similar contractual arrangements with several other key dealers and third parties. For certain other dealers and third parties, substantially all of the customer agreements originated by such dealers and third parties are Sunnova agreements, although they are under no exclusivity arrangement. During the year ended December 31, 2023, Monitronics International Inc. dba Brinks Home ("Brinks Home") and Lennar accounted for 30% and 10%, respectively, of our net originations. During the year ended December 31, 2022, Lennar and Windmar PV Energy, Inc ("Windmar Energy") accounted for 15% and 13%, respectively, of our net originations. No dealer or third party other than Brinks Home, Trinity, Lennar and Windmar Energy accounted for more than 10% of our net originations during 2023 or 2022.
Direct Sales
We have established a direct to market team to sell and install our products and services in limited markets. This sales team is primarily focused on selling solutions, such as Sunnova Protect Services, Sunnova +SunSafe and financing for electric vehicle chargers, generators and other supplements as requested by consumers. In many cases, these services will be directed to a third-party installer in our network, as required, for the installation of equipment.
Commercial Sector
We have established a division to serve commercial, industrial, agricultural, not-for-profit and public sector customers. This division is primarily focused on offering solutions, such as solar energy systems, energy storage systems and electric vehicle chargers as requested by customers, through a lease agreement, loan agreement or cash purchase.
Grid Services
We have developed relationships with various independent system operators, utilities, community choice aggregators and others, seeking to provide them with specialized grid services so these grid participants can more efficiently conduct their operations. Examples of these services include demand response as well as grid capacity. These grid programs can make use of the solar energy systems, energy storage systems and other technologies installed in customer homes and businesses and managed by us via a centralized platform and internally developed software. By providing grid services, we seek to earn additional revenue, improve grid resiliency and operations where our customers are located, and lower the cost of power to our customers.
Software Platforms
We have created sophisticated cloud-based technology platforms, streamlining the origination, installation, administration, orchestration and servicing of our energy solutions. Our proprietary dealer, customer and energy management software supports customers, dealers and internal users in the sale, installation and management of our products and services. The platforms leverage cloud-based infrastructure and software capabilities using multiple third-party providers, including Salesforce, Amazon Web Services, Heroku and FinancialForce. The platforms are compatible with multiple end-user device types, including smartphone, tablet and desktop/laptop interfaces.
Our key software platforms include:
•Sunnova CatalystTM Dealer Platform: Sunnova Catalyst enables dealers to manage leads, design systems, generate quotes and contracts, and create plan sets and commissioning packages through a combination of web, tablet and mobile device interfaces. As part of the quoting feature set, customer pricing is delivered by a combination of cloud-based technologies including Genability, PV Watts (a service of the National Renewable Energy Laboratory) and proprietary applications running on Amazon Web Services and Heroku. We enable dealers to generate customer agreements and proposal documents on demand for presentation to prospective customers. Each completed quote is transferred into Salesforce for agreement generation, customer access and reporting. Sunnova Catalyst also includes features to streamline the approval process for the design and installation of solar energy systems, track install progress and establish a standard process for ongoing service and warranty management.
•Sunnova App and Portal: Sunnova App and Portal are our mobile and web experiences for customers. The mobile and web apps enable customers to interact with the Sunnova Adaptive Home. Customers can view their energy systems' production history, manage devices, pay bills, manage account and contact information, generate referrals and contact our customer service team. Sunnova App is available for both Android and iOS.
•Sunnova SentientTM: Sunnova Sentient is our proprietary platform for energy awareness, intelligence and control. Sunnova Sentient powers Sunnova Adaptive solutions for homes, businesses and communities. We are incorporating Sunnova Sentient into our dealer and customer platforms to recommend customer-specific energy solutions and optimize energy products and services. Sunnova Sentient powers our advanced grid services and carbon reduction programs.
•Salesforce: Salesforce is our central repository and system of record for all contracts, process documentation, customer account information, maintenance information and payment tracking for the life of the customer agreement. This single system allows for integrated and comprehensive reporting for the life cycle of the customer, from quote to end of the customer agreement term. Many of our other systems interact with the Salesforce platform.
•FinancialForce: FinancialForce is a cloud-based accounting system built on the Salesforce platform.
Customer Agreements
| | | | | | | | | | | | | | |
Sunnova Service | Agreement Type(s) | Sunnova Plan(s) | Description | Initial Term |
Sunnova Home Solar Service | Lease | Easy PlanTM equipment lease | Lease of solar energy system | 25 years |
LeasePlusTM New Home Solar Plan | 20 or 25 years |
Prepaid LeasePlusTM New Home Solar Plan |
Solar Benefits Agreement | 20 years |
PPA | Easy PlanTM PPA | Sale of solar energy production | 25 years |
Solar 20/20 PlanTM Agreement & Covenants | 20 years |
Fixed Rate Power Purchase Agreement |
Loan | Easy Own PlanTM equipment purchase | Sale of solar energy system | 10, 15 or 25 years |
Sunnova SunSafe® Solar + Battery Storage Service | Lease | Easy PlanTM equipment lease | Lease of solar energy system and energy storage system | 25 years |
Loan | Easy Own PlanTM equipment purchase | Sale of solar energy system and energy storage system | 10, 15 or 25 years |
Sunnova +SunSafe® Add-on Battery Service | Loan | Easy Own PlanTM equipment purchase | Sale of energy storage system | 10, 15 or 25 years |
Standalone Lease | Lease | Easy PlanTM equipment lease | Lease of energy storage system | 10 years |
Sunnova Loan | Loan | Easy Own PlanTM equipment and services | Financing of home improvement products and services (including partial or full roof replacement) independent of a solar energy system | 1 to 11 or 20 years |
Sunnova Protect Service | Service Plan | Sunnova Protect Service | Monitoring and service agreements for non-Sunnova solar energy systems | 1, 5, 10 or 20 years |
Sunnova Repair Service | Repair Service | Sunnova Repair Service | Repair service agreements for Sunnova and non-Sunnova solar energy systems | 1 year workmanship warranty |
Accessory Purchase and/or Roof Replacement | Loan | Easy Own PlanTM equipment purchase | Home improvement products and services (including partial or full roof replacement) when combined with either a Home Solar Service or Sunnova SunSafe® Solar + Battery offering | 10, 15 or 25 years |
We focus on growing a geographically diverse customer base with a strong credit profile. We perceive our recurring customer payments as high-quality assets given the broad and relatively inelastic demand for electricity and because our customers typically have high credit scores. As of December 31, 2023, our customers had, at the time of signing the customer agreement, an average FICO® score of 741. The purpose of our stringent credit approval policy is to ensure reliability of collecting payment over the duration of the customer agreements. As of December 31, 2023, approximately 0.9% of our customers were in default (over 120 days past due) under their agreements.
Our lease and PPA agreements typically include an opportunity for customers to renew for up to an additional 10 years via two five-year or one 10-year renewal options. The customer is obligated to make monthly payments to us, and we operate and maintain the solar energy system and energy storage system, if applicable, in good condition throughout the duration of the agreement. Under our lease agreements and PPAs, the customer's monthly payment or price per kilowatt hour ("kWh") is set based on a calculation that takes into account the life of the equipment and/or expected solar energy generation. The customer has an option of choosing a flat rate without an escalator or a lower initial rate with an escalator. As of December 31, 2023, approximately 40% of our lease agreements and PPAs contained a price escalator, ranging from 0.9% to 3.9% annually.
Our customer agreements are designed to offer the customer energy cost savings and bill stability relative to centralized utility prices, often resulting in an immediate reduction in the customer's overall utility bill, with little or no upfront costs. We provide our services related to solar energy systems and energy storage systems through long-term agreements in the following formats:
•Lease Agreements. Under the Easy Plan equipment lease, the customer leases a solar energy system and/or energy storage system from us at a fixed monthly rate that is typically subject to annual escalation. Under the LeasePlus New Home Solar Plan, the customer leases a solar energy system from us at a fixed monthly rate that is not subject to escalation throughout the term of the lease. Under the Prepaid LeasePlus New Home Solar Plan, the lease is prepaid upfront for the term of the lease. The Solar Benefits Agreement is offered to customers in certain states and like the LeasePlus New Home Solar Plan, the customer leases a solar energy system from us at a fixed monthly rate that is not subject to escalation throughout the term of the lease. We own, operate and maintain the solar energy system under our lease agreements. In most cases, lease agreements include a performance guarantee under which we will refund payments or credit the customer if the solar energy system fails to meet a guaranteed minimum level of power production for specified time periods.
•PPAs. We offer PPAs with variable monthly payments or balanced monthly payments. We own, operate and maintain the solar energy system under our PPAs.
•Easy Plan PPA with variable billing. The customer agrees to pay for all power generated by a solar energy system at a price per kWh that is generally lower than the local utility rate. The monthly payment will vary month to month based on the system's actual production. The monthly rate is generally subject to annual escalation.
•Easy Plan PPA with balanced billing. This is similar to the variable billing option except the customer's payments are levelized over the course of a year based on an annual production estimate so the customer's payments are insulated from monthly fluctuations in energy production subject to a true-up at the end of such period. The fixed monthly rate is typically subject to annual escalation. Should the annual production estimate exceed actual production, the customer will receive a bill credit at the end of the applicable period and we may decrease the estimated production (and corresponding monthly payments) for the subsequent year. Should actual production exceed the annual estimate, we may apply the overproduction to a subsequent year or increase the estimated annual production and corresponding monthly payments for the subsequent year. The estimated annual production will not increase more than 110% from the estimated annual production for the first year.
•Solar 20/20 Plan Agreement & Covenants. The customer agrees to pay for all power generated by a solar energy system at a price per kWh that is indexed to the local utility rate but is guaranteed to be at least 20% lower than the applicable utility's weighted-average rate that takes into account the customer's estimated production. The monthly payment will vary month to month based on the system's actual production and that month's indexed rate.
•Fixed Rate Power Purchase Agreement. This is similar to the variable billing option except the monthly rate is fixed throughout the term of the agreement and not subject to annual escalation.
•Loan Agreements. Pursuant to an Easy Own Plan equipment purchase agreement, the customer purchases the solar energy system from a dealer using financing provided by us. The customer repays the amount financed plus a finance charge through monthly payments for a term of 10, 15 or 25 years. We purchase the Easy Own Plan equipment purchase agreement from the dealer and agree to operate and maintain the solar energy system. We operate and maintain the solar energy system through our network of dealers. In most cases, Easy Own Plan equipment purchase agreements include a production guarantee under which we will refund payments or credit the customer if the solar energy system fails to meet a guaranteed minimum level of power production for specified time periods. Customers under our Easy Own Plan equipment purchase agreements have the option to prepay outstanding principal amounts, in part or in full, without penalty.
•Energy Storage Systems. Our Sunnova SunSafe program offers customers the option of a solar energy system integrated with a solar storage system. The customer can either choose an Easy Plan equipment lease or Easy Own Plan equipment purchase plan. These are similar to our Easy Plan equipment lease and Easy Own Plan equipment purchase for home solar services but include energy storage systems with the solar energy system. The customer may select a term of 10, 15 or 25 years for the Easy Own Plan equipment purchase. These agreements have a production guarantee for the solar energy system, similar to the home solar service Easy Plan equipment lease and Easy Own Plan equipment purchase plans, except in Guam, Saipan, Hawaii, Puerto Rico, Arkansas and Florida. Additionally, we offer
the Sunnova +SunSafe agreement to new and existing customers in several states and territories, under which the customer purchases an energy storage system from a dealer using financing provided by us. Under the Sunnova +SunSafe agreement, the customer repays the amount financed plus a finance charge through monthly payments for a term of 10, 15 or 25 years. In the fourth quarter of 2023, we launched our standalone lease program in several states to new and existing customers, under which the customer can lease an energy storage system with a fixed monthly payment for a term of 10 years.
•Sunnova Loan. We finance energy-related products and services and other sustainable home products sold by our dealers/contractors independent of a solar energy system. We offer customer financing for products including home security and monitoring, home automation, energy management and other smart home devices, upgraded roofing, modern HVAC, generators, water systems, water heaters, main panel upgrades and electric vehicle charging. We have established a niche amongst pure financing competitors by providing energy-related products and services and other sustainable home products with competitive rates and tenors. Where applicable, the financed products come with a standard manufacturer's warranty on equipment. Our Sunnova Loan offering gives our dealers and contractors the flexibility to offer additional products and services to customers outside of a traditional solar loan. Customers may select a pre-defined term ranging from 1 to 20 years.
•Sunnova Protect Services. For solar energy systems not owned or sold by us, our Sunnova Protect Services agreements provide customers maintenance and repairs as well as system monitoring and diagnostics. We provide two levels of service: (a) Basic, which is monitoring only and (b) Premium, which is monitoring plus repair and/or replacement of all equipment under a manufacturer's warranty. The customer may select the level of service and a term of 1, 5, 10 or 20 years. Prior to commencing coverage, we will run a diagnostic evaluation on the customer's solar energy system and will identify any underperforming equipment and estimate production. The customer may elect to repair underperforming equipment, on a time and materials basis, so that it may be included in the coverage going forward. Should the customer decline to repair the underperforming equipment, it will not be covered under the Sunnova Protect Services agreement.
•Sunnova Repair Services. Through our Sunnova Repair Services, we provide repairs to solar energy systems and energy storage systems for out of warranty system repairs or to owners of solar energy systems and energy storage systems not owned or sold by us who do not have a service provider. Additionally, Sunnova Repair Services can address repairs not covered by warranties for both solar energy systems and energy storage systems owned or sold by us and solar energy systems and energy storage systems not owned or sold by us. The variety of repairs that Sunnova Repair Services may provide includes assessment and troubleshooting, warranty administration, warranty fulfillment, preventative maintenance and repair and replacement of equipment. Additionally, suppliers and financiers procure Sunnova Repair Services for repairs on their behalf.
As of December 31, 2023, approximately 24% of our customers had lease agreements, approximately 24% had PPAs, approximately 37% had loan agreements and approximately 12% had service plan agreements.
We have developed protocols and policies to qualify potential customers for different product and service arrangements. For customer agreements, we review the customer's credit application for compliance with our credit standards early in the origination process. Customer agreements that are accepted must comply with our underwriting standards, which emphasize the prospective customer's ability to pay and the value of the customer's estimated savings under the solar service agreement compared to traditional utility rates. The customer agreement exceptions are solar service agreements of prospective purchasers of homes subject to the Easy Plan equipment lease, LeasePlus New Home Solar Plan, the Prepaid LeasePlus New Home Solar Plan, the Solar 20/20 Plan Agreement & Covenants and the Fixed Rate Power Purchase Agreement. These customers are not subject to credit checks and these agreements are freely transferable.
We maintain reporting and controls in place to monitor the timeliness of customer payments. As of December 31, 2023, approximately 86% of all payments received pursuant to our customer agreements are collected via Automated Clearing House payments (i.e., the funds are deducted automatically on a monthly basis from the customer's bank account), approximately 8% are collected via automatic recurring credit card payments and approximately 6% are collected through non-recurring means. If a customer becomes delinquent on one or more monthly installment payments, we typically begin a collection process with respect to the customer.
In the event a customer elects to sell his or her home or business, the customer's agreement may be transferred to the prospective purchaser through prescribed reassignment procedures, subject to certain conditions related to the prospective purchaser's creditworthiness. To initiate the reassignment process, the customer must notify us of the pending sale, after which we will provide a copy of the agreement, including any amendments, to the prospective purchaser. The prospective purchaser
will then be required to complete a customer profile and a credit application. With the exception of customers originated through our homebuilder channel, each prospective purchaser's FICO® Score and Experian TEC (Telecommunications, Energy and Cable) Score will be evaluated on the same basis as a customer in a new origination and will be evaluated by our computer auto-decisioning system.
In the event a prospective purchaser does not meet our credit criteria or elects not to be subject to such credit inquiry, the current customer will be required to prepay the agreement in full or the prospective purchaser will be required to provide a security deposit in cash in accordance with such customer's agreement or our transfer policy prior to the approval of the reassignment. Each such security deposit is held in a separate account until the earlier of (a) the time at which the prospective purchaser satisfies our established credit criteria or (b) upon 12 consecutive months of on-time payments following the date of reassignment.
Monitoring and Maintenance Service and Warranties
Our customer agreements typically are accompanied by a warranty and/or monitoring and service agreement. The warranty and monitoring services provided with each type of customer agreement vary but can include operations and maintenance, equipment repairs, monitoring or site power controls and energy management of both supply and demand. Additionally, our Sunnova Protect program offers monitoring, service and facilitation of repairs across two tiers of service for solar energy systems owned by the home or business owner and installed by a third party.
For our customer agreements, we provide ongoing service during the entire term of the customer relationship, including monitoring, maintenance and warranty services of the solar energy system and energy storage system, if applicable. We have an operations and maintenance administration organization consisting of administration staff and a dedicated monitoring and production team that evaluates the solar energy systems' and energy storage systems' performance daily. When a performance or operation issue is detected via our monitoring system, we provide or arrange for troubleshooting or field services as necessary. We rely on our own personnel and our dealer network to complete the field services required to maintain the solar energy systems. After completion of the resolution steps, the maintenance administration organization verifies remotely the issue has been resolved and the system or energy service is performing as expected. For accessory loan agreements, we do not provide ongoing monitoring, warranties or similar services.
Additionally, customers under our agreements receive a range of warranties on the related solar energy systems and energy storage systems, including warranties for module production and against defects in workmanship and against component or materials breakdown. We also provide the customers with a warranty on roof penetrations of up to 10 years in compliance with applicable state, territorial or local law. Through our agreements with our dealers, the dealer is generally obligated, at its sole cost and expense, to correct defects in its installation work for a period of up to 10 years and provide a roof warranty on roof penetrations of 5 to 10 years. Furthermore, we provide a pass-through of the solar photovoltaic panel manufacturers' warranty coverage to our customers, generally of 25 years, and of the inverter and energy storage system manufacturers' warranty coverage, typically of 10 to 25 years. We typically exercise our rights under the manufacturer's equipment warranties or dealer installation warranties before incurring direct charges or costs. Many service expenses are borne by our dealers and not us directly because of the workmanship warranty provided by the dealers to us. Additionally, many component costs and, in many cases, in and out labor costs, are covered by manufacturer warranties.
Seasonality
The amount of electricity our solar energy systems produce is dependent in part on the amount of sunlight, or irradiation, where the assets are located. Because shorter daylight hours in winter months and poor weather conditions due to cloud cover, rain or snow results in less irradiation, the output of solar energy systems will vary depending on the season or the year. While we expect seasonal variability to occur, the geographic diversity in our assets helps to mitigate our aggregate seasonal variability.
Our Easy Plan PPAs with variable billing, Solar 20/20 Plan Agreements and Fixed Rate Power Purchase Agreements are subject to seasonality because we sell all the solar energy system's energy output to the customer at either a fixed price per kWh or indexed, variable rate per kWh. Our Easy Plan PPAs with balanced billing are not subject to seasonality (from a cash flow perspective or the customer's perspective) within a given year because the customer's payments are levelized on an annualized basis so we insulate the customer from monthly fluctuations in production. In addition, energy production true-ups and production estimate adjustments for Easy Plan PPAs with balanced billing are calculated over an entire year. However, our Easy Plan PPAs with balanced billing are subject to seasonality from a revenue recognition perspective because, similar to the Easy Plan PPAs with variable billing, we sell all the solar energy system's energy output to the customer. Our lease agreements are not subject to seasonality within a given year because we lease the solar energy system to the customer at a fixed monthly
rate and the reference period for any production guarantee payments is a full year. Finally, our loan agreements are not subject to seasonality within a given year because the monthly installment payments for the financing of the customers' purchase of the solar energy system are fixed and the reference period for any production guarantee is a full year.
In addition, weather may impact our dealers' ability to install solar energy systems and energy storage systems. For example, the ability to install solar energy systems and energy storage systems during the winter months in the Northeastern U.S. is limited. This can impact the timing of when solar energy systems and energy storage systems can be installed and when we can acquire and begin to generate revenue from solar energy systems and energy storage systems.
Intellectual Property
We rely on intellectual property laws, primarily a combination of copyright and trade secret laws in the U.S., as well as license agreements and other contractual provisions, to protect our proprietary technology. We also rely on several registered and unregistered trademarks to protect our brand. In addition, we generally require our employees and independent contractors involved in the development of intellectual property on our behalf to enter into agreements to limit access to, and disclosure and use of, our confidential information and proprietary technology. We also continue to expand our technological capabilities through licensing technology and intellectual property from third parties.
Government Regulations
While we are not regulated as extensively as a public utility where our business is conducted in the U.S., we are subject to various national, state, territorial and other local regulatory regimes. For example, in California and New York, we are subject to regulations concerning marketing and contracting promulgated by state public utility commissions. In some states, such as Arizona and Florida, we are limited to offering only a lease agreement or a loan agreement to homeowners and are prohibited from offering a PPA, which is deemed a retail sale of electricity in such states and can only be made by a regulated utility. In Puerto Rico, we are subject to regulation as an electric power company by the PREB and are required to comply with certain filing, certification, reporting and annual fee requirements. Regulation by the PREB as an electric power company does not currently subject us to centralized utility-like regulation or require the PREB's approval of charges to customers.
To operate the solar energy systems and energy storage systems, our dealers work with customers to obtain interconnection permission from the applicable local electric distribution utility. In many states and territories, by statute, regulations or administrative order, there are standardized procedures for interconnecting distributed solar energy systems and related energy storage systems to the electric utility's local distribution system. In some states, such as New Jersey and Massachusetts, certain utilities, such as municipal utilities or electric cooperatives, are exempt from some interconnection requirements. Provided that the system and energy, if applicable, qualify for the standardized procedures based upon size, use of industry-standard components, location on a suitable local network and other applicable requirements, utilities in such states or territories are required to interconnect qualifying solar energy systems and energy storage systems on an expedited basis relative to non-qualifying systems. Expedited procedures, when available, streamline the installation and interconnection process for solar energy systems and energy storage systems to begin operating. In the U.S. states and territories in which we operate, our dealers typically obtain interconnection permission on behalf of us and our customers using standardized interconnection procedures.
In certain states, independent solar energy producers who enter into lease agreements, PPAs or loan agreements with home and business owners for solar energy systems are required to make certain disclosures to the home or business owner regarding the solar energy system and the terms of the agreement and/or record a notice against the title to the real property on which the electricity is generated and against the title to any adjacent real property on which the electricity will be used. The notice does not constitute a title defect, lien or encumbrance against the real property.
Our operations, as well as the operation of our dealers and contractors, are subject to stringent and complex federal, state, territorial and local laws, including regulations governing the occupational health and safety of employees, regulations of wages and benefits and environmental protection. For example, we and our dealers/contractors may be subject to the regulations of the U.S. Department of Labor's Occupational Safety and Health Administration ("OSHA") and Wage and Hour Division, the U.S. Department of Transportation ("DOT"), the U.S. Environmental Protection Agency ("EPA") and comparable state and territorial entities that protect and regulate employee health and safety and the environment. These include, for example, regulations regarding the disposal of solid and hazardous wastes from the solar energy systems we own and the wages paid to our dealers and contractors. In addition, environmental laws can result in the imposition of liability in connection with end-of-life system disposal, such as in connection with disposal and recycling of batteries.
We and our dealers/contractors are also subject to laws and regulations related to interactions with consumers, including those pertaining to sales and trade practices, privacy and data security, equal protection, consumer financial and credit
transactions, consumer collections, mortgages and re-financings, home or business improvements, trade and professional licensing, warranties and various means of customer solicitation, as well as specific regulations pertaining to solar installations.
For a discussion of these and other regulatory requirements, see "Risk Factors—Risks Related to Regulations".
Government Incentives
In September 2023, we entered into a loan guarantee arrangement with the U.S. Department of Energy (the "DOE") under Title XVII of the Energy Policy Act of 2005 ("Title XVII") pursuant to which the DOE has agreed, subject to certain conditions, to guarantee up to $3.0 billion of aggregate obligations in a series of intercompany loans between our affiliates made in connection with limited recourse financings, such as the Sunnova Hestia Loan Program. Recipients of Title XVII loan guarantees may be subject to compliance with various additional federal law and contractual requirements, such as the Davis-Bacon Act and the False Claims Act, as well as the statutory and regulatory requirements of Title XVII. In November 2023, we have been conditionally selected by the DOE Grid Deployment Office as part of a $440 million investment from the Puerto Rico Energy Resilience Fund to install rooftop solar energy systems and energy storage systems in vulnerable single-family households across Puerto Rico.
U.S. federal, state, territorial and local governments have established various incentives and financial mechanisms to reduce the cost of solar energy and to accelerate the adoption of solar energy. These incentives come in various forms, including rebates, tax credits and other financial incentives such as payments for renewable energy credits associated with renewable energy generation, exclusion of solar energy systems and energy storage systems from property tax assessments, system performance payments, accelerated depreciation and net energy metering, or net metering, programs. These incentives make solar energy system and energy storage system ownership more attractive to some home and business owners and enable us to charge our customers lower prices to purchase energy generated by our solar energy systems and energy storage systems or to lease or purchase our solar energy systems and energy storage systems than they would normally be expected to pay for utility-provided energy. These incentives also help catalyze private sector investments in solar energy and efficiency measures, including the installation and operation of residential and commercial solar energy systems and energy storage systems.
Net metering is one of several key policies that have enabled the growth of distributed solar in the U.S., providing significant value to certain customers with solar energy systems for the electricity generated by their systems but not directly consumed on site. Net metering allows a customer to pay the local electric utility only for power usage net of excess production from the customer's solar energy system. Customers receive a credit for the energy an interconnected solar energy system generates in excess of that needed by the home or business, which is provided to the electrical grid. The credit offsets energy usage incurred by the customer at times when the customer requires more electricity than is generated by the solar energy system. In many markets, this credit is equal to the residential retail rate for electricity and in other markets the rate is less than the retail rate and may be based, for example, in whole or in part on the centralized electric utility's "avoided cost" for electricity that it would have had to generate or purchase at wholesale to meet the customer's demand. Furthermore, when coupled with a time of use rate program in certain electric utility territories, a home or business owner may offset usage billed at lower rates with net metering credits provided at a higher rate.
For these reasons, net metering credits incentivize consumers to use distributed solar in certain jurisdictions, including some of those in which we operate. In some electric utility territories, any excess credits are rolled over to the next billing period and may also be cashed out later at a rate lower than the retail rate. Most states, the District of Columbia, Puerto Rico and Guam have adopted some form of net metering by statute, regulation, administrative order or a combination thereof, although some of these jurisdictions provide for a credit at less than the retail rate. In some jurisdictions, centralized electric utilities have also adopted net metering on a voluntary basis. Some of the states in which we operate, including New Jersey, Maryland, Massachusetts, Rhode Island, Delaware, Illinois and Hawaii, have in place policies that limit or permit utilities to limit the amount of total electricity generated through net metering and/or solar energy systems, and some of these states, as well as other states or territories, including Pennsylvania, Nevada, New Mexico and Guam, have policies that limit or place conditions on the size of individual solar energy systems.
Net metering and other incentive programs are subject to legislative and regulatory review in many states and territories in which we operate, and the availability and value of these programs could be limited, reduced or phased out. Some states such as Arizona, Nevada, California and Kentucky have reduced their net metering credits. Further reviews by these states and others are anticipated and the subsequent amount of net metering credits will continue to be assessed over the next few years in states that have net metering policies. For example, net metering rates in Colorado, New Jersey, Puerto Rico and South Carolina are up for consideration currently or over the next few years.
In December 2022, the California Public Utility Commission (the "CPUC") approved a successor program (Net Energy Metering 3.0 or "NEM 3.0")to its current net metering program that reduces the value of net metering credits from the retail rate to an avoided cost rate for customers that will have solar energy systems installed on their homes and businesses over the next five years. Customers will also be placed on an electrification rate. Residential customers located in the territories of two of the investor-owned utilities will also receive small adders to the avoided cost rate, while the residential customers in the territory of the third investor-owned utility, as well as new homes and commercial customers in all three of the service territories, do not receive any adders. In addition, it may only be possible for customers to realize savings from installing solar energy systems compared to the utility retail rate by adding storage to their solar energy systems or undersizing them so exports are limited. The decision went into effect in April 2023.
New York is working on developing an alternative to net metering through a Value of Distributed Energy Resources credit that would allow certain customers to receive direct monetary compensation as opposed to a net metering credit. This program was expected to be implemented in 2021 but has been delayed due to not enough utilities having deployed smart meters that would enable an accurate valuation of distributed energy production. New York is keeping net metering in place with a nominal customer benefit charge added for solar customers who have solar energy systems installed after January 1, 2022. As a result of the Definitive Restructuring Support Agreement ("DRSA") between the PREPA and its creditors submitted in May 2019, which is currently pending before the U.S. District Court for the District of Puerto Rico, net metering customers in Puerto Rico may be impacted by transition charges and other requirements. Several legislators publicly oppose the DRSA and negotiations on the DRSA continued throughout 2023.
In September 2020, the Federal Energy Regulatory Commission ("FERC") issued Order 2222 directing regional transmission operators ("RTO") and independent system operators ("ISO") to remove barriers to the participation of distributed energy resources ("DERs") in wholesale electricity markets on an aggregated basis. While the FERC's order is subject to challenge as well as further proceedings concerning the implementation of the order's directives in each of the RTOs/ISOs, Order 2222 provides a framework that once implemented will allow for aggregated DERs to be compensated through the wholesale market for the capacity, energy and ancillary services they provide.
In late 2020, we began offering our lease storage customers participation in the ConnectedSolutions demand response program through Eversource and National Grid utilities in Massachusetts. We expanded these offerings for our Connecticut, Rhode Island and New Hampshire customers in early 2021, including loan storage customers. Our storage customers in California have the option to participate in the demand response market to help California manage its electricity demand, where we manage the battery storage system in response to price signals in the energy market for customers served by Pacific Gas and Electric Company, San Diego Gas & Electric utilities and Southern California Edison to provide demand response and resource adequacy. In late 2023, we expanded our Sunnova Sentient Virtual Power Plant Platform to Puerto Rico to participate in LUMA Energy, LLC's battery energy sharing program. Further, we will seek to participate in market specific opportunities and negotiate bilateral agreements, where appropriate, to enroll systems and customers in energy management and demand response programs.
Many states and territories have adopted renewable portfolio energy production requirements. The majority of states, the District of Columbia and Puerto Rico have adopted a renewable portfolio standard ("RPS") that requires regulated electric utilities to generate or procure a specified percentage of total electricity delivered to customers in the state or territory from eligible renewable energy sources, such as solar energy systems, by a series of specified dates. In addition, several other states have set voluntary goals for renewable generation.
Roughly one-third of states with RPS policies require a minimum portion of the RPS be met by electric generation from solar energy systems, with substantial penalties for non-compliance. To demonstrate compliance with such RPS mandates, electric generation providers must submit SRECs to the applicable authority. One SREC is produced by one megawatt-hour of energy generated by an eligible solar energy system. The specified amount of energy is dependent on system size and when the solar energy system receives a "permission to operate" order. Electric generation providers can either generate their own SRECs through solar energy systems they own or they can purchase SRECs owned by other parties.
SRECs are a distinct product, separate from the electricity generated by solar energy systems. We and our customers apply for and receive SRECs in certain jurisdictions for power generated by the solar energy systems we own. As a distinct product from the electricity generated by solar energy systems, SRECs represent a separate source of cash flow from the sale of electricity. SRECs can be sold with or without the actual electricity associated with the renewable-based generation. Solar energy system owners are typically able to sell SRECs to electric generation providers, such as electric utilities, or in the SREC commodity market. We have hedged a portion of our expected SREC production under fixed price forward contracts. The forward contracts require us to physically deliver the SRECs upon settlement.
Several states have an energy storage mandate or policies designed to encourage the adoption of storage. For example, California offers a cash rebate for storage installations through the Self Generation Incentive Program and Massachusetts and New York offer performance-based financial incentives for storage. Storage installations also are supported in certain states by state public utility commission policies that require utilities to consider alternatives such as storage before they can build new generation. In February 2018, the FERC issued Order 841 directing RTOs and ISOs to remove barriers to the participation of storage in wholesale electricity markets and to establish rules to help ensure storage resources are compensated for the services they provide. An appeal of Order 841 filed by utility trade associations and other parties challenging the extent of the FERC's jurisdiction over storage resources connected to distribution systems was rejected by the U.S. Court of Appeals for the D.C. Circuit in July 2020.
Some state and territorial governments, centralized electric utilities, municipal utilities and co-operative utilities offer a cash rebate or other payment incentive for the installation and operation of a solar energy system or energy storage system or to customers undertaking other energy efficiency measures. Capital cost or "up-front" rebates provide funds to solar customers or developers or solar energy system owners, such as us, based on the cost, size or expected production of a customer's solar energy system. Performance-based incentives and tariff-based incentives provide payments to solar customers or a solar energy system owner based on the energy generated by the solar energy system during a pre-determined period. These rebates and payment incentives, when available, improve the economics of distributed solar to both us and our customers.
The economics of purchasing a solar energy system and energy storage system are also improved by eligibility for accelerated depreciation, which allows for the depreciation of equipment according to an accelerated schedule set forth by the IRS. This accelerated schedule allows a taxpayer to recognize the depreciation of tangible solar property on a five-year basis even though the useful life of such property is greater than five years. The acceleration of depreciation creates a valuable tax benefit that increases the return on investment from a solar energy system and energy storage system. We benefit from accelerated depreciation on the solar energy systems and energy storage systems we own.
The federal government currently provides business investment tax credits under Section 48(a) (the "Section 48(a) ITC") and, for projects that begin construction after December 31, 2024, under Section 48E (the "Section 48E ITC") as well as residential energy credits under Section 25D (the "Section 25D Credit") of the U.S. Internal Revenue Code of 1986, as amended (the "Code"). In August 2022, the Inflation Reduction Act of 2022 (the "IRA") was signed into law. Among other things, the IRA expanded and extended the tax credits available to solar energy projects in an effort to achieve President Biden's non-binding target of net-zero emissions by 2050. The IRA extended the investment tax credit for eligible solar energy projects through at least 2033 and, depending on the location of a particular project, its size, its ability to satisfy certain labor and domestic content requirements and the category of consumers it serves, the investment tax credit percentage can range between 6% and 70%. For projects that begin construction after December 31, 2024, the Section 48(a) ITC will be replaced with the Section 48E ITC, a new clean energy investment tax credit, and the Section 48E ITC percentage will be the same as the percentage for the Section 48(a) ITC and subject to the same requirements to benefit from the full 30%. Following passage of the IRA, retroactive to the beginning of 2022, we are able to claim the Section 48(a) ITC or the Section 48E ITC, as applicable, for energy storage systems whether attached to a solar energy system or stand-alone.
The IRA also extended the Section 25D Credit, which allows qualifying homeowners who purchase a residential solar energy system and/or energy storage system to apply up to 30% of the cost of installing those systems as a credit against their U.S. federal income taxes, thereby returning a material portion of the purchase price of the residential solar energy system and/or energy storage system to homeowners. Under the terms of the current extension, the Section 25D Credit will remain at 30% through the end of 2032, reduce to 26% for 2033, reduce to 22% for 2034 and further reduce to 0% after the end of 2034, unless it is extended before that time.
Certain states and territories in which we operate offer a personal and/or corporate investment or production tax credit for solar energy. Further, most of the states and local jurisdictions have established sales and/or property tax incentives for renewable energy systems that include exemptions, exclusions, abatements and credits. For a discussion of these and other governmental incentives, see "Risk Factors—Risks Related to Regulations".
Competition
We believe our primary competitors are centralized electric utilities that supply electricity to our potential customers. We compete with these centralized electric utilities primarily based on price (cents per kWh), predictability of future prices (by providing pre-determined annual price escalations, where applicable), reliability and the ease by which customers can switch to electricity generated by solar energy systems. We believe we compete favorably with centralized electric utilities based on these factors in the states and territories where our customer agreements are offered.
We also compete with retail electric providers and independent power producers that are not regulated like centralized electric utilities but have access to the centralized utilities' electricity transmission and distribution infrastructure pursuant to state, territorial and local pro-competitive and consumer choice policies. Furthermore, we compete with solar companies with vertically integrated business models, such as Sunrun Inc. and SunPower Corporation. In addition, we compete with other solar companies who sell or finance products directly to consumers, inclusive of programs like Property-Assessed Clean Energy, such as Goodleap, LLC and Mosaic, Inc. For example, we face competition from solar installation businesses that seek financing from external parties or utilize competitive loan products or state and local programs. In the future, we may also compete with solar companies that have business models similar to our own, some of which are marketed to potential customers by our dealers and contractors. We compete with these companies based on the competitiveness of the products, the overall customer relationship and the commissions we are willing to pay dealers and contractors for the origination of new customers.
Suppliers
The major components of the solar energy systems include (a) solar photovoltaic panels that turn sunlight into direct current ("DC") electricity, (b) inverters that convert solar-generated DC electricity into alternating current ("AC") electricity, the form of energy used by most standard household appliances, (c) racking systems that attach the solar photovoltaic panels to the roof or ground, (d) a remote monitoring system that measures and monitors all energy generated by the solar energy system and provides alerts about system performance and (e) in some cases, an energy storage system that stores excess energy generated by the photovoltaic panels to supplement energy supply during hours when energy consumption exceeds energy produced by the photovoltaic panels or in the event of a grid outage. The solar energy system may also be connected to the electrical grid or other supplemental energy sources, such as electric vehicle chargers, smart load controllers or panels and generators, with additional wiring and electrical hardware.
We require our dealers to choose all major components of the solar energy system or energy storage system from a pre-approved list of manufacturers and models. By allowing dealers to choose from several manufacturers and models without direct supplier obligations, we have greater flexibility to satisfy customer demand, ensure competitive pricing and adequate supply of components and reduce the concentration of warranty risks. We have entered into master contractual arrangements with each vendor on our pre-approved list of vendors that defines the general terms and conditions of our purchases and those of our dealers, including warranties, product specifications, indemnities, delivery and certain other terms. Our dealers typically purchase solar panels and inverters on an as-needed basis from our pre-approved suppliers at then-prevailing prices pursuant to purchase orders having the benefit of our master contractual arrangements. At times, we will also procure equipment directly and sell it to our dealers.
For installations of solar energy systems on new homes or businesses, we negotiate pricing directly with the manufacturers for all components used in the solar energy systems. Based upon our production planning model, we position and deliver the material on a just-in-time basis to our dealers to meet the builder requirements.
We evaluate and qualify our manufacturers and their product offerings based on total cost of ownership, reliability, warranty coverage, credit quality and other factors. All equipment must be listed on the California Energy Commission's SB1 List of Eligible Equipment. All approved solar photovoltaic panels must have a minimum 25-year power warranty and 25-year workmanship warranty. We also require approved solar photovoltaic panels to undergo extended reliability testing as an indication of a 25-year or greater lifetime. Beginning in April 2016, we required all our manufacturers carry a 25-year warranty, or offer a warranty extension to 25 years, on all product offerings to be eligible for inclusion on our approved vendor list. Prior to April 2016, we sourced inverter manufacturers offering a warranty of no less than 10 years. All approved racking systems are required to be solar energy system Fire Class Rated "A" with a Type 1 module per California Fire requirements. Additionally, the racking system must have a Professional Engineers stamp as proof of structural analysis and wind speed certification and the racking system must be certified as conforming to the integrated grounding and bonding requirements of UL Subject 2703. All replacement parts and components must meet or exceed the same standards as those of the original installation.
In September 2018, the Office of the United States Trade Representative ("USTR") determined to modify its prior actions in its investigation into certain acts, policies and practices of the government of China related to technology transfer, intellectual property and innovation pursuant to Section 301 of the Trade Act of 1974 by imposing an additional 10% duty on $200 billion worth of products from China, including inverters. In May 2019, the tariffs were increased from 10% to 25% and may be raised by the USTR in the future. If inverter production is not shifted to other countries before any tariff rate increase on these products, the price of inverters could increase. However, the cost of solar photovoltaic panels and inverters generally do not comprise a meaningful portion of our operating expenses. In addition, many of the solar photovoltaic panel and inverter manufacturers on our approved vendor list are from countries other than China, including Canada, the U.S., Mexico, Vietnam and Malaysia. See "Risk Factors—Risks Related to the Solar Industry—Increases in the cost or reduction in supply of solar energy system and energy storage system components due to tariffs or trade restrictions imposed by the U.S. government could
have an adverse effect on our business, financial condition and results of operations". These tariffs have not had a material impact on our business or our operations.
Human Capital Management
At Sunnova, our unwavering commitment to service, synergy and sustainability shapes our approach to human capital management. These core values not only reflect our belief in providing better energy service to the communities we service but also underscore our dedication to the well-being and development of our employees. Our governance framework, led by our board of directors (our "Board") and its committees, is structured to align human capital management with our broader business objectives. This includes rigorous oversight of inclusion and diversity programs, employee development, performance management, compensation and succession planning. Our audit committee collaborates closely with our enterprise risk management function to identify and mitigate labor and human capital risks.
By embracing the diversity of our customers, employees and communities, we are committed to creating an inclusive environment that reflects a spectrum of backgrounds and cultures. Our initiatives focus on enhancing attraction, retention and advancement of a diverse workforce, ensuring our team represents the communities we serve. We place a high premium on the continuous training and development of our employees. Our employee training and development programs span e-learning, classroom training, performance management and leadership initiatives. Regular employee surveys provide valuable insights, helping us refine our attraction, retention and advancement strategies and enhance employee engagement. Safety is of paramount importance at Sunnova. Our objective of zero workplace injuries drives our comprehensive safety programs, which include protocols for various operational risks. The well-being of our employees is further supported by comprehensive benefits that protect their health, financial security and foster a sense of ownership through stock incentive programs.
As of December 31, 2023, our dynamic team comprised of 2,047 employees and is a reflection of our growth and commitment to creating jobs in clean energy. We value our relationships with all our employees, are not party to any collective bargaining agreements, have not experienced any strikes or work stoppages and maintain a focus on positive employee relations. We encourage open dialogue and transparency, with our CEO regularly engaging in townhall meetings to discuss operational results and address employee queries. Additionally, our anonymous hotline ensures employees can voice concerns regarding compliance and ethics comfortably. Sunnova's future is intricately linked with our human capital management. Our focus on integrating our core values into every aspect of employee experience underpins our goal of advancing the energy industry through collaboration, ownership and empowerment. As we continue to grow, our commitment to our employees remains central to our mission to power energy independence.
Insurance
We maintain the types and amounts of insurance coverage we believe are consistent with customary industry practices. Our insurance policies cover employee and contractor-related accidents and injuries, property damage, business interruption, storm damage, inventory, vehicles, fixed assets, facilities, cyber risk, crime and general liability deriving from our activities. Our insurance policies also cover directors, officers, employment practices and fiduciary liabilities. We may also be covered for certain liabilities by insurance policies owned by third parties, including, but not limited to, our dealers, contractors and vendors.
Available Information
We file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Exchange Act. The Securities and Exchange Commission ("SEC") maintains a website at www.sec.gov that contains reports, proxy and information statements and other information we file with the SEC electronically. Copies of our reports on Form 10-K, Form 10-Q, Form 8-K and amendments to those reports may also be obtained, free of charge, electronically on the investor relations page on our website located at investors.sunnova.com as soon as reasonably practical after we file such material with, or furnish it to, the SEC.
We also use the investor relations page on our website as a channel of distribution for important company information. Important information, including press releases, analyst presentations and financial information regarding us, as well as corporate governance information, is routinely posted and accessible on the investor relations page on our website. Information on or that can be accessed through our website is not part of this Annual Report on Form 10-K and the inclusion of our website address is an inactive textual reference only.
Item 1A. Risk Factors.
Investing in our common stock involves a high degree of risk. You should carefully consider the risks described below together with all of the other information included in this Annual Report on Form 10-K, including the section titled "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our annual audited consolidated financial statements ("consolidated financial statements") and related notes, before deciding to invest in our common stock. We may experience additional risks and uncertainties not currently known to us; or, as a result of developments occurring in the future, conditions that we currently deem to be immaterial may also materially and adversely affect our business, financial condition, cash flows and results of operations. If any of the risks actually occur, they may materially and adversely affect our business, financial condition, cash flows and results of operations. In this event, the trading price of our common stock could decline and you could lose all or part of your investment in us.
Risks Related to Our Business
Historically, we have incurred operating and net losses and we may be unable to achieve or sustain profitability in the future.
We incurred operating losses of $243.4 million, $81.5 million and $54.9 million and net losses of $502.4 million, $130.3 million and $147.5 million for the years ended December 31, 2023, 2022 and 2021, respectively. These historical operating and net losses were due to a number of factors, including increased expenses to fund our growth and related financing needs. We expect to incur significant expenses as we finance the expansion of our operations and implement additional internal systems and infrastructure to support our growth and operations. We do not know whether our revenue will grow rapidly enough to absorb these costs. Our ability to achieve profitability depends on a number of factors, including:
• growing our customer base and originating new customer agreements on economic terms;
• maintaining or lowering our cost of capital;
• reducing operating costs by optimizing our operations and maintenance processes;
• maximizing the benefits of our dealer network;
• finding additional tax equity investors and other sources of institutional capital; and
• the continued availability of various governmental incentives for the renewable energy industry.
Even if we do achieve profitability, we may be unable to sustain or increase our profitability in the future.
Our growth and operations strategy depends on the continued origination of customer agreements by us and our dealers.
Our growth and operations strategy depends on the continued origination of customer agreements by us and our dealers. We may be unable to originate additional customer agreements and related systems in the numbers or at the pace we currently expect for a variety of reasons, including, among other things, the following:
• demand for solar energy systems or energy storage systems failing to develop sufficiently or taking longer than expected to develop;
• solar energy technology being available at economically attractive prices as a result of factors outside of our control, including utility prices not rising as quickly as anticipated;
• issues related to identifying, engaging, contracting, compensating and maintaining relationships with dealers and the negotiation of dealer agreements;
• issues related to financing, construction, permitting, the environment, governmental approvals and the negotiation of customer agreements;
• a reduction or elimination of government incentives or adverse changes in policy and laws for the development or use of solar energy, including net metering, SRECs and tax credits;
• other government or regulatory actions that could impact our business model;
• negative developments in public perception of the solar energy industry; and
• competition from other solar companies and energy technologies, including the emergence of alternative renewable energy technologies.
If the challenges of originating customer agreements and related systems increase, our pool of available opportunities may be limited, which could have a material adverse effect on our business, financial condition, cash flows and results of operations.
If we fail to manage our operations and growth effectively, we may be unable to execute our business plan, maintain high levels of customer service or adequately address competitive challenges.
We have experienced significant growth in recent periods measured by our number of customers and we intend to continue our efforts to expand our business within existing and new markets. This growth has placed, and any future growth may place, a strain on our management, operational and financial infrastructure. Our growth requires our management to devote a significant amount of time and effort to maintain and expand our relationships with customers, dealers and other third parties, attract new customers and dealers, arrange financing for our growth and manage our expansion into additional markets.
In addition, our current and planned operations, personnel, information technology and other systems and procedures might be inadequate to support our future growth and may require us to make additional unanticipated investments in our infrastructure. Our success and ability to further scale our business will depend, in part, on our ability to manage these changes in a cost-effective and efficient manner.
If we cannot manage our operations and growth, we may be unable to meet our expectations regarding growth, opportunity and financial targets, take advantage of market opportunities, execute our business strategies, meet our tax equity financing commitments or respond to competitive pressures. This could also result in declines in quality or customer satisfaction, increased costs, difficulties in introducing new offerings or other operational difficulties. Any failure to effectively manage our operations and growth could adversely impact our reputation, business, financial condition, cash flows and results of operations.
Our growth and operations are dependent on our dealer network and our failure to retain or replace existing dealers or to grow our dealer network could adversely impact our business.
Our dealer network is an integral component of our business strategy and serves as the means by which we are able to originate customer agreements and related systems in existing and prospective markets. Poor performance by our dealers in originating customer agreements could have a material adverse effect on our business, financial condition and results of operations. We have in the past had disputes and litigation with certain of our dealers over their performance, and, in the future, may have disputes with dealer labor, including with respect to prevailing wage and fringe rate regulations.
Misconduct, noncompliance with applicable laws and regulations, fraud or other improper activities by our or our dealers' employees, affiliates or independent contractors could have a significant negative impact on our and/or their business, investments and results of operations. Such misconduct could include failures to comply with federal employment laws and regulations, consumer protection laws, laws and regulations regarding the pricing of labor provided by dealers and other project costs, and various other applicable laws or regulations applicable to us or our affiliates, including those arising as a result of our participation in the DOE loan guarantee program and current and future DOE loan guarantees to our affiliates. Although we require applicable dealers to comply with such laws and regulations and provide training and processes to help them do so, neither we nor our affiliates control the dealers, nor can we guarantee their compliance with all such laws and regulations. Failure to comply with applicable laws or regulations or acts of fraud or misconduct by dealers or our employees or affiliates could subject us and our affiliates to fines and penalties, and suspension or debarment from future contracting with government agencies. Additionally, changes in laws, regulations or prevailing wages, or a failure to comply with any of the foregoing, could have a significant negative impact on their business reputation, investments and results of operations.
As we grow, particularly in new jurisdictions, we will need to expand our dealer network. We are subject to significant competition for the recruitment and retention of dealers from our competitors and we may not be able to recruit new or replacement dealers in the future. We compete for our dealers with other providers primarily based on the amount and timing of payments for originating customer agreements, financial ability and our suite of technology tools.
Most of our dealers are not restricted in their ability to work with our competitors and are not obligated to continue working with us. In the past, some of our dealers have chosen to work with competitors of ours or terminated their relationships with us and dealers may reduce or terminate their work with us in the future. The departure of a significant number of our dealers for any reason, or the failure to replace departing dealers in the event of such departures, could reduce our potential origination opportunities and could have a material adverse effect on our business, financial condition and results of operations. As we develop and expand our Sunnova Protect services, dealers may view us as a competitor and choose to end their relationship with us.
Additionally, dependence on any one dealer or small group of dealers further concentrates our exposure to risks related to termination of the dealer arrangement, poor service provided by such dealer, the deterioration in financial condition of the dealer and other risks inherent in such a relationship. For the years ended December 31, 2023, 2022 and 2021, Trinity accounted for approximately 10%, 19% and 15% of our net originations, respectively. Although we entered into a sixty-six
month exclusivity agreement with Trinity in October 2022, pursuant to which Trinity may only originate solar service agreements for us, there are various exceptions to this obligation. For a discussion of exclusivity arrangements with certain of our dealers, see "Business—Our Relationships with Our Dealers".
If we or our dealers fail to hire and retain a sufficient number of employees and service providers in key functions, our growth, profitability and our ability to timely complete customer projects and successfully manage customer accounts would be constrained.
To support our growth and profitability, we and our dealers need to hire, train, deploy, manage and retain a substantial number of skilled employees, engineers, installers, electricians and sales and project finance specialists. Competition for qualified personnel in our industry has increased substantially, particularly for skilled personnel involved in the installation of solar energy systems and energy storage systems. We and our dealers also compete with the homebuilding and construction industries for skilled labor. These industries are cyclical and when participants in these industries seek to hire additional workers, it puts upward pressure on our and our dealers' labor costs. Companies with whom our dealers compete to hire installers may offer compensation or incentive plans that certain installers may view as more favorable. As a result, our dealers may be unable to attract or retain qualified and skilled installation personnel. The further unionization of our industry's labor force or the homebuilding and construction industries' labor forces could also increase our dealers' labor costs. Shortages of skilled labor could significantly delay a project or otherwise increase our dealers' costs. Further, we need to continue to increase the training of our customer service team to provide high-end account management and service to home and business owners before, during and following the point of installation of our solar energy systems and energy storage systems. Identifying and recruiting qualified personnel and training them requires significant time, expense and attention. It can take several months before a new customer service team member is fully trained and productive at the standards we have established. If we are unable to hire, develop and retain talented customer service or other personnel, we may not be able to grow our business.
We do not directly control certain costs related to our business, which could put us at a disadvantage relative to companies who have a vertically integrated business model.
We do not have direct control over the costs our suppliers charge for the components of our solar energy systems and energy storage systems or the costs to our dealers of installing and marketing such products. This may lead us to charge higher prices for our solar energy systems and energy storage systems than our competitors with a vertically integrated business model, causing us to be unable to maintain or increase market share.
We may be unsuccessful in introducing new service and product offerings, including our distributed energy storage services and energy storage management systems.
We intend to introduce new offerings of services and products to both new and existing customers in the future, including home automation products and additional home technology solutions. We may be unsuccessful in significantly broadening our customer base through the addition of these services and products within our current markets or in new markets we may enter. Additionally, we may not be successful in generating substantial revenue from any additional services and products we may introduce in the future and may decline to initiate new product and service offerings.
Our business is concentrated in certain markets, putting us at risk of region-specific disruptions.
As of December 31, 2023, approximately 28%, 16% and 10% of our customers were located in California, Puerto Rico and New Jersey, respectively. In addition, we expect much of our near-term future growth and profitability to occur in these same markets, further concentrating our customer base and operational infrastructure. Accordingly, our business and results of operations are particularly susceptible to adverse economic, regulatory, political, weather and other conditions in such markets and in other markets that may become similarly concentrated. See "—Certain of our solar energy systems are located in, and we conduct business in, Puerto Rico. Weakness in the fiscal health of the government and PREPA, the damage caused by hurricanes, a series of earthquakes that affected the island in December 2019 and early 2020 and potential tax increases that may increase our cost of conducting business in Puerto Rico, create uncertainty that may adversely impact us. In addition, we are subject to administrative proceedings instituted by the PREB" and "General Risk Factors—We are not able to insure against all potential risks and we may become subject to higher insurance premiums". Any of these conditions, even if only in one such market, could have a material adverse effect on our business, financial condition and results of operations. In addition, all of our current solar energy systems are located in the U.S. and its territories, which makes us particularly susceptible to adverse changes in U.S. tax laws.
Our corporate and operational headquarters is located in Houston, Texas, an area that has a heightened risk of hurricanes and other natural disasters. We may not have adequate insurance, including business interruption insurance, to compensate us
for losses that may occur from any such significant events. A significant natural disaster, such as a hurricane, a public health crisis, such as a pandemic, or civil unrest could have a material adverse impact on our business, results of operations and financial condition. In addition, acts of terrorism or malicious computer viruses could cause disruptions in our or our dealers' businesses or the economy as a whole. To the extent these disruptions result in delays or cancellations of installations or the deployment of our solar service offerings, our business, results of operations and financial condition would be adversely affected.
Certain of our solar energy systems are located in, and we conduct business in, Puerto Rico. Weakness in the fiscal health of the government and PREPA, the damage caused by hurricanes, a series of earthquakes that affected the island in December 2019 and early 2020 and potential tax increases that may increase our cost of conducting business in Puerto Rico, create uncertainty that may adversely impact us. In addition, we are subject to administrative proceedings instituted by the PREB.
Puerto Rico is a significant market for our business, representing 16% of our customers as of December 31, 2023 and 2022, respectively, and has suffered from significant economic difficulties in recent years. As a result of the continued weakness of the Puerto Rico economy, liquidity constraints and a lack of market access, the credit ratings of the Puerto Rico government's general obligation bonds and guaranteed bonds, as well as the ratings of most of the Puerto Rico public corporations, including PREPA, are non-investment grade by Moody's, S&P and Fitch Ratings.
Puerto Rico has also enacted certain measures that could increase the cost of solar energy systems. In 2015, the Puerto Rico government increased the sales and use tax from 7% to 11.5%. Although leases and materials used in solar energy systems are currently exempt from such sales and use tax pursuant to Act No. 83-2010, the Green Energy Incentives Act, the increase in sales tax is applicable to repair and maintenance services. Additionally, Sunnova qualifies for a 4% corporate income tax rate under the Green Energy Incentives Act. Should our current tax incentives expire or additional taxes be imposed, the tax increase may impose greater costs on our future and current customers, which may hinder our future origination efforts and adversely impact our business, financial condition, results of operations and future growth and profitability. Future changes in Puerto Rico tax law could affect our tax position and adversely impact our business.
Although Puerto Rico had already suffered from economic difficulties in recent years, Hurricane Fiona in 2022 and Hurricanes Irma and Maria in 2017, catastrophic weather events whose effects have been long enduring, earthquakes in the southwest of the island beginning in 2019 and continuing through 2020 and the COVID-19 pandemic have caused significant additional disruption to the island's electric grid and economic activity. The continued weakness of the Puerto Rico economy has strained the fiscal health of the government, which may create uncertainty that may adversely impact us. Furthermore, the future financial condition and prospects of PREPA are uncertain, which could negatively impact the availability and the reliability of Puerto Rico's electrical grid and adversely impact our operations on the island.
In 2018, the government of Puerto Rico enacted legislation that set in motion the privatization of PREPA. Said legislation governs the establishment of public-private partnerships ("P3") with respect to the concession for the distribution and transmission assets, services and facilities of PREPA, including its generation assets. In the summer of 2020, the government of Puerto Rico signed a 15-year P3 agreement with LUMA Energy, LLC to operate, maintain and modernize PREPA's electric transmission and distribution system. Moreover, in November 2020, the government announced that several companies had been qualified as part of the procurement process related to the Request for Qualifications for the management and operation of PREPA's legacy generation assets. In January 2023, the management and operation of PREPA's legacy generation assets was awarded to Genera PR, LLC, a wholly owned subsidiary of New Fortress Energy Inc.
Legislation enacted in April 2019 requires a study of net metering to be completed within five years, which may result in revisions to the existing rules. However, no changes can be made to retail net metering for five years after the date the legislation was enacted. Meanwhile, "true" net metering will continue to apply, meaning the credit for energy exported by net metering clients will equal the value of such energy under the rate applicable to those clients and accordingly, their charges will be based on their net consumption. Customers subject to this regime will continue to be covered by it on a legacy basis for a period of 20 years from the date of their net metering agreements.
Net metering customers in Puerto Rico may be impacted by transition charges and other requirements contemplated in a restructuring agreement between PREPA and its creditors, currently pending before the U.S. District Court for the District of Puerto Rico in bankruptcy-like proceedings under Title III of the Puerto Rico Oversight, Management, and Economic Stability Act ("PROMESA"). PROMESA provides PREPA with access to a workout process similar to bankruptcy. The Financial Oversight and Management Board for Puerto Rico has filed a fourth amended Plan of Adjustment ("POA") to reduce more than $10 billion of total asserted claims by various creditors against PREPA before the U.S. District Court for the District of Puerto Rico in bankruptcy-like proceedings under Title III of the PROMESA. Said POA includes a "legacy charge" that is composed of a volumetric charge depending on consumption and a flat connection fee; a direct "solar tax" is not currently expected.
Depending on a customer's consumption and status as a rate payer (i.e. low income exemption), rates are likely to increase. Nevertheless, the POA has not been finally adjudicated by the Title III Court, and creditors could appeal any final judgement. Hence, the PREPA bankruptcy is ongoing but is nearing its final stages.
While we do not currently contract directly with the Puerto Rico government or PREPA, continued weakness in the Puerto Rico economy or the failure of the Puerto Rico government to manage its fiscal challenges in an orderly manner could result in policy decisions we do not anticipate and may directly or indirectly adversely impact our business, financial condition and results of operations. In addition, it is unclear whether the selection of private concessionaires for PREPA's transmission and distribution system and legacy generation assets may have an impact on our business.
The PREB has instituted administrative proceedings regarding customer complaints about our Puerto Rican operations, the operations of some of our dealers in Puerto Rico and certain Sunnova policies and procedures related to contract disclosures and invoice disputes in Puerto Rico. At this time, we are unable to determine whether the PREB will seek penalties against us in the future in connection with these proceedings or require a change in our practices and procedures. Based on this matter, the U.S. Better Business Bureau listed Sunnova as not accredited. We have not experienced a material impact as a result of the listing.
The ongoing COVID-19 pandemic and future pandemics could adversely affect our business, financial condition and results of operations.
We cannot predict the full impact the COVID-19 pandemic or other pandemics or the affect any resulting disruption and volatility in the capital markets will have on our business, cash flows, liquidity, financial condition and results of operations due to numerous uncertainties. The ultimate impact will depend on future developments, including, among other things, the ultimate duration of any such virus, the distribution, acceptance and efficacy of a vaccine, the depth and duration of the economic downturn and other economic effects of the pandemic, the consequences of governmental and other measures designed to prevent the spread of any such virus, actions taken by governmental authorities, customers, dealers and other third parties, our ability and the ability of our customers, potential customers and dealers to adapt to operating in a changed environment and the timing and extent to which normal economic and operating conditions resume thereafter.
Dealer and marketplace confidence in our liquidity and long-term business prospects is important for building and maintaining our business.
Our financial condition, operating results and business prospects may suffer materially if we are unable to establish and maintain confidence about our liquidity and business prospects among dealers, consumers and within our industry. Our dealer network is an integral component of our business strategy and serves as the means by which we are able to rapidly and successfully expand within existing and prospective markets. Dealers and other third parties will be less likely to enter into dealer agreements with us or originate new customer agreements if they are uncertain we will be able to make payments on time, our business will succeed or our operations will continue for many years.
Our solar energy systems and energy storage systems require ongoing maintenance and support. If we were to reduce operations, even years from now, buyers of our solar energy systems and energy storage systems from years earlier might have difficulty having us provide or arrange repairs or other services to our and their solar energy systems and energy storage systems, which remain our responsibility under the terms of our solar service agreements. As a result, consumers may be less likely to enter into solar service agreements with us if they are uncertain our business will succeed or our operations will continue for many years.
Accordingly, in order to build and maintain our business, we must maintain confidence among dealers, customers and other parties in our liquidity and long-term business prospects. We may not succeed in our efforts to build this confidence.
Damage to our brand and reputation or change or loss of use of our brand could harm our business and results of operations.
We depend significantly on our reputation for high-quality products, excellent customer service and the brand name "Sunnova" to attract new customers and grow our business. If we fail to continue to deliver our solar energy systems, energy storage systems or other sustainable home products within the planned timelines, if our offerings do not perform as anticipated or if we damage any of our customers' properties or delay or cancel projects, our brand and reputation could be significantly impaired. Future technological improvements may allow us to offer lower prices or offer new technology to new customers; however, technical limitations in our current solar energy systems and energy storage systems may prevent us from offering such lower prices or new technology to our existing customers. The inability of our current customers to benefit from
technological improvements could cause our existing customers to lower the value they perceive our existing products offer and impair our brand and reputation.
In addition, given the sheer number of interactions our personnel or dealers operating on our behalf have with customers and potential customers, it is inevitable that some customers' and potential customers' interactions with our company or dealers operating on our behalf will be perceived as less than satisfactory. This has led to instances of customer complaints, some of which have affected our digital footprint on rating websites and social media platforms. If we cannot manage our hiring and training processes to avoid or minimize these issues to the extent possible, our reputation may be harmed and our ability to attract new customers would suffer.
In addition, if we were to no longer use, lose the right to continue to use or if others use the "Sunnova" brand, we could lose recognition in the marketplace among customers, suppliers and dealers, which could affect our business, financial condition, results of operations and would require financial and other investment and management attention in new branding, which may not be as successful. Further, an increased politicization of solar energy and financing options may result in increased scrutiny on our industry participants and may negatively impact consumers' perception of our products.
Our operating results and our ability to grow may fluctuate from quarter to quarter and year to year, which could make our future performance difficult to predict and could cause our operating results for a particular period to fall below expectations.
Our quarterly and annual operating results and our ability to grow are difficult to predict and may fluctuate significantly in the future. We have experienced seasonal and quarterly fluctuations in the past and expect to experience such fluctuations in the future. In addition to the other risks described in this "Risk Factors" section, the following factors could cause our operating results to fluctuate:
• expiration, reduction, or initiation of any governmental rebates or incentives;
• significant fluctuations in customer demand for our solar energy services and related systems;
• our dealers' ability to complete installations in a timely manner;
• our and our dealers' ability to gain interconnection permission for an installed solar energy system from the relevant utility;
• the availability, terms and costs of suitable financing;
• the amount, timing of sales and potential decreases in value of investment tax credits ("ITCs") and SRECs;
• our ability to continue to expand our operations and the amount and timing of expenditures related to this expansion;
• announcements by us or our competitors of significant acquisitions, strategic partnerships, joint ventures or capital-raising activities or commitments;
• changes in our pricing policies or terms or those of our competitors, including centralized electric utilities;
• actual or anticipated developments in our competitors' businesses, technology or the competitive landscape; and
• natural disasters or other weather or meteorological conditions.
For these or other reasons, the results of any prior quarterly or annual periods should not be relied upon as indications of our future performance.
Inflation could result in decreased value from future contractual payments and higher expenses for labor and equipment, which, in turn, could adversely impact our reputation, business, financial condition, cash flows and results of operations.
Any future increase in inflation may adversely affect our costs, including our dealers' cost of labor and equipment, and may result in a decrease in value in our future contractual payments. Many of our solar service agreements, which generally have a term ranging from 10 to 25 years, do not contain any pricing escalators. The pricing escalators we do have may not keep pace with inflation, which would result in the agreement yielding decreased value over time. These factors could adversely impact our reputation, business, financial condition, cash flows and results of operations.
Increased interest rates may result in a decrease in origination for our homebuilder channel and a reduction in principal prepayments by our customers.
Origination for our homebuilder channel relies on the construction and sale of new homes by our homebuilder partners. Many customers of our homebuilder partners rely on mortgage loans from banks and other lenders to finance a substantial portion of the purchase price for their home. Increased mortgage interest rates may lead to lower demand for new homes and a reduced number of homes available for solar origination through our homebuilder channel. Additionally, increased interest rates may result in fewer secondary home sales, a reduction in the number of customers refinancing their mortgage and uncertainty
about the economy. This could result in a material reduction in the amount of our customers making principal prepayments of their loans.
Future expansions of our operations may subject us to additional risks.
We may expand into other industry verticals in the future. There is no assurance that we will be able to successfully develop products and services that are valued for these new industries. Our investment of resources to develop products and services for the new industries we enter into may either be insufficient or result in expenses that are excessive as compared to the revenue that we may earn in launching such vertical.
As we explore additional opportunities, we can make no assurance that we will be able to accurately forecast demand (or lack thereof) for our products or services or that new industries would be receptive to our products or services. Failure to predict demand or growth accurately in new industries could have a material adverse effect on our business.
Any future international operations may subject us to risks related to currency fluctuations. Foreign currencies periodically experience rapid and/or large fluctuations in value against the U.S. dollar. A weakened U.S. dollar could increase the cost of procurement of raw materials, by our suppliers, from foreign jurisdictions and operating expenses in foreign locations, which could have a material adverse effect on our business and results of operations.
Since the price at which we originate product offerings from our dealers is generated in U.S. dollars, we are mostly insulated from currency fluctuations. However, since suppliers of our dealers often incur a significant amount of their costs by purchasing raw materials and generating operating expenses in foreign currencies, if the value of the U.S. dollar depreciates significantly or for a prolonged period of time against these other currencies, this may cause those suppliers to raise the prices they charge us and our dealers, which in turn could harm our business and results of operations. Although the value of the U.S. dollar has been high relative to other currencies in recent periods, there is no guarantee this trend will continue.
If we are unsuccessful in developing and maintaining our proprietary technology, including our Catalyst software, our ability to attract and retain dealers and customers could be impaired, our competitive position and our ability to raise capital could be harmed and our results of operations and financial position could be harmed.
Our future growth and profitability depends on our ability to continue to develop and maintain our proprietary technology that supports our solar service offerings, including our design and proposal software, Catalyst. In addition, we rely, and expect to continue to rely, on licensing agreements with certain third parties for aerial images that allow us to efficiently and effectively analyze a customer's rooftop for solar energy system specifications. In the event our current or future products require features that we have not developed or licensed, or we lose the benefit of an existing license, we will be required to develop or obtain such technology through purchase, license or other arrangements. If the required technology is not available on commercially reasonable terms, or at all, we may incur additional expenses in an effort to internally develop the required technology.
If our allowance for credit losses is not enough to cover actual credit losses from our customer notes receivable portfolio, our results of operations and financial condition could be negatively affected.
We maintain an allowance for credit losses, which is a reserve that represents our best estimate of actual credit losses we may experience in our existing customer notes receivable portfolio. The level of the allowance reflects our continuing evaluation of factors including the financial asset type, customer credit rating, contractual term, vintage, volume and trends in delinquencies, nonaccruals, write-offs and present economic, political and regulatory conditions. The determination of the appropriate level of the allowance for credit losses inherently involves subjectivity in our modeling and requires us to make estimates of current credit risks and future trends, all of which may undergo material changes or vary from our historical experience. Deterioration in economic conditions affecting our customers, including the effects of rising inflation in the U.S., new information regarding existing loans and other factors, both within and outside of our control, may require an increase in the allowance for credit losses. Furthermore, if write-offs in future periods exceed the allowance for credit losses we will need to increase the allowance for credit losses in future periods. Any increases in the allowance for credit losses will result in an increase in net loss and could have a material adverse effect on our business, financial condition and results of operations.
We adopted Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses, in January 2020, which requires entities to use a forward-looking expected loss approach, referred to as the current expected credit loss ("CECL") methodology in place of the previously-used incurred loss model. In future periods, CECL may result in increased reserves during or in advance of an economic downturn. If we are required to materially increase our level of allowance for credit losses for any reason, such increase could have a material adverse effect on our business, financial condition and results of operations.
Certain of our key operational metrics, including estimated gross contracted customer value, are based on various assumptions and estimates we make that cover an extended period of time. Actual experience may vary materially from these estimates and assumptions and therefore undue reliance should not be placed on these metrics.
Our key operational metrics include a number of assumptions and estimates we make that cover an extended period of time (up to 35 years) and may not prove accurate. In calculating estimated gross contracted customer value, we estimate projected monthly customer payments over the remaining life of our customer agreements, in particular our solar service agreements which typically range from 10 to 25 years in length with an opportunity for customers to renew for up to an additional 10 years, and from the future sale of related SRECs. These estimated future cash flows depend on various factors including but not limited to customer agreement type, contracted rates, customer loss rates, expected sun hours and the projected production capacity of the solar equipment installed. Additionally, in calculating estimated gross contracted customer value we also estimate cash distributions to tax equity fund investors and operating, maintenance and administrative expenses associated with the customer agreements, including expenses related to accounting, reporting, audit, insurance, maintenance and repairs over the remaining life of our customer agreements.
Furthermore, in calculating estimated gross contracted customer value, we discount our future net cash flows at 6% based in part on industry practice and in part on the interest rate obtained on certain recent securitizations. This discount rate might not be the most appropriate discount rate based on interest rates in effect from time to time and industry or company-specific risks associated with these cash flows and the appropriate discount rate for these estimates may change in the future due to the level of inflation, rising interest rates, our cost of capital, customer default rates and consumer demand for solar energy systems, among other things. We also assume customer losses of 0% in calculating these metrics even though we expect to have some minimal level of customer losses over the life of our contracts. To illustrate the way in which actual results may change, we present sensitivities around the discount rate and the rate of customer losses, although these sensitivities may not capture the most appropriate discount rate or the rate of customer losses we will experience. For a discussion of estimated gross contracted customer value and the related discount rate and such sensitivities, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Key Financial and Operational Metrics—Estimated Gross Contracted Customer Value".
PricewaterhouseCoopers LLP has not audited, reviewed, examined, compiled nor applied agreed-upon procedures with respect to these operational metrics or their components. The estimates discussed above are based on a combination of assumptions that may prove to be inaccurate over time. Such inaccuracies could be material, particularly given the estimates relate to cash flows up to 35 years in the future.
Risks Related to the Solar Industry
If sufficient additional demand for solar energy systems does not develop or takes longer to develop than we anticipate, our origination of solar service agreements may decrease.
The distributed solar energy market is at a relatively early stage of development in comparison to fossil fuel-based electricity generation. If additional demand for distributed solar energy systems fails to develop sufficiently or takes longer to develop than we anticipate, we may be unable to originate additional solar service agreements and related solar energy systems and energy storage systems to grow our business. In addition, demand for solar energy systems and energy storage systems in our targeted markets may not develop to the extent we anticipate. As a result, we may be unsuccessful in broadening our customer base through origination of solar service agreements and related solar energy systems and energy storage systems within our current markets or in new markets we may enter.
Many factors may affect the demand for solar energy systems, including the following:
• availability, substance and magnitude of solar support programs including government targets, subsidies, incentives, renewable portfolio standards and net metering rules;
• the relative pricing of other conventional and non-renewable energy sources, such as natural gas, coal, oil and other fossil fuels, wind, utility-scale solar, nuclear, geothermal and biomass;
• performance, reliability and availability of energy generated by solar energy systems compared to conventional and other non-solar renewable energy sources;
• availability and performance of energy storage technology, the ability to implement such technology for use in conjunction with solar energy systems and the cost competitiveness such technology provides to customers as compared to costs for those customers reliant on the conventional electrical grid; and
• general economic conditions and the levels of inflation and interest rates.
The solar energy industry is constantly evolving, which makes it difficult to evaluate our prospects. We cannot be certain if historical growth rates reflect future opportunities or whether growth anticipated by us will be realized. The failure of distributed solar energy to achieve, or its being significantly delayed in achieving, widespread adoption could have a material adverse effect on our business, financial condition and results of operations.
A material reduction in the retail price of electricity charged by electric utilities or other retail electricity providers would harm our business, financial condition and results of operations.
Decreases in the retail price of electricity from electric utilities or from other retail electric providers, including other renewable energy sources such as larger-scale solar energy systems, could make our offerings less economically attractive. The price of electricity from utilities could decrease as a result of:
• the construction of a significant number of new power generation plants, whether generated by natural gas, nuclear power, coal or renewable energy;
• the construction of additional electric transmission and distribution lines;
• a reduction in the price of natural gas or other natural resources as a result of increased supply due to new drilling techniques or other technological developments, a relaxation of associated regulatory standards or broader economic or policy developments;
• less demand for electricity due to energy conservation technologies and public initiatives to reduce electricity consumption or to recessionary economic conditions; and
• development of competing energy technologies that provide less expensive energy.
A reduction in electric utilities' rates or changes to peak hour pricing policies or rate design (such as the adoption of a fixed or flat rate) could also make our offerings less competitive with the price of electricity from the electrical grid. If the cost of energy available from electric utilities or other providers were to decrease relative to solar energy generated from solar energy systems or if similar events impacting the economics of our offerings were to occur, we may have difficulty attracting new customers or existing customers may default or seek to terminate, cancel or otherwise avoid the obligations under their solar service agreements. For example, large utilities in California have started transitioning customers to time-of-use rates and also have adopted a shift in the peak period for time-of-use rates to later in the day. Unless grandfathered under a different rate, customers with solar energy systems are required to take service under time-of-use rates with the later peak period. Moving utility customers to time-of-use rates or the shift in the timing of peak rates for utility-generated electricity to include times of day when solar energy generation is less efficient or non-operable could also make our offerings less competitive. Time-of-use rates could also result in higher costs for our customers whose electricity requirements are not fully met by our offerings during peak periods.
Additionally, the price of electricity from utilities may grow less quickly than the escalator feature in certain of our solar service agreements, which could also make our solar energy systems less competitive with the price of electricity from the electrical grid and result in a material adverse effect on our business, financial condition and results of operations.
Our business has benefited from the declining cost of solar energy system and energy storage system components and may be harmed to the extent the cost of such components stabilizes or increases in the future.
Our business has benefited from the declining cost of solar energy system and energy storage system components and to the extent such costs stabilize, decline at a slower rate or increase, our future growth rate may be negatively impacted. The declining cost of solar energy system and energy storage system components and the raw materials necessary to manufacture them has been a key driver in the price of solar energy systems and energy storage systems we own, the prices charged for electricity and customer adoption of solar energy. While historically solar energy system and energy storage system components and raw material prices have declined, the cost of these components and raw materials have recently increased and may continue to increase in the future, and such products' availability could decrease, due to a variety of factors, including growth in the solar energy system and energy storage system industries and the resulting increase in demand for solar energy system and energy storage system components and the raw materials necessary to manufacture them, supply chain disruptions, tariff penalties, duties, and trade barriers, export regulations, regulatory or contractual limitations, industry market requirements and industry standards, changes in technology, the loss of or changes in economic governmental incentives, inflation or other factors. An increase of solar energy system components and raw materials prices could slow our growth and operations and cause our business and results of operations to suffer. See "—Increases in the cost or reduction in supply of solar energy system and energy storage system components due to tariffs or trade restrictions imposed by the U.S. government could have an adverse effect on our business, financial condition and results of operations".
We and our dealers depend on a limited number of suppliers of solar energy system components and technologies to adequately meet demand for our solar energy systems. Due to the limited number of suppliers in our industry, the acquisition of any of these suppliers by a competitor or any shortage, delay, price change, imposition of tariffs or duties or other limitation in our or our dealers' ability to obtain components or technologies we use could result in sales and installation delays, cancelations and loss of customers.
We rely on our dealers to install solar energy systems and energy storage systems, each of whom has direct supplier arrangements. Our dealers purchase solar panels, inverters, energy storage systems and other system components and instruments from a limited number of suppliers, approved by us, making us susceptible to quality issues, shortages and price changes. For the year ended December 31, 2023, Hanwha Q-Cells and Canadian Solar supplied approximately 55% and 11% of our solar photovoltaic panels installed, respectively, and no other supplier represented more than 10% of our solar photovoltaic panels installed. For the year ended December 31, 2022, Hanwha Q-Cells supplied approximately 68% of our solar photovoltaic panels installed and no other supplier represented more than 10% of our solar photovoltaic panels installed. For the year ended December 31, 2023, Enphase Energy, Inc. and SolarEdge Technologies Inc. accounted for approximately 67% and 27%, respectively, of the inverters used in our solar energy system installations. For the year ended December 31, 2022, Enphase Energy, Inc. and SolarEdge Technologies Inc. accounted for approximately 57% and 42%, respectively, of the inverters used in our solar energy system installations. For the year ended December 31, 2023, Tesla, Inc. accounted for approximately 87% of our energy storage system purchases. For the year ended December 31, 2022, Tesla, Inc. accounted for approximately 94% of our energy storage system purchases. There are a limited number of suppliers of solar energy system components, instruments and technologies. If one or more of the suppliers we and our dealers rely upon to meet anticipated demand ceases or reduces production due to its financial condition, acquisition by a competitor or otherwise, is unable to increase production as industry demand increases or is otherwise unable to allocate sufficient production to us and our dealers, it may be difficult to quickly identify alternative suppliers or to qualify alternative products on commercially reasonable terms and our ability and the ability of our dealers to satisfy this demand may be adversely affected. While we believe there are other sources of supply for these products available, a dealer's need to transition to a new supplier may result in additional costs and delays in originating solar service agreements and deploying our related solar energy systems or energy storage systems, which in turn may result in additional costs and delays in our acquisition of such solar service agreements and related solar energy systems and energy storage systems. These issues could have a material adverse effect on our business, financial condition and results of operations.
There have also been periods of industry-wide shortages of key components and instruments, including batteries and inverters, in times of rapid industry growth. The manufacturing infrastructure for some of these components has a long lead-time, requires significant capital investment and relies on the continued availability of key commodity materials, potentially resulting in an inability to meet demand for these components. The solar industry is currently experiencing rapid growth and, as a result, shortages of key components or instruments, including solar panels, may be more likely to occur, which in turn may result in price increases for such components. Even if industry-wide shortages do not occur, suppliers may decide to allocate key components or instruments with high demand or insufficient production capacity to more profitable customers, customers with long-term supply agreements or customers other than us, our dealers or other third parties from whom we may originate solar energy systems and our ability to originate solar service agreements and related solar energy systems and energy storage systems may be reduced as a result.
Our supply chain and operations (or those of our dealers) could be subject to natural disasters and other events beyond our control, such as earthquakes, wildfires, flooding, hurricanes, freezes, tsunamis, typhoons, volcanic eruptions, droughts, tornadoes, power outages or other natural disasters, the effects of climate change and related extreme weather, public health issues and pandemics, war, terrorism, government restrictions or limitations on trade, impediments to international shipping and geopolitical unrest and uncertainties. Human rights and forced labor issues in foreign countries and the U.S. government's response to them could disrupt our supply chain and our operations could be adversely impacted.
Historically, we and our dealers have relied on foreign suppliers for a number of solar energy system components, instruments and technologies that our dealers purchase. Our success in the future may be dependent on our dealers' ability to import or transport such products from overseas vendors in a timely and cost-effective manner. We and our dealers may rely heavily on third parties, including ocean carriers and truckers, both of which are experiencing disruptions, shortages and rate increases, in that process. Our dealers may find it necessary to rely on an increasingly expensive spot market and other alternative sources to make up any shortfall in shipping needs.
If our dealers cannot obtain substitute materials or components on a timely basis or on acceptable terms, they could be prevented from installing our solar energy systems within the time frames required in our customer contracts. Any such delays could increase our overall costs, reduce our profit, delay the timing for solar energy systems to be placed in service and ultimately have a material adverse effect on our business, financial condition and results of operations.
Warranties provided by the manufacturers of equipment for our assets and maintenance obligations of our dealers may be limited by the ability of a supplier and/or dealer to satisfy its warranty or performance obligations or by the expiration of applicable time or liability limits, which could reduce or void the warranty protections or may be limited in scope or magnitude of liabilities and thus, the warranties and maintenance obligations may be inadequate to protect us.
We agree to maintain the solar energy systems and energy storage systems installed on our customers' homes and businesses during the length of the term of our solar service agreements, which typically range from 10 to 25 years. We are exposed to any liabilities arising from the solar energy systems' failure to operate properly and are generally under an obligation to ensure each solar energy system remains in good condition during the term of the agreement. We are the beneficiary of the panel manufacturers' warranty coverage, typically of 10 years for material and 25 years for performance and workmanship, the inverter manufacturers' warranty coverage, typically from 10 to 25 years and the energy storage manufacturers' warranty coverage, typically of 10 years. Furthermore, our dealers provide warranties as to their workmanship. In the event such warranty providers or dealers file for bankruptcy, cease operations, face regulatory challenges that limit or prevent conducting operations or otherwise become unable or unwilling to fulfill their warranty or maintenance obligations, we may not be adequately protected by such warranties or maintenance obligations. Even if such warranty or maintenance providers or dealers fulfill their obligations, the warranty or maintenance obligations may not be sufficient to protect us against all of our losses. In addition, our warranties are of limited duration, ranging from one year, in the case of certain solar energy system and transformer warranties, to 25 years, in the case of certain panel performance and workmanship warranties, after the date each equipment item is delivered or commissioned, although the useful life of our solar energy systems is 35 years. These warranties are subject to liability and other limits. If we seek warranty protection and a warranty provider is unable or unwilling to perform its warranty obligations, or if a dealer is unable or unwilling to perform its maintenance obligations, whether as a result of its financial condition, its inability to comply with applicable laws or regulations, or otherwise, or if the term of the warranty or maintenance obligation has expired or a liability limit has been reached, there may be a reduction or loss of protection for the affected assets, which could have a material adverse effect on our business, financial condition and results of operations.
Our failure to accurately predict future liabilities related to material quality or performance expenses could result in unexpected volatility in our financial condition. Because of the long estimated useful life of our solar energy systems, we have been required to make assumptions and apply judgments regarding a number of factors, including our anticipated rate of warranty claims and the durability, performance and reliability of our solar energy systems. We made these assumptions based on the historic performance of similar solar energy systems or on accelerated life cycle testing. Our assumptions could prove to be materially different from the actual performance of our solar energy systems, causing us to incur substantial expense to repair or replace defective solar energy systems in the future or to compensate customers for solar energy systems that do not meet their performance guarantees. Equipment defects, serial defects or operational deficiencies also would reduce our revenue from solar service agreements because the customer payments under such agreements are dependent on solar energy system production or would require us to make refunds under performance guarantees. Any widespread product failures or operating deficiencies may damage our market reputation and adversely impact our financial results. For further discussion of these potential charges and related proposals, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Components of Results of Operations".
Increases in the cost or reduction in supply of solar energy system and energy storage system components due to tariffs or trade restrictions imposed by the U.S. government could have an adverse effect on our business, financial condition and results of operations.
China is a major producer of solar cells and other solar products. Certain solar cells, modules, laminates and panels from China are subject to various U.S. anti-dumping and countervailing duty rates, depending on the exporter supplying the product, imposed by the U.S. government as a result of determinations that the U.S. was materially injured as a result of such imports being sold at less than fair value and subsidized by the Chinese government. While historically our dealers have endeavored to purchase these products from manufacturers outside of China, some of these products are purchased from manufacturers in China or from manufacturers in other jurisdictions who rely, in part, on products sourced in China. If alternative sources are no longer available on competitive terms in the future, we and our dealers may be required to purchase these products from manufacturers in China. In addition, tariffs on solar cells, modules and inverters in China may put upward pressure on prices of these products in other jurisdictions from which our dealers currently purchase equipment, which could reduce our ability to offer competitive pricing to potential customers.
The anti-dumping and countervailing duties discussed above are subject to annual review and may be increased or decreased. Furthermore, under Section 301 of the Trade Act of 1974, the USTR imposed tariffs on $200 billion worth of imports from China, including inverters and certain AC modules and non-lithium-ion batteries, effective September 24, 2018. In May 2019, the tariffs were increased from 10% to 25% and may be raised by the USTR in the future. Since these tariffs
impact the purchase price of the solar products, these tariffs raise the cost associated with purchasing these solar products from China and reduce the competitive pressure on providers of solar cells not subject to these tariffs.
In August 2021, an anonymous trade group filed a petition with the U.S. Department of Commerce requesting an investigation into whether solar panels and cells imported from Malaysia, Thailand and Vietnam are circumventing anti-dumping and countervailing duties imposed on solar products manufactured in China. The group also requested the imposition of tariffs on such imports ranging from 50% - 250%. In November 2021, the U.S. Department of Commerce rejected the petition, citing the petitioners' ongoing anonymity as one of the reasons for its decision. In March 2022, the U.S. Department of Commerce announced it is initiating country-wide circumvention inquiries to determine whether imports of solar cell and modules produced in Cambodia, Malaysia, Thailand and Vietnam that use components from China are circumventing anti-dumping and countervailing duty orders on solar cells and modules from China. The Department of Commerce's inquiries were initiated pursuant to a petition filed by Auxin Solar, Inc. on February 8, 2022.
In December 2022, the Department of Commerce announced its preliminary determination in the investigation. In its determination, the Department of Commerce found that certain Chinese solar manufacturers circumvented U.S. import duties by routing some of their operations through Cambodia, Malaysia, Thailand and Vietnam. Given the Department of Commerce preliminarily found that circumvention was occurring through each of the four Southeast Asian countries, the Department of Commerce made a "country-wide" circumvention finding, which designates each country as one through which solar cells and modules are being circumvented from China. However, companies in these countries will be permitted to certify they are not circumventing the U.S. import duties, in which case the circumvention findings may not apply. In August 2023, after completing its investigation, which included conducting in-person audits and gathering public comments, the Department of Commerce issued a final determination that affirmed its preliminary determination in most respects and found that five of eight manufacturers investigated were circumventing anti-dumping and countervailing duty orders.
Notably, however, on June 6, 2022, the President of the United States issued an emergency declaration establishing a two-year tariff exemption on new tariffs for solar panels and cells imported from Cambodia, Malaysia, Thailand and Vietnam, delaying the possibility of the imposition of new anti-dumping and countervailing duties until the end of such two-year period. In September 2022, the Department of Commerce issued its final rule effectuating the two-year exemption period, and new dumping duties will not be imposed on solar panels and cells imported from Cambodia, Malaysia, Thailand and Vietnam until the earlier of two years after the date of the emergency declaration or when the emergency is terminated. Tariffs may be reinstated following the exemption period, but under the Department of Commerce's rule, imports of solar cells and modules will not be subject to retroactive tariffs during the exemption period. In December 2023, Auxin Solar and Concept Clean Energy commenced a new lawsuit challenging the Department of Commerce's authority to effect the exemption period and seeking to "reliquidate" imports completed during that period in order to retroactively apply anti-dumping and countervailing duty tariffs. The addition of new anti-dumping and countervailing duties would significantly disrupt the supply of solar cells and modules to customers in the U.S., as a large percentage of solar cells and modules used in the U.S. are imported from Cambodia, Malaysia, Thailand and Vietnam. If imposed, these or similar tariffs could put upward pressure on prices of these solar products, which could reduce our ability to offer competitive pricing to potential customers.
In addition, in December 2021, the U.S. International Trade Commission recommended the President extend tariffs initially imposed in 2018 on imported crystalline silicon PV cells and modules for another four years, until 2026. Under Presidential Proclamation 10339, published in February 2022, President Biden extended the tariff beyond the scheduled expiration date of February 6, 2022, with an initial tariff of 14.75%, which will gradually be reduced to 14% by the eighth year of the measure. Since such actions increase the cost of imported solar products, to the extent we or our dealers use imported solar products or domestic producers are able to raise their prices for their solar products, the overall cost of the solar energy systems will increase, which could inhibit our ability to offer competitive pricing in certain markets.
Additionally, the U.S. government has imposed various trade restrictions on Chinese entities determined to be acting contrary to U.S. foreign policy and national security interests. For example, the U.S. Department of Commerce's Bureau of Industry and Security has added a number of Chinese entities to its entity list for enabling human rights abuses in the Xinjiang Uyghur Autonomous Region ("XUAR") or for procuring U.S. technology to advance China's military modernization efforts, thereby imposing severe trade restrictions against these designated entities. Moreover, in June 2021, U.S. Customs and Border Protection issued a Withhold Release Order pursuant to Section 307 of the Tariff Act of 1930 barring the entry into U.S. commerce of silica-based products (such as polysilicon) manufactured by Hoshine Silicon Industry Co. Ltd. ("Hoshine") and related companies, as well as goods made using those products, based on allegations related to Hoshine labor practices in the XUAR to manufacture such products. Additionally, in December 2021, Congress passed the Uyghur Forced Labor Prevention Act, which, with limited exception, prohibits the importation of all goods or articles mined or produced in whole or in part in the XUAR, or goods or articles mined or produced by entities working with the XUAR government to recruit, transport or receive forced labor from the XUAR. Although we maintain policies and procedures designed to maintain compliance with all
governmental laws and regulations, these and other similar trade restrictions that may be imposed against Chinese entities in the future may have the effect of restricting the global supply of, and raising prices for, polysilicon and solar products, which could increase the overall cost of solar energy systems and reduce our ability to offer competitive pricing in certain markets.
We cannot predict what additional actions the U.S. may adopt with respect to tariffs or other trade regulations or what actions may be taken by other countries in retaliation for such measures. The tariffs described above, the adoption and expansion of trade restrictions, the occurrence of a trade war or other governmental action related to tariffs, trade agreements or related policies have the potential to adversely impact our supply chain and access to equipment, our costs and ability to economically serve certain markets. If additional measures are imposed or other negotiated outcomes occur, our ability or the ability of our dealers to purchase these products on competitive terms or to access specialized technologies from other countries could be further limited, which could adversely affect our business, financial condition and results of operations.
The solar energy systems we own or may originate have a limited operating history and may not perform as we expect.
Many of the solar energy systems we currently own or may originate in the future have not commenced operations, have recently commenced operations or otherwise have a limited operating history. Of the approximately 200,000 solar energy systems we owned as of December 31, 2023, 27%, 16% and 13% were placed into service in 2023, 2022 and 2021, respectively. The ability of our solar energy systems to perform as we expect will also be subject to risks inherent in newly constructed renewable energy assets, including breakdowns and outages, latent defects, equipment that performs below our expectations, system failures and outages. As a result, our assumptions and estimates regarding the performance of these solar energy systems are, and will be, made without the benefit of a meaningful operating history, which may impair our ability to accurately assess the potential profitability of the solar energy systems and, in turn, our results of operations, financial condition and cash flows.
The cost of maintenance or repair of solar energy systems or energy storage systems throughout the term of the associated solar service agreement or the removal of solar energy systems at the end of the term of the associated solar service agreement may be higher than projected today and adversely affect our financial performance and valuation.
If we incur repair and maintenance costs on our solar energy systems or energy storage systems after the individual component warranties have expired and if they then fail or malfunction, we will be liable for the expense of repairing these solar energy systems or energy storage systems without a chance of recovery from our suppliers. In addition, we typically bear the cost of removing the solar energy systems at the end of the term of the lease or PPA if the customer does not renew his or her agreement or elect to purchase the solar energy system at the end of its term. Furthermore, it is difficult to predict how future environmental regulations may affect the costs associated with the repair, removal, disposal or recycling of our solar energy systems. This could materially impair our future operating results.
Problems with performance of our solar energy systems may cause us to incur expenses, may lower the value of our solar energy systems and may damage our market reputation and adversely affect our business.
In most cases, our long-term leases and loan agreements contain a performance guarantee in favor of the customer. Solar service agreements with performance guarantees require us to provide a bill credit (or in limited cases, refund money) to the customer if the solar energy system fails to generate the minimum amount of electricity, as specified in the solar service agreement, in a given term, beginning as early as the first anniversary of the execution of the solar service agreement and annually thereafter. We may also suffer financial losses associated with such credit and refunds if significant performance guarantee payments are triggered. For a description of our performance guarantee obligations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations—Components of Results of Operations—Revenue".
We and our dealers are subject to risks associated with installation and other contingencies.
Our dealers design and install solar energy systems and energy storage systems on our behalf. Because the solar service agreement is entered into between us and the customer, we may be liable to our customers for any damage our dealers cause to our customers' homes or businesses, belongings or property during the installation of our solar energy systems and energy storage systems or otherwise.
For example, dealers may penetrate our customers' roofs during the installation process and we may incur liability for the failure to adequately weatherproof such penetrations following the completion of installation of solar energy systems. In addition, because our solar energy systems and energy storage systems are high-voltage energy systems, we may incur liability for a dealer's failure to comply with electrical standards and manufacturer recommendations. Furthermore, prior to obtaining permission to operate our solar energy systems and energy storage systems, the solar energy systems and energy storage
systems must pass various inspections. Any delay in passing, or inability to pass, such inspections, would adversely affect our results of operations. Because our profit on a particular solar service agreement and related solar energy system and energy storage system, if applicable, is based in part on assumptions as to the ongoing cost of the related solar energy system and energy storage system, if applicable, cost overruns, delays or other execution issues may cause us to not achieve our expected results or cover our costs for that solar service agreement and related solar energy system and energy storage systems, if applicable.
Product liability claims against us or accidents could result in adverse publicity and potentially significant monetary damages.
It is possible our solar energy systems, energy storage systems or our other sustainable home products could injure our customers or other third parties or those systems or products could cause property damage as a result of product malfunctions, defects, improper installation, fire or other causes. We rely on third-party manufacturing warranties, warranties provided by our dealers and our general liability insurance to cover product liability claims and have not obtained separate product liability insurance. Our solar energy systems, energy storage systems and other sustainable home products or their components could be subject to recalls either to production defects or malfunctions. Any product liability claim we face could be expensive to defend and may divert management's attention. The successful assertion of product liability claims against us could result in potentially significant monetary damages, potential increases in insurance expenses, penalties or fines, subject us to adverse publicity, damage our reputation and competitive position and adversely affect sales of solar energy systems, energy storage systems or other sustainable home products. In addition, product liability claims, injuries, defects or other problems experienced by other companies could lead to unfavorable market conditions to the industry as a whole and may have an adverse effect on our ability to expand our portfolio of customer agreements and related solar energy systems and energy storage systems, thus affecting our business, financial condition and results of operations.
We typically bear the risk of loss and the cost of maintenance, repair and removal on solar energy systems that are owned by our subsidiaries and included in securitization and tax equity vehicles.
We typically bear the risk of loss and are generally obligated to cover the cost of maintenance, repair and removal for any solar energy system we sell to subsidiaries and include in securitization and tax equity vehicles. At the time we enter into a tax equity or securitization transaction, we enter into a maintenance services agreement where we agree to operate and maintain the solar energy system for a fixed fee calculated to cover our future expected maintenance costs. If our solar energy systems require an above-average amount of repairs or if the cost of repairing the solar energy systems were higher than our estimate, we would need to perform such repairs without additional compensation. If our solar energy systems, approximately 44% of which were located in California and Puerto Rico as of December 31, 2023, are damaged as the result of a natural disaster beyond our control, losses could exceed or be excluded from our insurance policy limits and we could incur unforeseen costs that could harm our business and financial condition. We may also incur significant costs for taking other actions in preparation for, or in reaction to, such events. We purchase property insurance with industry standard coverage and limits approved by an investor's third-party insurance advisors to hedge against such risk, but such coverage may not cover our losses.
The installation and operation of solar energy systems and energy storage systems depends heavily on suitable solar and meteorological conditions, which may be impacted by the effects of climate change. If meteorological conditions are unexpectedly unfavorable, the electricity production from our solar energy systems may be substantially below our expectations and our ability to timely deploy new solar energy systems and energy storage systems may be adversely impacted.
Climate change poses a systemic threat to the global economy and is inextricably linked with our business. While our core business model seeks to mitigate climate change and accelerate energy independence, there are inherent climate-related risks to our business operations. Climate change could exacerbate the frequency and severity of weather events in all areas where we operate. Climate change or other factors could also cause prevailing weather patterns to materially change in the future, making it harder to predict the average annual amount of sunlight striking each location where we install a solar energy system and energy storage system. Potential negative effects of climate change include, among others, a temporary decrease in solar availability in certain locations, disruptions in transmission grids and delays or reductions in new installations.
The energy produced and the revenue and cash receipts generated by a solar energy system depend on suitable solar, atmospheric and weather conditions, all of which are beyond our control. Furthermore, components of our systems, such as panels and inverters, could be damaged by severe weather or natural catastrophes, such as hurricanes, freezes, hailstorms, tornadoes, fires or earthquakes. Our economic model and projected returns on our solar energy systems require achievement of certain production results from our systems and, in some cases, we guarantee these results to our consumers. If the solar energy systems underperform for any reason, our business could suffer. For example, the amount of revenue we recognize in a given
period from our PPAs and the amount of our obligations under the performance guarantees of our solar service agreements are dependent in part on the amount of energy generated by solar energy systems under such solar service agreements. As a result, revenue derived from our standard PPAs is impacted by seasonally shorter daylight hours in winter months. In addition, the ability of our dealers to install solar energy systems and energy storage systems is impacted by weather. For example, the ability to install solar energy systems and energy storage systems during the winter months in the Northeastern U.S. is limited. Such solar, atmospheric and weather conditions can delay the timing of when solar energy systems and energy storage systems can be installed and when we can originate and begin to generate revenue from solar energy systems. This may increase our expenses and decrease revenue and cash receipts in the relevant periods.
These or other effects could make our solar energy systems less economical overall or make individual solar energy systems less economical. Any of these effects on meteorological conditions could harm our business, financial condition and results of operations.
We may be subject to interruptions or failures in our information technology systems.
We rely on information technology systems and infrastructure to support our business. Any of these systems may be susceptible to damage or interruption due to fire, floods, power loss, telecommunication failures, usage errors by employees, computer viruses, cyberattacks or other security breaches or similar events. For example, we have in the past experienced cybersecurity attacks on our information technology systems or related to software we utilize, and, while none to date have been material, we expect further attacks may occur in the future, some of which may be material. A compromise of our information technology systems or those with which we interact could harm our reputation and expose us to regulatory actions and claims from customers and other persons, any of which could adversely affect our business, financial condition, cash flows and results of operations. If our information systems are damaged, fail to work properly or otherwise become unavailable, we may incur substantial costs to repair or replace them and we may experience a loss of critical information, customer disruption and interruptions or delays in our ability to perform essential functions.
Disruptions to our solar monitoring and metering systems or energy storage control solution could negatively impact our revenues and increase our expenses.
Our ability to monitor solar energy production, energy storage and battery discharge for various purposes, including to accurately charge customers, depends on the operation of our monitoring and metering systems and energy storage control. We have in the past experienced periods where some of our cellular connections have been unavailable and, as a result, we have been forced to estimate the production of their solar energy systems. Such estimates may prove inaccurate and could cause us to underestimate the power being generated by our systems and undercharge our customers, thereby harming our results of operations. We could incur significant expense and disruption to our operations in connection with failures of our solar monitoring and metering systems and energy storage control, including hardware failures and failure or obsolescence of the cellular and other technology that we use to communicate with those meters and controls. For example, many of our meters operate on either the 3G or 4G cellular data networks, which are expected to sunset before the term of our customer agreements, and newer technologies we use today may become obsolete before the end of the term of customer agreements entered into now.
Upgrading our metering solution may cause us to incur significant expense. Hardware may also be damaged or these systems may fail to communicate due to equipment failure, manufacturing defects, natural disasters such as hurricanes, freezes, fires and earthquakes, terrorist attacks, sabotage, vandalism and environmental risks. In addition, sophisticated hardware and operating system software and applications we procure from third parties may contain defects in design or manufacture, including "bugs" and other problems that could unexpectedly interfere with the operation of our solar energy systems or energy storage systems. Should we be unable to continue to license, on agreeable terms, the software necessary to communicate with our meters, it could cause a significant disruption in our business and operations.
Any unauthorized access to or disclosure or theft of personal information we gather, store or use could harm our reputation and subject us to claims or litigation.
We receive, store and use personal information of our customers, including names, addresses, e-mail addresses, credit information, credit card and financial account information and other housing or building and energy use information. We also store information of our dealers, including employee, financial and operational information. We rely on the availability of data collected from our customers and our dealers in order to manage our business and market our offerings. We take certain steps in an effort to protect the security, integrity and confidentiality of the personal information we collect, store or transmit, but there is no guarantee inadvertent or unauthorized use or disclosure will not occur or third parties will not gain unauthorized access to this information despite our efforts. We also rely on third-party suppliers or vendors to host certain of the systems we use.
Although we take precautions to provide for disaster recovery, our ability to recover systems or data may be expensive and may interfere with our normal operations. Also, although we obtain assurances from such third parties they will use reasonable safeguards to secure their systems, we may be adversely affected by unavailability of their systems or unauthorized use or disclosure or our data maintained in such systems. Because techniques used to obtain unauthorized access or sabotage systems change frequently and generally are not identified until they are launched against a target, we, our suppliers or vendors and our dealers may be unable to anticipate these techniques or to implement adequate preventative or mitigation measures.
Cyberattacks, including those leveraging artificial intelligence, are becoming more sophisticated and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions in critical systems, disruption of our customers' operations, loss or damage to our data delivery systems, unauthorized release of confidential or otherwise protected information, corruption of data and increased costs to prevent, respond to or mitigate cybersecurity events. In addition, certain cyber incidents, such as advanced persistent threats, may remain undetected for an extended period.
Unauthorized use, disclosure of or access to any personal information maintained by us or on our behalf, whether through breach of our systems, breach of the systems of our suppliers, vendors or dealers by an unauthorized party or through employee or contractor error, theft or misuse or otherwise, could harm our business. If any such unauthorized use, disclosure of or access to such personal information were to occur, our operations could be seriously disrupted and we could be subject to demands, claims and litigation by private parties and investigations, related actions and penalties by regulatory authorities.
In addition, we could incur significant costs in notifying affected persons and entities and otherwise complying with the multitude of international, federal, state and local laws and regulations related to the unauthorized access to, use of or disclosure of personal information. Finally, any perceived or actual unauthorized access to, use of or disclosure of such information could harm our reputation, substantially impair our ability to expand our portfolio of customer agreements and related solar energy systems, energy storage systems and other sustainable home products and have an adverse impact on our business, financial condition and results of operations. The recent increase in the number of individuals and companies working remotely and otherwise working online is increasing the attack surface available to criminals. Consequently, the risk of a cybersecurity incident suffered by us or our vendors or service providers is increased, and our investment in risk mitigations against cybersecurity incidents is evolving as the threat landscape changes. While we currently maintain cybersecurity insurance, such insurance may not be sufficient to cover us against claims, and we cannot be certain that cyber insurance will continue to be available to us on economically reasonable terms, or at all, or that any insurer will not deny coverage as to any future claim.
Terrorist or cyberattacks against centralized utilities could adversely affect our business.
Assets owned by utilities such as substations and related infrastructure have been physically attacked in the past and will likely be attacked in the future. These facilities are often protected by limited security measures, such as perimeter fencing. Any such attacks may result in interruption to electricity flowing on the grid and consequently interrupt service to our solar energy systems not combined with an energy storage system, which could adversely affect our operations. Furthermore, cyberattacks, whether by individuals or nation states, against utility companies could severely disrupt their business operations and result in loss of service to customers, which would adversely affect our operations.
We face competition from centralized electric utilities, retail electric providers, independent power producers and renewable energy companies.
The solar energy and renewable energy industries are both highly competitive and continually evolving as participants strive to distinguish themselves within their markets and compete with large centralized electric utilities. We believe our primary competitors are the centralized electric utilities that supply electricity to our potential customers. We compete with these centralized electric utilities primarily based on price (cents per kWh), predictability of future prices (by providing pre-determined annual price escalations) and the ease by which customers can switch to electricity generated by our solar energy systems. We may also compete based on other value-added benefits, such as reliability and carbon-friendly power. If we cannot offer compelling value to our customers based on these factors, our business may not grow.
Centralized electric utilities generally have substantially greater financial, technical, operational and other resources than we do. As a result, these competitors may be able to devote more resources to the research, development, promotion and sale of their products or services or respond more quickly to evolving industry standards and changes in market conditions than we can. Centralized electric utilities could also offer other value-added products or services that could help them to compete with us even if the cost of electricity they offer is higher than ours. In addition, a majority of utilities' sources of electricity is non-solar, which may allow utilities to sell electricity more cheaply than electricity generated by our solar energy systems. Centralized electric utilities could also offer customers the option of purchasing electricity obtained from renewable energy
resources, including solar, which would compete with our offerings. Moreover, regulated utilities are increasingly seeking approval to "rate-base" their own solar energy system and energy storage system businesses. Rate-basing means that utilities would receive guaranteed rates of return for their solar energy system and energy storage system businesses. This is already commonplace for utility-scale solar projects and commercial solar projects. While few utilities to date have received regulatory permission to rate-base residential solar energy systems or energy storage systems, our competitiveness would be significantly harmed should more utilities receive such permission because we do not receive guaranteed profits for our solar service offerings.
We also compete with retail electric providers and independent power producers not regulated like centralized electric utilities but that have access to the centralized utilities' electricity transmission and distribution infrastructure pursuant to state, territorial and local pro-competition and consumer choice policies. These retail electric providers and independent power producers are able to offer customers electricity supply-only solutions that are competitive with our solar energy system options on both price and usage of renewable energy technology while avoiding the long-term agreements and physical installations our current business model requires. This may limit our ability to acquire new customers, particularly those who wish to avoid long-term agreements or have an aesthetic or other objection to putting solar panels on their roofs.
We also compete with solar companies with vertically integrated business models, including sales, financing, engineering, manufacturing, installation, maintenance and monitoring services. If the integrated approach of our competitors is successful, it may limit our ability to originate solar energy systems. Many of our vertically integrated competitors are larger than we are. As a result, these competitors may be able to devote more resources to the research, development, promotion and sale of their products or services or respond more quickly to evolving industry standards and changes in market conditions than we can. Solar companies with vertically integrated business models could also offer other value-added products or services that could help them to compete with us. Larger competitors may also be able to access financing at a lower cost of capital than we are able to obtain.
In addition, we compete with other solar companies who sell or finance products directly to consumers, inclusive of programs like Property-Assessed Clean Energy financing programs established by local governments. For example, we face competition from solar installation businesses that seek financing from external parties or utilize competitive loan products or state and local programs.
We also compete with solar companies with business models similar to our own, some of which are marketed to potential customers by our dealers, and we may also face competition from new entrants into the market as a result of the passage of the IRA and its anticipated impacts and benefits to the solar industry. Some of these competitors specialize in the distributed solar energy market and some may provide energy at lower costs than we do. Some of our competitors offer or may offer similar services and products as we do, such as leases, PPAs and direct outright sales of and consumer loan products for solar energy systems. Many of our competitors also have significant brand name recognition, lower barriers to entry into the solar market, greater capital resources than we have and extensive knowledge of our target markets.
We also compete with solar companies that offer community solar products and utility companies that provide renewable power purchase programs. Some customers might choose to subscribe to a community solar project or renewable subscriber programs instead of having a solar energy system installed on their home or business, which could affect our sales. Additionally, some utility companies (and some utility-like entities, such as community choice aggregators in California) have generation portfolios that are increasingly renewable in nature. In California, for example, utility companies and community choice aggregators in that state are required to have generation portfolios comprised of 60% renewable energy by 2030 and state regulators are planning for utility companies and community choice aggregators to sell 100% greenhouse gas free electricity to retail customers by 2045. As utility companies offer increasingly renewable portfolios to retail customers, those customers might be less inclined to have a solar energy system installed on their home or business, which could adversely affect our growth and profitability.
We have historically provided our solar services only to residential customers, but we have expanded to other markets, including commercial and industrial customers. There is intense competition in the solar energy sector in the markets in which we operate and the markets in which we intend to operate. As new entrants continue to enter into these markets, and as we enter into new markets, we may be unable to grow or maintain our operations and we may be unable to compete with companies that have already established themselves in both the residential market and non-residential markets.
As the solar industry grows and evolves, we will also face new competitors and technologies who are not currently in the market (including those resulting from the consolidation of existing competitors). Our industry is characterized by low technological barriers to entry and well-capitalized companies, including utilities and integrated energy companies, could choose to enter the market and compete with us. Our failure to adapt to changing market conditions and to compete successfully
with existing or new competitors will limit our growth and profitability and will have a material adverse effect on our business, financial condition and results of operations.
Developments in technology or improvements in distributed solar energy generation and related technologies or components may materially adversely affect demand for our offerings.
Significant developments in technology, such as advances in distributed solar power generation, energy storage solutions such as batteries, energy storage management systems, the widespread use or adoption of fuel cells for residential or commercial properties or improvements in other forms of distributed or centralized power production may materially and adversely affect demand for our offerings and otherwise affect our business. Future technological advancements may result in reduced prices to consumers or more efficient solar energy systems than those available today, either of which may result in current customer dissatisfaction. We may not be able to adopt these new technologies as quickly as our competitors or on a cost-effective basis.
Due to the length of our solar service agreements, the solar energy system deployed on a customer's property may be outdated prior to the expiration of the term of the related solar service agreement, reducing the likelihood of renewal of our solar service agreement at the end of the applicable term and possibly increasing the occurrence of customers seeking to terminate or cancel their solar service agreements or defaults. If current customers become dissatisfied with the price they pay for their solar energy system under our solar service agreements relative to prices that may be available in the future or if customers become dissatisfied by the output generated by their solar energy systems relative to future solar energy system production capabilities, or both, this may lead to customers seeking to terminate or cancel their solar service agreements or higher rates of customer default and have an adverse effect on our business, financial condition and results of operations. Additionally, recent technological advancements may impact our business in ways we do not currently anticipate. Any failure by us to adopt or have access to new or enhanced technologies or processes, or to react to changes in existing technologies, could result in product obsolescence or the loss of competitiveness of and decreased consumer interest in our solar energy services, which could have a material adverse effect on our business, financial condition and results of operations.
Obtaining a customer contract with a potential customer does not guarantee the potential customer will not decide to cancel or that we will not need to cancel due to a failed inspection, which could cause us to generate no revenue despite incurring costs and adversely affect our results of operations.
Even after we secure a customer contract with a potential customer, we (either through our dealers or directly) must perform an inspection to ensure the home, including the rooftop, meets our standards and specifications. If the inspection finds repairs to the rooftop are required in order to satisfy our standards and specifications to install the solar energy system, and a potential customer does not want to make such required repairs, we would lose that anticipated sale. In addition, per the terms of our customer contracts, a customer maintains the ability to cancel before commencement of installation, subject to certain conditions. Any delay or cancellation of an anticipated sale could materially and adversely affect our financial results, as we may have incurred sales-related, design-related and other expenses and generated no revenue.
The value of our solar energy systems at the end of the associated term of the lease or PPA may be lower than projected, which may adversely affect our financial performance, results of operations and valuation.
We depreciate the costs of our solar energy systems over their estimated useful life of 35 years. At the end of the initial term (typically 20 or 25 years) of the lease or PPA, customers may choose to purchase their solar energy systems, ask us to remove the solar energy system at our cost or renew their lease or PPA. Home and business owners may choose to not renew or purchase for any reason, such as pricing, decreased energy consumption, relocation, switching to a competitor product or technological obsolescence of the solar energy system. We are also contractually obligated to remove, store and reinstall the solar energy systems, typically for a fee, if customers need to replace or repair their roofs. Furthermore, it is difficult to predict how future environmental regulations may affect the costs associated with the removal, disposal or recycling of our solar energy systems. If the residual value of the solar energy systems is less than we expect at the end of the customer contract, after giving effect to any associated removal and redeployment costs, we may be required to accelerate the recognition of all or some of the remaining unamortized costs. This could materially impair our future results of operations.
Risks Related to Our Financing Activities
We need to obtain substantial additional financing arrangements to provide working capital and growth capital. If financing is not available to us on acceptable terms when needed, our ability to continue to grow our business would be materially adversely impacted.
Distributed solar power is a capital-intensive business that relies heavily on the availability of debt and equity financing sources to fund solar energy system purchase, design, engineering and other capital expenditures. Our future success depends in part on our ability to raise capital from third-party investors and commercial sources, such as banks and other lenders, on competitive terms to help finance the deployment of our solar energy systems. We seek to minimize our cost of capital in order to improve profitability and maintain the price competitiveness of the electricity produced by, the payments for and the cost of our solar energy systems. We rely on access to capital, including through tax equity financing and indebtedness in the form of debt facilities, asset-backed securities and loan-backed securities, to cover the costs related to bringing our solar energy systems and energy storage systems in service, although our customers ultimately bear responsibility for those costs pursuant to our solar service agreements.
To meet the capital needs of our growing business, we will need to obtain additional debt or equity financing from current and new investors. If any of our current debt or equity investors decide not to invest in us in the future for any reason, or decide to invest at levels inadequate to support our anticipated needs or materially change the terms under which they are willing to provide future financing, we will need to identify new investors and financial institutions to provide financing and negotiate new financing terms. In addition, our ability to obtain additional financing through the asset-backed securities market, loan-backed securities market or other secured debt markets is subject to our having sufficient assets eligible for securitization as well as our ability to obtain appropriate credit ratings. If we are unable to raise additional capital in a timely manner, our ability to meet our capital needs and fund future growth and profitability may be limited.
Delays in obtaining financing could cause delays in expansion in existing markets or entering into new markets and hiring additional personnel. Any future delays in capital raising could similarly cause us to delay deployment of a substantial number of solar energy systems for which we have signed solar service agreements with customers. Our future ability to obtain additional financing depends on banks' and other financing sources' continued confidence in our business model and the renewable energy industry as a whole. It could also be impacted by the liquidity needs of such financing sources themselves. Additionally, it could be impacted by our failure to satisfy certain conditions to receive additional guarantees of certain of our indebtedness from the DOE. We face intense competition from a variety of other companies, technologies and financing structures for such limited investment capital. If we are unable to continue to offer a competitive investment profile, we may lose access to these funds or they may only be available to us on terms less favorable than those received by our competitors. For example, if we experience higher customer default rates than we currently experience, it could be more difficult or costly to attract future financing. Any inability to secure financing could lead us to cancel planned installations, impair our ability to accept new customers or increase our borrowing costs, any of which could have a material adverse effect on our business, financial condition and results of operations. Further, because we must continue to comply with certain additional rules and requirements imposed by the DOE in connection with its loan guarantees, any material noncompliance may result in penalties that limit our ability to access capital.
We enter into securitization structures, warehouse financings and other debt financings that may limit our ability to access the cash of our subsidiaries and include acceleration events that, if triggered, could adversely impact our financial condition.
Since April 2017, we have pooled and transferred eligible solar energy systems, energy storage systems and the related asset receivables into 19 special purpose entities, which sold solar asset-backed notes and solar loan-backed notes to institutional investors, the net proceeds of which were distributed to us. We intend to monetize additional solar energy systems, energy storage systems and other sustainable home products in the future through contributions to new special purposes entities for cash. There is a risk the institutional investors that have purchased the notes issued by these special purpose entities will be unwilling to make further investments at attractive prices. Although the creditors of these special purpose entities have no recourse to our other assets except as expressly set forth in the terms of the notes, the special purpose entities are typically required to maintain a liquidity reserve account, a reserve account for equipment replacements, as well as, in certain cases, reserve accounts to finance purchase option/withdrawal right exercises, storage system replacement or payment of liquidated damages for the benefit of the lenders under the applicable series of notes, each of which are funded from initial deposits or cash flows to the levels specified therein.
The securitization structures, warehouse financings and other debt financings often include certain other features designed to protect investors. The primary feature relates to the availability and adequacy of cash flows in the pool of assets to meet
contractual requirements, the insufficiency of which triggers an early repayment of the indebtedness. We refer to this as "early amortization", which may be based on, among other things, a debt service coverage ratio falling or remaining below certain levels or exceeding certain allowable thresholds for customer defaults or delinquencies. In the event of an early amortization, the applicable borrower or notes issuer would be required to repay the affected indebtedness using available collections received from the asset pool. However, the period of ultimate payment would be determined based on the amount and timing of collections received and, in limited circumstances, early amortization may be cured prior to full repayment. An early amortization event would impair our liquidity and may require us to utilize other available contingent liquidity or rely on alternative funding sources, which may not be available at the time. Certain of the securitizations, warehouse financings and other debt financings also contain a "cash trap" feature, which requires excess cash flow to be held in an account based on, among other things, a debt service coverage ratio falling or remaining below certain levels. If the cash trap conditions are not cured within a specified period, then the cash in the cash trap account must be applied to repay the indebtedness. If the cash trap conditions are timely cured, the cash is either released back to the borrower or used to repay the indebtedness at the borrower's option. The indentures of our securitizations also typically contain customary events of default for solar securitizations that may entitle the noteholders to take various actions, including the acceleration of amounts due and foreclosure on the issuer's assets. Any significant payments we may be required to make as a result of these arrangements could adversely affect our financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Financing Arrangements".
Servicing our existing debt requires a significant amount of cash. We may not have sufficient cash flow from our business to timely pay our interest and principal obligations and may be forced to take other actions to satisfy our payment obligations.
As of December 31, 2023, our total indebtedness was approximately $7.5 billion and the available borrowing capacity under our credit facilities was $733.0 million. Our ability to make scheduled payments of the principal of, to pay interest on or to refinance our indebtedness depends on our future performance, which is subject to economic, financial, competitive and other factors beyond our control. Our business may not generate cash flow from operations sufficient to service our debt and make necessary capital expenditures to operate our business. If we are unable to generate such cash flow, we may be required to adopt one or more alternatives, such as slowing or ceasing the origination of new customer agreements, selling assets, restructuring debt or obtaining additional debt and equity capital on terms that may be onerous or highly dilutive. Our securitizations are structured so cash flows generated by the pool of solar energy systems, energy storage systems, other sustainable home products and related customer agreements are initially used to repay outstanding principal amounts based on the priority of payments in the agreement. However, should these cash flows decrease below applicable thresholds, all excess cash flows from such asset pool must be applied to pay down the related indebtedness, which would reduce the cash available to otherwise fund our business. Our ability to timely repay or otherwise refinance our indebtedness will depend on the capital markets and our financial condition at such time. We may not be able to engage in any of these activities or engage in these activities on desirable terms, which could result in a default on our debt obligations.
Furthermore, we and our subsidiaries expect to incur additional debt in the future, subject to the restrictions contained in our debt instruments. Increases in our existing debt obligations would further heighten the debt related risk discussed above. In addition, we may not be able to enter into new debt instruments on acceptable terms or at all. If we were unable to satisfy financial covenants and other terms under existing or new instruments, or obtain waivers or forbearance from our lenders, or if we were unable to obtain refinancing or new financings for our working capital, equipment and other needs on acceptable terms if and when needed, our business would be adversely affected.
Restrictive covenants in certain of our debt agreements could limit our growth, profitability and our ability to finance our operations, fund our capital needs, respond to changing conditions and engage in other business activities that may be in our best interests.
Our debt agreements impose operating and financial restrictions on us. These restrictions limit our ability and that of our subsidiaries to, among other things:
• incur additional indebtedness;
• make investments or loans;
• create liens;
• consummate mergers and similar fundamental changes;
• make restricted payments;
• make investments in unrestricted subsidiaries;
• enter into transactions with affiliates; and
• use the proceeds of asset sales.
We may be prevented from taking advantage of business opportunities that arise because of the limitations imposed on us by the restrictive covenants under certain of our debt agreements. The restrictions contained in the covenants could:
• limit our ability to plan for or react to market conditions, to meet capital needs or otherwise to restrict our activities or business plan; and
• adversely affect our ability to finance our operations, enter into acquisitions or divestitures to engage in other business activities that would be in our interest.
A breach of any of these covenants or our inability to comply with the required financial ratios or financial condition tests could result in a default under our debt agreements that, if not cured or waived, could result in acceleration of all indebtedness outstanding thereunder and cross-default rights under our other debt. In addition, in the event of an event of default under one of the credit facilities, the affected lenders could foreclose on the collateral securing such credit facility and require repayment of all borrowings outstanding thereunder. If the amounts outstanding under the credit facilities or any of our other indebtedness were to be accelerated, our assets may not be sufficient to repay in full the amounts owed to the lenders or to our other debt holders.
Volatility and continued increases in interest rates would raise our cost of capital and may adversely impact our business.
Due to recent increases in inflation, the U.S. Federal Reserve has raised its benchmark interest rates. Further increases in the federal benchmark rate could result in an increase in market interest rates, which may increase our interest expense under our variable-rate borrowings and the costs of refinancing existing indebtedness or obtaining new debt. For example, borrowings under our existing warehouse credit facilities accrue interest based on the Secured Overnight Financing Rate ("SOFR") as a benchmark for establishing the rate of interest. Consequently, rising interest rates or continued higher interest rates will increase our cost of capital and may decrease the amount of capital available to us to finance deployment of new solar energy systems, energy storage systems and other sustainable home products. Our future success depends in part on our ability to raise capital from investors and obtain secured lending to help finance the deployment of our customer agreements. As a result, rising interest rates may have an adverse impact on our ability to offer attractive pricing on our customer agreements to our customers. If in the future we have a need for significant borrowings and interest rates increase or continue at high interest rates, that may increase the cost of the systems we purchase, which either would make those systems more expensive for customers, which is likely to reduce demand, or would lower our operating margins, or both.
The majority of our cash flows to date have been from solar service agreements monetized under various tax equity fund structures and secured lending arrangements. One of the components of this monetization is the present value of the payment streams from customers who enter into these long-term solar service agreements. If the rate of return required by capital providers, including debt providers, rises as a result of a rise in interest rates, it will reduce the present value of the customer payment stream and consequently reduce the total value derived from this type of monetization. Any measures we could take to mitigate the impact of rising interest rates on our ability to secure third-party financing could ultimately have an adverse impact on the value proposition we offer our customers or our profitability.
We may not have the ability to raise the funds necessary to settle conversions of the Convertible Notes in cash or to repurchase the Convertible Notes upon a fundamental change, and our future debt may contain limitations on our ability to pay cash upon conversion or repurchase of the Convertible Notes.
Holders of the 0.25% convertible senior notes and 2.625% convertible senior notes (the "Convertible Notes") will have the right to require us to repurchase all or a portion of their Convertible Notes upon the occurrence of a fundamental change under the indenture, which includes certain events such as a change of control, before the maturity date at a fundamental change repurchase price equal to 100% of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid special interest, if any. In addition, upon conversion of the Convertible Notes, unless we elect to deliver solely shares of our common stock to settle such conversion (other than paying cash in lieu of delivering any fractional share), we will be required to make cash payments in respect of the Convertible Notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make repurchases of Convertible Notes surrendered therefor or pay cash for Convertible Notes being converted. In addition, our ability to repurchase the Convertible Notes or to pay cash upon conversions of the Convertible Notes may be limited by law, by regulatory authority or by agreements governing our indebtedness at the time.
Our failure to repurchase Convertible Notes at a time when the repurchase is required by the indenture governing such Convertible Notes or to pay any cash payable on future conversions of the Convertible Notes as required by the indenture would constitute a default. A default under the indenture or the fundamental change itself could also lead to a default under agreements governing our existing or future indebtedness. If the repayment of the related indebtedness were to be accelerated
after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Convertible Notes or make cash payments upon conversions thereof.
We are subject to counterparty credit risk with respect to the capped call transactions.
In connection with the pricing of the Convertible Notes, we entered into privately negotiated capped call transactions with certain financial institutions (the "option counterparties"). The option counterparties are financial institutions or affiliates of financial institutions, and we will be subject to the risk that one or more of such option counterparties may default or otherwise fail to perform their obligations under the capped call transactions. Our exposure to the credit risk of the option counterparties will not be secured by any collateral.
If any option counterparty becomes subject to bankruptcy or other insolvency proceedings, with respect to such option counterparty's obligations under the relevant capped call transaction, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under our transactions with that counterparty. Our exposure will depend on many factors but, generally, our exposure will increase if the market price or the volatility of our common stock increases. In addition, upon a default or other failure to perform by an option counterparty, we may suffer more dilution than we currently anticipate with respect to our common stock. We can provide no assurance as to the financial stability or viability of any of the option counterparties.
We may be required to make payments or contribute assets to our investors upon the occurrence of certain events, including one-time reset or true-up payments or upon the exercise of a redemption option by one of our tax equity investors.
Our investors in our tax equity investment funds typically advance capital to us based on, among other things, production capacity estimates. The models we use to calculate prepayments in connection with certain of our tax equity investment funds are updated at a fixed date occurring after placement in service of all applicable solar energy systems or an agreed upon date (typically within the first year of the applicable term) to reflect certain specified conditions, as they exist at such date including the ultimate system size of the equipment that was sold or leased to the tax equity investment fund, the cost thereof, and the date the equipment went into service. In some cases, these true-up models also incorporate any changes in law, which would include any reduction in rates (and thus any reduction in the benefits of depreciation). As a result of this true-up, applicable payments are resized, and we may be obligated to refund a portion of the tax equity investor's prepayments or to contribute additional assets to the tax equity investment fund. In addition, certain of our tax equity fund investors have the right to require us to purchase their interests in the tax equity investment funds after a set period of time, generally at a price equal to the greater of a set purchase price or fair market value of the interests at the time of the repurchase. Any significant refunds, capital contributions or purchases we may be required to make could adversely affect our liquidity or financial condition.
Risks Related to Regulations
We are not currently regulated as an electric public utility under applicable law but may be subject to regulation as an electric utility in the future.
We are not currently regulated as an electric public utility in the U.S. under applicable national, state or other local regulatory regimes where we conduct business. As a result, we are not currently subject to the various federal, state and local standards, restrictions and regulatory requirements applicable to centralized public utilities. Any federal, state or local regulations that cause us to be treated as an electric utility or to otherwise be subject to a similar regulatory regime of commission-approved operating tariffs, rate limitations and related mandatory provisions, could place significant restrictions on our ability to operate our business and execute our business plan by prohibiting, restricting or otherwise regulating our sale of electricity. If we were subject to the same state or federal regulatory authorities as centralized electric utilities in the U.S. and its territories or if new regulatory bodies were established to oversee our business in the U.S. and its territories or in foreign markets we enter, our operating costs would materially increase or we might have to change our business in ways that could have a material adverse effect on our business, financial condition and results of operations.
While we are not regulated as extensively as an electric public utility, we are subject to certain utility-like regulations in jurisdictions such as California, New York, Arizona, Nevada, Florida and Puerto Rico. In New York, distributed energy providers are subject to regulation by the New York Public Service Commission (the "NYPSC") with respect to customer interactions (including contracting and marketing) and are required to comply with the NYPSC's Uniform Business Practices. In connection with approving the Uniform Business Practices, the NYPSC also established an oversight framework under which it could impose
other regulatory requirements on distributed energy providers. In Puerto Rico, we are regulated as an electric power company under applicable Puerto Rico Energy BureauPREB regulations in connection with the sale and invoicing of energy generated by distributed generation systems having an aggregate capacity of more than 1 megawatt. Among other requirements, these
regulations impose certain filing, certification, reporting and annual fee requirements upon us but do not currently subject the companies to centralized utility-like regulation or require the Puerto Rico Energy Bureau'sPREB's approval of their charges. In California, the California Public Utilities Commission ("CPUC")CPUC issued an order approving several consumer protection measures for solar customers, including a requirement for solar providers to provide customers with the California Solar Consumer Protection Guide, which provides customers with information regarding the selection of a contractor, solar financing, bill savings estimates, net energy metering and electric rates, low-income options and related matters. The CPUC order also requires the investor-owned utilities in California to adopt procedures to verify during the interconnection process that the customer received the California Solar Consumer Protection Guide and that the solar provider is licensed, and to collect and report on complaints regarding solar providers. If we become subject to new, additional regulatory requirements in these jurisdictions or other jurisdictions adopt similar regulatory requirements, our operating costs would materially increase or we might have to change our business in ways that could have a material adverse effect on our business, financial condition and results of operations.
Electric utility policies and regulations, including those affecting electric rates, may present regulatory and economic barriers to the purchase and use of solar energy systems that may significantly reduce demand for electricity from our solar energy systems and adversely impact our ability to originate new solar service agreements.
Federal, state and local government regulations and policies concerning the electric utility industry, utility rates and rate structures and internal policies and regulations promulgated by electric utilities, heavily influence the market for electricity generation products and services. These regulations and policies often relate to electricity pricing. Policies and regulations that promote renewable energy and distributed energy generation have been challenged by centralized electric utilities and questioned by those in government and others arguing for less governmental spending and involvement in the energy market. To the extent such views are reflected in government policies and regulations, the changes in such policies and regulations could adversely affect our business, financial condition and results of operations. Furthermore, any effort to overturn federal and state laws, regulations or policies that are supportive of solar energy generation or that remove costs or other limitations on other types of energy generation that compete with solar energy projects could materially and adversely affect our business.
In the U.S., governmental authorities and state public service commissions that determine utility rates, rate structures and the terms and conditions of electric service continuously modify these regulations and policies. These regulations and policies could result in a significant reduction in the potential demand for electricity from our solar energy systems and could deter customers from entering into solar service agreements with us.
With regard to rates, customers with residential solar energy systems may currently pay or be subject in the future to increased charges due to increased rates or changes in rate design and structures. Utilities in certain jurisdictions may assess fees that apply only to customers with distributed generation systems, including residential or non-residential solar energy systems or impose charges on solar customers that are significantly higher than comparable charges billed to non-solar customers.
These fees may include demand, stand-by or departing load charges or monthly minimum charges. Certain jurisdictions may permit utilities to change their rate design and structures whichthat could result in charges that would disproportionately impact customers with solar energy systems. For example, a reduction in the number of tiers of residential rates could result in increased charges for lower-demand customers, including many solar customers, by moving them to a new rate tier with higher rates. It could also result in lower charges for higher-demand customers, who may then become less incentivized to consider solar energy to meet their electricity needs. Similarly, a change in rate design to recover more costs from fixed charges as opposed to variable charges (i.e. "decoupled" rates, by which the utility's revenue requirement is "decoupled" from its level of electricity sales in designing rates) may have the same effect. Additionally, depending on the region, electricity generated by solar energy systems competes most effectively with the most expensive retail rates for electricity from the electrical grid, rather than the less expensive average price of electricity. Modifications to the centralized electric utilities' peak hour pricing policies or rate design could make our current product offerings less competitive with the price of electricity from the electrical grid. A shift in the timing of peak rates for utility-generated electricity to include times of day when solar energy generation is less efficient or non-operable could make our solar energy systems less competitive and reduce demand for our product offerings. Time-of-use rates could also result in higher costs for solar customers whose electricity requirements are not fully met by the solar energy system during peak periods.
Utilities in California, New Jersey and Puerto Rico, among other states and jurisdictions, have proposed or received approval by state regulators for such rate measures as described in this risk factor. Any such changes affecting rates could increase our customers' cost to use our solar energy systems and make our service and product offerings less desirable, thereby
harming our business, financial condition and results of operations. The imposition of any such rate measures could limit the ability of distributed residential solar power companies to compete with the price of electricity generated by centralized electric utilities, which may reduce the number of solar energy systems installed in those jurisdictions. Additionally, any such unaccounted for increases in the fees or charges applicable to existing customer agreements may increase the cost of energy to those customers
and result in an increased rate of defaults, terminations or cancelations under our solar service agreements. In addition, changes to government or internal utility regulations and policies that favor centralized electric utilities could reduce our competitiveness and cause a significant reduction in demand for our product offerings.
Any of the foregoing results could limit our ability to expand our portfolio of solar service agreements and related solar energy systems and energy storage systems or harm our business, financial condition and results of operations.
We rely on net metering and related policies to offer competitive pricing to our customers in most of our current markets and changes to net metering policies may significantly reduce demand for electricity from residential solar energy systems.
Net metering is one of several key policies that have enabled the growth of distributed generation solar energy systems in the U.S., providing significant value to certain qualifying residential and commercial customers for electricity generated by their residential solar energy systems but not directly consumed on-site. Net metering allows a homeowner or a business to pay his or herthe local electric utility for power usage net of production from the solar energy system or other distributed generation source. Homeowners or businesses receive a credit for the energy an interconnected solar energy system generates in excess of that needed by the home to offset energy purchases from the centralized utility made at times when the solar energy system is not generating sufficient energy to meet the customer's demand. In many markets, this credit is equal to the residential retail rate for electricity and in other markets, such as Hawaii and Nevada, the rate is less than the retail rate and may be set, for example, as a percentage of the retail rate or based upon a valuation of the excess electricity. In some states and utility territories, customers are also reimbursed by the centralized electric utility for net excess generation on a periodic basis.
Net metering programs have been subject to legislative and regulatory scrutiny in some states and territories including, but not limited to, California, New Jersey, California, Arizona, Nevada, Connecticut, Florida, Maine, Kentucky, Puerto Rico and Guam. These jurisdictions, by statute, regulation, administrative order or a combination thereof, have recently adopted or are considering new restrictions and additional changes to net metering programs either on a state-wide basis or within specific utility territories. Many of these measures were introduced and supported by centralized electric utilities. These measures vary by jurisdiction and may include a reduction in the rates or value of the credits customers are paid or receive for the power they deliver back to the electrical grid, caps or limits on the aggregate installed capacity of generation in a state or utility territory eligible for net metering, expiration dates for and phasing out of net metering programs, replacement of net metering programs with alternative programs that may provide less compensation and limits on the capacity size of individual distributed generation systems that can qualify for net metering. Net metering and related policies concerning distributed generation also received attention from federal legislators and regulators.
In New Jersey, the Board of Public Utilities has the option under state law of limiting participation in the retail rate net metering program if the aggregate capacity of owned and operating systems reaches 5.8% of total annual kWh sold in the state. As of December 31, 2020, that threshold had not yet been reached.
In California, the CPUC issued an order in 2016 retaining retail-based net metering credits for residential customers of California's major utilities as part of Net Energy Metering 2.0 ("NEM 2.0"). Under NEM 2.0, new distributed generation customers receive the retail rate for electricity exported to the grid, less certain non-bypassable fees. Customers under NEM 2.0 also are subject to interconnection charges and time‑of-use rates. Existing customers who receive service under the prior net metering program, as well as new customers under the NEM 2.0 program, currently are grandfatheredpermitted to remain covered by them on a legacy basis for a period of 20 years. On September 3, 2020, the CPUC opened a new proceeding to review its current net metering policies and to develop Net Energy Metering 3.0 ("NEM 3.0"), also referred to by the CPUC as the NEM 2.0 successor tariff, with the goal of implementing NEM 3.0 no later than December 31, 2021. While the outcome of this proceeding is uncertain, it could result in the reduction of the value of net metering credits, although customers under NEM 2.0 are expected to remain under that program for 20 years from enrollment. Proceedings on distributed energy policy and utility rates before the CPUC or legislation concerning these matters could also result in changes that affect customers with distributed generation systems.
LegislationIn New Jersey, the Board of Public Utilities has the option under state law of limiting participation in the retail rate net metering program if the aggregate capacity of owned and operating systems reaches 5.8% of total annual kWh sold in the state. As of December 31, 2023, that threshold had not yet been reached.
In October 2023, the Arizona Corporation Commission voted to reopen the proceeding that set the level of net metering credits. The value of credits, the current schedule for the step-down of the credit value over time and the length of the period during which the value of credits are locked in for customers may all be subject to review. No final action has been taken at this stage.
In Puerto Rico, legislation enacted in April 2019 requires a study of net metering to be completed within five years, which may result in revisions to the existing rules. However, no changes can be made to retail net metering for five years after the date the legislation was enacted. Meanwhile, "true" net metering will continue to apply, meaning the credit for energy exported by net metering clients will equal the value of such energy under the rate applicable to those clients and accordingly, their charges will be based on their net consumption. Customers subject to this regime would be grandfatheredwill remain covered by it on a legacy basis for a period of 20 years from the date of their net metering agreements.
Net metering customers in Puerto Rico may be impacted by transition charges and other requirements contemplated in a restructuring agreement between PREPA and its creditors, currently pending before the U.S. District Court for the District of
Puerto Rico in bankruptcy-like proceedings under Title III of the PROMESA. PROMESA providesNevertheless, the POA has not been finally adjudicated by the Title III Court and creditors could appeal any final judgement. Hence, the PREPA with access to a workout process similar to bankruptcy. In response to the effects of the COVID-19 pandemic, however, the approval of the restructuring agreement has been stayed, and the government announced in December 2020 that it continues to conduct diligence to determine whether, among other things, the terms of the restructuring agreement should be renegotiated and the parameters for doing so.bankruptcy is ongoing but is nearing its final stages.
In Guam, the Consolidated Commission on Utilities ("CCU") adopted a resolution in 2018 recommending retail rate net metering for customers of the Guam Power Authority ("GPA") be replaced with a "buy all/sell all" or similar program that provides for compensation to homeowners at a lower, avoided cost rate. The GPA is a public corporation that provides electricity in Guam and is overseen by the CCU and regulated by the Guam Public Utilities Commission ("GPUC"). In 2019, the GPUC, who has the authority to approve or reject the CCU's recommendations, rejected the resolution and instead voted to cap participation in the net metering program from 1,000 customers to 261 megawatts, which represents 10% of the GPA system's peak power demand. The GPA has also proposed to eliminate the option for customers to roll over any excess net metering credits to the next year or receive a payment for excess credits remaining at the end of the year. In May 2020, the GPUC approved the GPA's proposal to eliminate the option for customers to roll over any excess net metering credits or receive a payment for excess credits remaining at the end of the year. This change will go into effect on January 1, 2021. Customers will be able to receive a payment for excess credits at the end of 2020, but any excess credits remaining at the end of a year in the future will be surrendered to the utility without compensation. In February 2020, the CCU adopted a resolution requiring all new distributed generation that participates in net metering and is tied to the GPA power grid to have an energy storage system such as a battery. In lieu of having an energy storage system, the CCU resolution permits customers to instead select pay an additional charge under an energy storage service rate schedule that is under development. The GPUC has approved the CCU proposal, but requirements for implementation have not yet been finalized.
In other jurisdictions, including Minnesota, Connecticut and parts of Texas, replacing net metering with a "value of distributed energy", "feed-in", or "sell-all/ buy-all" tariff is also being considered or has been adopted. Under a "value of distributed energy" tariff, the customer would be compensated at a rate that accounts for the electricity, capacity, environmental and other attributes provided by distributed generation to the grid and the electricity market. Under a "feed-in" or "sell-all/ buy-all" tariff, all the solar energy system's generation is exported to the grid and purchased by the utility at an established rate and the customer is required to purchase all of its electricity requirements from the utility at the retail rate. In New York, the New York Public Service Commission adopted a "value of distributed energy" policy but grandfathered existing net metering customers and continuing net metering for new residential customers interconnected before January 1, 2022 for a period of 20 years. Residential customers otherwise still eligible for net metering may also elect to be compensated under a "value of distributed energy" tariff. New solar customers interconnecting after January 1, 2022 will continue to be eligible for net metering, but will be subject to a monthly fixed fee. Compensation for those customers covered by a "value of solar" tariff varies and may not favorably compare to that provided by net metering.
Net metering and related policies concerning distributed generation have received attention from federal legislators and regulators and challenge by various stakeholders. For example, in April 2020, the New England Ratepayers Association petitioned the FERC to declare its exclusive federal jurisdiction over distributed generation, including residential solar, and to establish new federal customer compensation rates for excess energy in lieu of state net metering programs. While the FERC rejected the petition on procedural grounds, further challenges to net metering based on federal law may occur. Changes in federal law, including those made by statute, regulation, rule or order, could negatively affect net metering or other related policies that otherwise promote and support solar energy and enhance the economic viability of distributed residential solar.
If net metering caps in certain jurisdictions are reached while they are still in effect, if the value of the credit that customers receive for net metering is significantly reduced, if net metering is discontinued or replaced by a different regime that values solar energy at a lower rate or if other limits or restrictions on net metering are imposed, current and future customers may be unable to recognize the same level of cost savings associated with net metering. The absence of favorable net metering policies or of net metering entirely, or the imposition of new charges that only or disproportionately impact customers that use net metering would likely significantly limit customer demand for distributed residential solar energy systems and the electricity they generate and result in an increased rate of defaults, terminations or cancelations under customer agreements. Our ability to lease, finance and sell our solar energy systems and services or sell the electricity generated from our solar energy systems may be adversely impacted by the failure to expand existing limits on the amount of net metering in states that have implemented it, the failure to adopt a net metering policy where it currently is not in place or reductions in the amount or value of credit customers receive through net metering. This could adversely impact our ability to expand our portfolio of solar service agreements and related solar energy systems and energy storage systems, our business, financial condition and results of operations.
Additionally, distributed residential solar customers in certain jurisdictions may be subject to higher charges from centralized electric utilities than non-solar customers and such charges should be evaluated together with the net metering policies in place. If such charges are imposed, the cost savings associated with switching to solar energy may be significantly reduced and our ability to expand our portfolio of solar service agreements and related solar energy systems and energy storage systems and compete with centralized electric utilities could be impacted.
For further discussion of these potential charges and related proposals, see "—Electric utility policies and regulations, including those affecting electric rates, may present regulatory and economic barriers to the purchase and use of solar energy systems that may significantly reduce demand for electricity from our solar energy systems and adversely impact our ability to originate new solar service agreements".
Our business currently depends in part on the availability of rebates, tax credits and other financial incentives. The expiration, elimination or reduction of these rebates, credits or incentives or our ability to monetize them could adversely impact our business.
Our business depends in part on current government policies that promote and support solar energy and enhance the economic viability of distributed residential solar. Revenues from SRECs constituted approximately 22%7%, 29%9% and 29%17% of our revenues for the years ended December 31, 2020, 20192023, 2022 and 2018,2021, respectively. U.S. federal, state and local governments established various incentives and financial mechanisms to reduce the cost of solar energy and to accelerate the adoption of solar energy. These incentives come in various forms, including rebates, tax credits and other financial incentives such as payments for renewable energy credits associated with renewable energy generation, exclusion of solar energy systems from property tax assessments or other taxes and system performance payments. However, these programs may expire on a particular date, end when the allocated funding is exhausted or be reduced or terminated as solar energy adoption rates increase. For example, New Jersey's SREC program closed in 2020 due to legislation requiring that it be closed by the earlier of the share of electricity sold by the state's utilities supplied by solar reaching 5.1% or June 2021. Following the close of the program in June 2020, customers became eligible for Transitional Renewable Energy Credits ("TRECS"TRECs") under an interim transitional program replacing SRECs that will be in place until New Jersey adopts a long-term successor program. The TREC program provides for a lower level of revenue than the SREC program. In July 2021, the New Jersey Board of Public Utilities closed the TREC program effective August 27, 2021 and approved the long-term successor program to the TREC program, which is referred to as the Successor Solar Incentive Program ("SuSI"). Under the SuSI program, which became effective on August 28, 2021, residential facilities are eligible for the Solar Renewable Energy Certificate-II ("SREC-II") incentive. For net metered residential facilities, the SREC-II provides an administratively-determined fixed payment per megawatt hour that is guaranteed for 15 years, but is lower than the level revenue provided by the TREC program. The financial value of certain incentives decreases over time. The value of SRECs in a market tends to decrease over time as the supply of SREC‑producing solar energy systems installed in that market increases. If we overestimate the future value of these incentives, it could adversely impact our business, results of operations and financial results. See "Business—Government Incentives".
A loss or reduction in such incentives could decrease the attractiveness of new solar energy systems to customers, which could adversely impact our business and our access to capital. We also enter into economic hedges related to expected production of SRECs through forward contracts that require us to physically deliver the SRECs upon settlement. These arrangements may, depending on the instruments used and the level of additional hedges involved, limit any potential upside from SREC production increases. We may be exposed to potential economic loss should a counterparty be unable or unwilling
to perform their obligations under the terms of a hedging agreement. In addition, we are exposed to risks related to changes in interest rates and may engage in hedging activities to mitigate related volatility. We may fail to properly hedge these SRECs or may fail to do so economically, which may also adversely affect our results of operations.
The economics of purchasing a solar energy system and energy storage system are also improved by eligibility for accelerated depreciation, also known as the modified accelerated cost recovery system ("MACRS"), which allows for the depreciation of equipment according to an accelerated schedule set forth by the IRS. This accelerated schedule allows a taxpayer, such as us and investors in tax equity financing arrangements, to recognize the depreciation of tangible solar property on a five-year basis even though the useful life of such property is generally greater than five years. We benefit from accelerated depreciation on the solar energy systems and energy storage systems we own. To the extent these policies are changed in a manner that reduces the incentives that benefit our business, we may experience reduced revenues and reduced economic returns, experience increased financing costs and encounter difficulty obtaining financing.
The federal government currently provides business investment tax credits underfor the Section 4848(a) ITC, the Section 48E ITC for eligible property that begins construction after 2024 and residential energy credits underthe Section 25D ofCredit. Under current law, the Code. Section 48(a) ITC of the Code allows taxpayers to claim an investment tax credit equalthat, depending on the location of a particular project, its size, its ability to 30%satisfy certain labor and domestic content requirements and the category of the qualified expenditures for certain commercially owned solar energy systems that began construction before 2020. The Section 48(a) ITC percentage decreases to 26%consumers it serves, can range between 6% and 70% of the basis of certain commercially owned energy property, in each case construction of which begins before 2025. The Section 48E ITC percentage generally will be the same as the percentage for the Section 48(a) ITC. The Section 48E ITC percentage will begin to phase down for projects that began construction after (a) 2033 or (b) if later, the first year after the year in which the U.S. Treasury Department determines greenhouse gas emissions from the production of electricity in the U.S. are no more than 25% of 2022 levels. To be eligible for the Section 48(a) ITC or the Section 48E ITC at the 30% level, the eligible energy property must either (a) meet certain labor and apprenticeship requirements or (b) have a maximum net output of less than one megawatt (as measured in alternating current). Beginning in 2023, we are able to claim the Section 48(a) ITC or the Section 48E ITC, as applicable, for energy storage systems regardless of whether such systems are installed in conjunction with solar energy system that begins construction during 2020, 2021 or 2022, 22% for 2023 and 10% if construction begins after 2023 or if the solar energy system is placed into service after 2025. In June 2018, the IRS provided guidance as to when construction is considered to begin for such purposes, including the 5% ITC Safe Harbor that may apply when a taxpayer pays or incurs (or in certain cases, a contractor of the taxpayer pays or incurs) 5% or more of the costs of a solar energy system before the end of the applicable year.
systems. We would be able to claim the Section 48(a) ITC or the Section 48E ITC, as applicable, when available for solar energy systems or energy storage systems we originate under lease agreements or PPAs based on our ownership of the solar energy system at the time it is placed in service. We are also ableAdditionally, the IRA allows for the transfer of ITCs, increasing opportunities to claimmonetize the Section 48(a) ITC for energy storage systems installed in conjunction with solar energy systems as long as they are only charged by on-site solar. A reduced Section 48(a) ITC may be available for energy storage systems charged in part from sources other than on-site solar as long as the energy storage systems are charged at least 75% by on-site solar.relevant credits.
Until 2023, Section 25D of the Code allows an individual to claim a 26%30% federal tax credit with respect to a residential solar energy system and/or energy storage system that is owned by the homeowner. As a result, the Section 25D Credit is claimed by customers who purchase solar energy systems and/or energy storage systems. This Section 25D Credit will remain at 30% through the end of 2032, reduce to 26% rate is scheduled to be reducedfor 2033, reduce to 22% for solar energy systems placed in service during 2023. This credit2034 and further reduce to 0% after 2034, unless it is scheduled to expire effective January 1, 2024.extended before that time. The Section 25D Credit reduces the cost of consumer ownership of solar energy systems and/or energy storage systems, such as under the loan program.
The Section 48(a) ITC has been a significant driver of the financing supporting the adoption of residential solar energy systems in the U.S. and the Section 25D Credit has been a significant driver of consumer demand for ownership of solar energy systems. TheAny reduction in, or expiration of, these tax credits will likely impact the attractiveness of residential solar and could harm our business. For example, we expect the expiration of the Section 25D Credit will increase the cost of consumer ownership of solar energy systems, such as under the loan program.
The scheduled reductions in the Section 48(a) ITC could adversely impact our financing structures that monetize a substantial portion of such Section 48(a) ITC and provide financing for our solar energy systems, including if solar energy systems that incorporate our inventory are unsuccessful in claiming the 5% ITC Safe Harbor and therefore fail to qualify for a higher Section 48(a) ITC. To the extent we have a reduced ability to raise tax equity as a result of this reduction or an inability to continue to monetize such benefits in our financing arrangements, the rate of growth of installations of our residential solar energy systems and our ability to maintain such solar energy systems could be negatively impacted. In addition, future changes in existing law and interpretations by the IRS or the courts with respect to certain matters, including but not limited to, treatment of the Section 48(a) ITC, the 5% ITC Safe Harbor and our financing arrangements and the taxation of business entities including the deductibility of interest expense could affect the amount tax equity investors are willing to invest, which could reduce our access to capital. See "Business—Government Incentives".
Applicable authorities may adjust or decrease incentives from time to time or include provisions for minimum domestic content requirements or other requirements to qualify for these incentives. Reductions in, eliminations or expirations of or additional application requirements for governmental incentives could adversely impact our results of operations and ability to compete in our industry by increasing our cost of capital, causing distributed residential solar power companies to increase the prices of their energy and solar energy systems and reducing the size of our addressable market. In addition, this would adversely impact our ability to attract investment partners and lenders and our ability to expand our portfolio of solar service agreements and related solar energy systems and energy storage systems. See "Business—Government Incentives".
Our business depends in part on the regulatory treatment of third-party owned solar energy systems.
Our lease and PPA agreements are third-party ownership arrangements. Retail sales of electricity by third parties such as us face regulatory challenges in some states and jurisdictions, including states and jurisdictions we intend to enter where the laws and regulatory policies have not historically embraced competition to the service provided by the vertically integrated centralized electric utility. Some of the principal challenges pertain to whether third-party owned solar energy systems qualify for the same levels of rebates or other non-tax incentives available for customer‑owned solar energy systems, whether third-party owned solar energy systems are eligible at all for these incentives and whether third-party owned solar energy systems are
eligible for net metering and the associated significant cost savings. Furthermore, in some states and utility territories, third parties are limited in the way they may deliver solar to their customers. In certain jurisdictions, such as Arizona, Kentucky, North Carolina, Utah and Los Angeles, California, laws have been interpreted to prohibit the sale of electricity pursuant to PPAs, leading distributed residential solar energy system providers to use leases in lieu of PPAs, in addition to customer ownership. These regulatory constraints may, for example, give rise to various property tax issues. See "Risks Related to Taxation". Changes in law and reductions in, eliminations of or additional requirements for, benefits such as rebates, tax incentives and favorable net metering policies decrease the attractiveness of new solar energy systems to distributed residential solar power companies and the attractiveness of solar energy systems to customers, which could reduce our acquisition opportunities. Such a loss or reduction could also adversely impact our access to capital and reduce our willingness to pursue solar energy systems due to higher operating costs or lower revenues from leases and PPAs.
Technical and regulatory limitations regarding the interconnection of solar energy systems to the electrical grid may significantly reduce our ability to sell electricity from our solar energy systems in certain markets or delay interconnections and customer in-service dates, harming our growth rate, operations and customer satisfaction.
Technical and regulatory limitations regarding the interconnection of solar energy systems to the electrical grid may curb or slow our growth and operations in key markets. Utilities throughout the country follow different rules and regulations regarding interconnection and regulators or utilities have or could cap or limit the amount of solar energy that can be interconnected to the grid. Our solar energy systems generally do not provide power to homeownershome and business owners until they are interconnected to the grid.
With regard to interconnection limits, the FERC, in promulgating the first form of small generator interconnection procedures, recommended limiting customer-sited intermittent generation resources, such as our solar energy systems, to a certain percentage of peak load on a given electrical feeder circuit. Similar limits have been adopted by many states as a de facto standard and could constrain our ability to market to customers in certain geographic areas where the concentration of solar installations exceeds this limit.
Furthermore, in certain areas, we benefit from policies that allow for expedited or simplified procedures related to connecting solar energy systems and energy storage systems to the electrical grid. We also are required to obtain interconnection permission for each solar energy system from the local utility. In many states and territories, by statute, regulations or administrative order, there are standardized procedures for interconnecting distributed residential solar energy systems and related energy storage systems to the electric utility's local distribution system. However, approval from the local utility could be delayed as a result of a backlog of requests for interconnection or the local utility could seek to limit the number of customer interconnections or the amount of solar energy on the grid. In some states, such as New Jersey and Massachusetts, certain utilities such as municipal utilities or electric cooperatives are exempt from certain interconnection requirements. If expedited or simplified interconnection procedures are changed or cease to be available, if interconnection approvals from the local utility are delayed or if the local utility seeks to limit interconnections, this could decrease the attractiveness of new solar energy systems and energy storage systems to distributed residential solar power companies, including us, and the attractiveness of solar energy systems and energy storage systems to customers. Delays in interconnections could also harm our growth rate and customer satisfaction scores. Such limitations or delays could also adversely impact our access to capital and reduce our willingness to pursue solar energy systems and energy storage systems due to higher operating costs or lower revenues from solar service agreements. Such limitations would negatively impact our business, results of operations, future growth, profitability and cash flows.
As adoption of solar distributed generation rises, along with the increased operation of utility-scale solar generation (such as in key markets including California), the amount of solar energy being contributed to the electrical grid may surpass the capacity anticipated to be needed to meet aggregate demand. Some centralized public utilities claim in less than five years,If solar generation resources may reach a level capable of producing an over-generation situation, which may require some existing solar generation resources may have to be curtailed to maintain operation of the electrical grid. In the event such an over-generation situation were to occur, this could also result in a prohibition on the addition of new solar generation resources. The adverse effects of such a curtailment or prohibition without compensation could adversely impact our business, results of operations, future growth, profitability and cash flows.
We and our dealers are subject to risks associated with construction, regulatory compliance and other contingencies.
We utilize our growing dealer network to market, design, construct and install solar energy systems and energy storage systems in each of the markets in which we operate. The marketing and installation of solar energy systems and energy storage systems is subject to oversight and regulation in accordance with national, state and local laws and ordinances relatingrelated to consumer protection, building, fire and electrical codes, professional codes, safety, environmental protection, utility interconnection, metering and related matters. We also rely on certain of our dealers and third-party contractors to obtain and maintain permits and professional licenses, including as contractors, and other authorizations from various regulatory
authorities and abide by their respective conditions and requirements in many of the jurisdictions in which we operate.operate, as well as perform permitting and installation of solar energy systems and energy storage systems using or complying with government sponsored platforms such as SolarAPP+. A failure by us to obtain necessary permits or encounter delays in obtaining or renewing such permits or to use properly licensed dealers and third-party contractors or to use government-sponsored or government-mandated platforms could adversely affect our operations in those jurisdictions. Furthermore, we may become subject to similar regulatory requirements in some jurisdictions in which we operate. It is difficult and costly to track the requirements of every authority with jurisdiction over our operations and our solar energy systems. Separately, we are subject to regulations and potential liability under the Resource Conservation and Recovery Act and the Comprehensive Environmental Response, Compensation, and Liability Act related to the disposal of wastes generated in connection with our operations. Regulatory authorities may impose new government regulations or utility policies, change existing government regulations or utility policies, may seek expansive interpretations of existing regulations or policies pertaining to our services or solar energy systems and energy storage systems or may initiate associated investigations or enforcement actions or impose penalties or reject solar
energy systems and energy storage systems. Any of these factors may result in regulatory and/or civil litigation, significant additional expenses to us or our customers, cause delays in our or our dealers' ability to originate solar service agreementagreements or install or interconnect solar energy systems and energy storage systems or cause other harm to our business. As a result, this could cause a significant reduction in demand for our services and solar energy systems and energy storage systems or otherwise adversely affect our business, financial condition and results of operations.
In connection with certain of our financing transactions guaranteed by the DOE, we and certain of our dealers and affiliates may be subject to additional laws and regulations including the Davis-Bacon Act of 1931, as amended ("Davis-Bacon Act"), governing certain prevailing wage requirements, the False Claims Act and similar state laws. These laws and regulations are complex and subject to varying interpretations, and it is possible regulatory authorities could challenge our or our dealers' policies and practices. If we or our dealers fail to comply with these laws, we could be subject to federal or state government investigations or actions or private actions. Additionally, these financing transactions guaranteed by the DOE are subject to satisfaction and certification of certain conditions, including the accuracy of project-related representations and warranties, delivery of updated project-related information, evidence of compliance with the prevailing wage requirements of the Davis-Bacon Act and certification from the DOE's consulting engineer that certain proceeds of the advances are used to reimburse eligible project costs.
Compliance with occupational safety and health requirements and best practices can be costly and noncompliance with such requirements may result in potentially significant monetary penalties, operational delays and adverse publicity.
The installation and ongoing operations and maintenance of solar energy systems and energy storage systems requires individuals hired by us, our dealers or third-party contractors, potentially including our employees, to work at heights with complicated and potentially dangerous electrical systems. The evaluation and modification of buildings as part of the installation process requires these individuals to work in locations that may contain potentially dangerous levels of asbestos, lead, mold or other materials known or believed to be hazardous to human health. There is substantial risk of serious injury or death if proper safety procedures are not followed. Our operations are subject to regulation under OSHA, DOT regulations and equivalent state and local laws. Changes to OSHA or DOT requirements, or stricter interpretation or enforcement of existing laws or regulations, could result in increased costs. If we fail to comply with applicable OSHA or DOT regulations, even if no work-related serious injury or death occurs, we may be subject to civil or criminal enforcement and be required to pay substantial penalties, incur significant capital expenditures or suspend or limit operations. Because individuals hired by us or on our behalf to perform installation and ongoing operations and maintenance of our solar energy systems and energy storage systems, including our dealers and third-party contractors, are compensated on a per project basis, they are incentivized to work more quickly than installers compensated on an hourly basis. While we have not experienced a high level of injuries to date, this incentive structure may result in higher injury rates than others in the industry and could accordingly expose us to increased liability. Individuals hired by or on behalf of us may have workplace accidents and receive citations from OSHA regulators for alleged safety violations, resulting in fines. Any such accidents, citations, violations, injuries or failure to comply with industry best practices may subject us to adverse publicity, damage our reputation and competitive position and adversely affect our business.
A failure to comply with laws and regulations relatingrelated to interactions by us or our dealers with current or prospective residential customers could result in negative publicity, claims, investigations and litigation and adversely affect our financial performance.
Our business substantially focuses on solar servicecustomer agreements and transactions with residential customers. We offer leases, loans and other products and services to consumers by contractors in our dealer networks, who utilize sales people employed by or engaged as third-party service providers of such contractors. We and our dealers must comply with numerous federal, state and local laws and regulations that govern matters relatingrelated to interactions with residential consumers, including those pertaining to consumer
protection, marketing and sales, privacy and data security, consumer financial and credit transactions, mortgages and refinancings, home improvement contracts, warranties and various means of customer solicitation.solicitation, including under the laws identified in "—Our business is subject to consumer protection laws. Such laws and regulatory enforcement policies and priorities are subject to change that may negatively impact our business". These laws and regulations are dynamic and subject to potentially differing interpretations and various federal, state and local legislative and regulatory bodies may initiate investigations, expand current laws or regulations, or enact new laws and regulations regarding these matters. Changes in these laws or regulations or their interpretation could dramatically affect how we and our dealers do business, acquire customers and manage and use information collected from and about current and prospective customers and the costs associated therewith. We and our dealers strive to comply with all applicable laws and regulations relatingrelated to interactions with residential and non-residential customers. It is possible, however, these requirements may be interpreted and applied in a manner inconsistent from one jurisdiction to another and may conflict with other rules or the practices of us or our dealers.
Although we require our dealers to meet our consumer compliance requirements and provide regular training to help them do so, we do not control our dealers and their suppliers or their business practices. Accordingly, we cannot guarantee they follow ethical business practices such as fair wage practices and compliance with environmental, safety and other local laws. A lack of demonstrated compliance could lead us to seek alternative dealers or suppliers, which could increase our costs and have a negative effect on our business and prospects for growth.growth and operations. Violation of labor or other laws by our dealers or suppliers or the divergence of a dealer or supplier's labor or other practices from those generally accepted as ethical in the U.S. or other markets in which we do or intend to do business could also attract negative publicity for us and harm our business.
From time to time, we have been included in lawsuits brought by the customers of certain contractors in our networks, citing claims based on the sales practices of these contractors. While we have paid only minimal damages to date, we cannot be sure that a court of law would not determine that we are liable for the actions of the contractors in our networks or that a regulator or state attorney general's office may hold us accountable for violations of consumer protection or other applicable laws by the contractors in selling our loans, leases, and other products and services. Our risk mitigation processes may not be sufficient to mitigate financial harm to us associated with violations of applicable law by our contractors or ensure that any such contractor is able to satisfy its indemnification obligations to us. Any significant judgment against us could expose us to broader liabilities, a need to adjust our distribution channels for our products and services or otherwise change our business model, and could adversely impact our business.
Violations of anti-bribery, anti-corruption and/or international trade laws to which we are subject could have a material adverse effect on our business operations, financial position and results of operations.
We are subject to laws concerning our business operations and marketing activities in the U.S. and its territories where we conduct business. Further, we are subject to the U.S. Foreign Corrupt Practices Act, which generally prohibits companies and their intermediaries from making improper payments to non-U.S. government officials for the purpose of obtaining or retaining
business. We currently only operate in the U.S. and its territories. However, in the future we may conduct business outside of the U.S. and operate in parts of the world that experienced governmental corruption to some degree and, in certain circumstances, strict compliance with anti-bribery laws may conflict with local customs and practices. In addition, due to the level of regulation in our industry, our entry into new jurisdictions through internal growth or acquisitions requires substantial government contact where norms can differ from U.S. standards. Additionally, we regularly interact with domestic municipalities and municipal-owned centralized electric utilities. We will consider our interactions with these domestic governmental bodies when designing our policies and procedures and conducting training designed to facilitate compliance with domestic and international anti-bribery laws. Although we believe these policies and procedures will mitigate the risk of violations of such laws, our employees, dealers and agents may take actions in violation of our policies and anti-bribery laws. Any such violation, even if prohibited by our policies, could subject us to criminal or civil penalties or other sanctions, which could have a material adverse effect on our business, financial condition, cash flows and reputation.
Violations of export control and/or economic sanctions laws and regulations to which we are subject could have a material adverse effect on our business operations, financial position and results of operations.
Our products may be subject to export control regulations, including the Export Administration Regulations administered by the U.S. Department of Commerce's Bureau of Industry and Security. We are also subject to foreign assets control and economic sanctions regulations administered by the U.S. Department of the Treasury's Office of Foreign Assets Control, which restrict or prohibit our ability to transact with certain foreign countries, individuals and entities. We currently only operate in the U.S. and its territories. However, export control regulations may restrict our ability to exchange technical information with foreign manufacturers and suppliers and economic sanctions regulations may restrict our ability to source from certain suppliers. In addition, in the future we may conduct business outside of the U.S. We will consider these scenarios when designing our policies and procedures and conducting training designed to facilitate compliance with U.S. export control and
economic sanctions laws and regulations. Although we believe these policies and procedures will mitigate the risk of violations of such laws, our employees, dealers and agents may take actions in violation of our policies or these laws. Any such violation, even if prohibited by our policies, could subject us to criminal or civil penalties or other sanctions, which could have a material adverse effect on our business, financial condition, cash flows and reputation.
Our business is subject to complex and evolving privacy and data protection laws. Many of these laws and regulations are subject to change and uncertain interpretation and could result in claims, increased cost of operations or otherwise harm our business.
Consumer personal privacy and data security have become significant issues and the subject of rapidly evolving regulation. Furthermore, federal, state and local government bodies or agencies have in the past adopted, and may in the future adopt, more laws and regulations affecting data privacy. For example, the state of California enacted the California Consumer Privacy Act of 2018 ("CCPA") and California voters approved the California Privacy Rights Act ("CPRA"). The CCPA creates individual privacy rights for consumers and places increased privacy and security obligations on entities handling the personal data of consumers or households. The CCPA went into effect in January 2020 and requires covered companies to provide new disclosures to California consumers, provides such consumers, business-to-business contacts and employees new ways to opt-out of certain sales of personal information, and allows for a new private right of action for data breaches. The CPRA modifies the CCPA and imposes additional data protection obligations on companies doing business in California, including additional consumer rights processes and opt outs for certain uses of sensitive data. The CPRA went into effect in January 2023 and established a new California privacy regulator. In addition, regulators, the CCPA and the CPRA, and similar frameworks, may significantly impact our business activities and require substantial compliance costs that adversely affect our business, operating results, prospects and financial condition. To date, we have not experienced substantial compliance costs in connection with fulfilling the requirements under applicable data privacy and protection frameworks. Although many of these legal frameworks currently impose similar obligations, interpretations and enforcement of these laws continues to evolve. Changes to interpretations or enforcement strategies could create a range of new compliance obligations, which could cause us to incur additional costs. If interpretations or enforcement of these laws deviate significantly in the future, those costs could become even more severe. Furthermore, if we expand to foreign markets we will be subject to additional privacy and data protection laws, such as the General Data Protection Regulation in the European Union.
Any inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable privacy and data protection laws, regulations and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales and adversely affect our business. Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations and policies that are applicable to our business may limit the use and adoption of, and reduce the overall demand for, our solutions. If we are not able to adjust to changing laws, regulations and standards related to privacy or security, our business may be harmed. Moreover, as noted above, we are also subject to the possibility of security breaches, some of which may result in a violation of these laws. Finally, if we acquire a company that has violated or is not in compliance with applicable data privacy and protection laws (or contractual provisions), we may experience similar adverse consequences.
Our business is subject to consumer protection laws. Such laws and regulatory enforcement policies and priorities are subject to change that may negatively impact our business.
We must comply with various international, federal, state, and local regulatory regimes, including those applicable to consumer credit transactions, leases, and marketing activities. These laws and regulations, including those applicable to consumer loans and their origination, are subject to change and modification by statute, administrative rules and orders, and judicial interpretation. As a result of infrequent or sparse interpretations, ambiguities in these laws and regulations may create uncertainty with respect to what type of conduct is permitted or restricted under such laws and regulations. Regulators, such as the Federal Trade Commission and the Consumer Financial Protection Board, as well as state attorney generals and agencies, also can initiate inquiries into market participants, which can lead to investigations and, ultimately, enforcement actions. As a result, we are subject to a constantly evolving consumer protection and consumer finance regulatory environment that is difficult to predict and may affect our business.
The laws to which we may be subject to include federal and state laws that prohibit unfair, deceptive or abusive business acts or practices (such as the Federal Trade Commission Act and the Dodd-Frank Act), regulate lease and loan disclosures and terms and conditions (such as the Truth-in-Lending Act and the Consumer Leasing Act), prohibit discrimination (such as the Equal Credit Opportunity Act), and provide additional protections for certain customers in the military (such as the Servicemembers Civil Relief Act). Our business is or may also be subject to federal and state laws that regulate consumer credit report information, data privacy, debt collection, electronic fund transfers, service contracts, home improvement contracting and marketing activities (such as telemarketing, door-to-door sales, and e-mails).
While we have developed policies and procedures designed to assist in compliance with these laws and regulations, no assurance is given that our compliance policies and procedures will be effective. Failure to comply with these laws and with regulatory requirements applicable to our business could subject us to damages, revocation of licenses, class action lawsuits, administrative enforcement actions, civil and criminal liability, settlements, limits on offering certain products and services, changes in business practices, increased compliance costs, indemnification obligations to our capital providers, loan repurchase obligations and reputational damage that may harm our business, results of operations and financial condition.
The highly regulated environment in which our capital providers operate could have an adverse effect on our business.
We and our capital providers are subject to federal and state supervision and regulation. Federal and state regulation of the banking industry, credit unions and other types of capital providers, along with tax and accounting laws, regulations, rules and standards, may limit their operations significantly and control the methods by which they conduct business and when and how they are able to deploy their capital. These requirements may constrain our ability to enter funding program agreements with new capital providers or the ability of our existing capital providers to continue originating loans through our platform. In choosing whether and how to conduct business with us, current and prospective capital providers can be expected to take into account the legal, regulatory and supervisory regimes that apply to them, including potential changes in the application or interpretation of regulatory standards, licensing requirements or supervisory expectations. Regulators may elect to alter standards or the interpretation of the standards used to measure regulatory compliance or to determine the adequacy of liquidity, certain risk management or other operational practices for financial services companies in a manner that impacts capital providers' ability to originate loans through our platform. An inability for an individual or type of capital provider to originate loans through our platform could have an adverse effect on our business, financial condition and cash flows.
Risks Related to Taxation
Our ability to use NOLs and tax credit carryforwards to offset future income taxes is subject to limitation and the amount of such carryforwards may be subject to challenge or reduction.
As of December 31, 2023, we had approximately $1.1 billion of U.S. federal NOLs, a portion of which will begin to expire in 2035, and approximately $309.7 million of U.S. federal tax credit carryforwards, which will begin to expire in 2033. Utilization of our NOLs and tax credit carryforwards depends on many factors, including having current or future taxable income, which cannot be assured. In addition, Section 382 of the Code generally imposes an annual limitation on the amount of NOLs that may be used to offset taxable income by a corporation that has undergone an "ownership change" (as determined under Section 382). An ownership change generally occurs if one or more stockholders (or groups of stockholders, including one or more groups of public stockholders) that are each deemed to own at least 5% of our stock increase their ownership percentage by more than 50 percentage points over their lowest ownership percentage during a rolling three-year period. Similar rules under Section 383 of the Code impose an annual limitation on the amount of tax credit carryforwards, including carryforwards of Section 48(a) ITCs, that may be used to offset U.S. federal income taxes.
We experienced an "ownership change" in August 2020 as defined by Sections 382 and 383 of the Code, which limits our future ability to utilize NOLs and tax credits generated before the "ownership change". However, these limitations do not prevent the use of our NOLs to offset certain built-in gains, including deemed gains with respect to our cost recovery deductions, recognized by us within five years after the ownership change with respect to assets held by us at the time of the ownership change, or the use of our tax credits to offset related tax liabilities, to the extent of our "net unrealized built-in gain" at the time of the ownership change. We have determined that, based upon the size of our net unrealized built-in gain at the time of our 2020 ownership change and our projected recognition of deemed built-in gains in the five years following the ownership change, there is no impact on the balances for deferred taxes or valuation allowance. Another "ownership change" could occur as a result of transactions that increase the ownership percentage of any of our 5% stockholders during a rolling three-year period, including redemptions of our stock, sales of our stock by other deemed 5% stockholders or issuances of stock by us, whether in additional public offerings or otherwise. If such another ownership change occurs, our ability to utilize NOLs and tax credit carryforwards may be subject to further limitation under Sections 382 and 383 of the Code. The application of the aforementioned limitations may cause U.S. federal income taxes to be paid by us earlier than they otherwise would be paid if such limitations were not in effect and could cause such NOLs and tax credit carryforwards to expire unused, in each case reducing or eliminating the benefit of such NOLs and tax credit carryforwards. To the extent we are not able to offset our future taxable income with our NOLs or offset future taxes with our tax credit carryforwards, this would adversely affect our operating results and cash flows if we have taxable income in the future. These same risks can arise in the context of state income and franchise tax given many states conform to federal law and rely on federal authority for determining state NOLs.
Furthermore, the IRS or other tax authorities could successfully challenge one or more tax positions we take, such as the classification of assets under the income tax depreciation rules or the characterization of expenses for income tax purposes, which could reduce the NOLs we generate and/or are able to use.
Our tax positions are subject to challenge by the relevant tax authority.
Our federal and state tax positions may be challenged by the relevant tax authority. The process and costs, including potential penalties for nonpayment of disputed amounts, of contesting such challenges, administratively or judicially, regardless of the merits, could be material. Future tax audits or challenges by tax authorities to our tax positions may result in a material increase in our estimated future income tax or other tax liabilities, which would negatively impact our financial condition.
For example, many of our solar energy systems are located in states or territories that exempt such assets from state, territorial and local sales and property taxes. We believe these solar energy systems are and should continue to be exempt from certain state, territorial and local sales and property taxes; however, some of our solar energy systems are located in certain jurisdictions where the applicability of these exemptions to solar energy systems is the subject of ongoing litigation and possible legislative change or else the jurisdiction's law is uncertain regarding the effect on property and sales tax exemptions of certain complex business reorganizations undergone by us and our subsidiaries. As such, some tax authorities could challenge the availability of these exemptions. If our solar energy systems are determined to be subject to state, territorial or local sales or property taxes, it could negatively impact our financial condition.
Our ability to provide our solar service offerings to home and business owners on an economically viable basis depends in part on our ability to finance these solar energy systems with tax equity investors that depend on particular tax and other benefits.
Historically, there have been a limited number of investors that generate sufficient profits and possess the requisite financial sophistication to benefit from the tax benefits our tax equity vehicles provide, and a lack of depth in this market may limit our ability to complete such tax equity financing. Potential investors seeking tax-advantaged financing must remain satisfied the structures we offer qualify for the tax benefits associated with solar energy systems available to these investors, which depends both on the investors' assessment of tax law and the absence of any unfavorable interpretations of that law. Changes in existing law and interpretations by the IRS and the courts could reduce the willingness of tax equity investors to invest in tax equity vehicles associated with these solar energy system investments or cause these investors to require a larger allocation of customer payments. We are not certain this type of financing will continue to be available to us as the legal and regulatory landscape may shift in a manner that reduces or eliminates the attractiveness of such financing opportunities. For example, in July 2023, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation jointly released a Notice of Proposed Rulemaking to implement a set of rules known as "Basel III", which could substantially increase the capital requirements applicable to large banking organizations with investments in tax equity. These rules, which are proposed to go into effect in 2025, could make tax equity investments significantly less attractive for large banks. Also, the Section 48E ITC percentage will begin to phase down for projects that begin construction after (a) 2033 or (b) if later, the first year after the year in which the U.S. Treasury Department determines greenhouse gas emissions from the production of electricity in the U.S. are no more than 25% of 2022 levels. The IRA also added a new provision that allows taxpayers to transfer certain federal income tax credits that arise after 2022, such as the Section 48(a) ITC, to third parties for cash. While we believe the ability to transfer the ITC is favorable to our business, it is unclear what effect the ability to transfer these tax credits will have on tax equity structures, although we expect the market for tax equity structures to continue for investors who will continue to value benefits that are not transferable, such as accelerated depreciation. Additionally, we may be unable to identify investors interested in engaging in this type of financing with us. As of December 31, 2023, we have formed 31 tax equity vehicles to which investors such as banks and other large financial investors have committed to invest approximately $2.7 billion. The undrawn committed capital for these tax equity vehicles as of December 31, 2023 is approximately $439.4 million. We plan to continue to form new tax equity vehicles as long as existing tax law and regulations make such financing attractive. See "—Risks Related to Regulations—Our business currently depends in part on the availability of rebates, tax credits and other financial incentives. The expiration, elimination or reduction of these rebates, credits or incentives or our ability to monetize them could adversely impact our business".
The contractual terms in certain of our tax equity vehicle documents impose conditions on our ability to draw on financing commitments from the tax equity investors, including if an event occurs that could reasonably be expected to have a material adverse effect on the tax equity vehicle or on us. The terms and conditions of our tax equity vehicles can vary and may require us to alter our products, services or product mix. If we do not satisfy such conditions due to events related to our business or a specific tax equity vehicle or developments in our industry or otherwise, and as a result we are unable to draw on existing commitments, it could have a material adverse effect on our business, financial condition, results of operations and liquidity. In addition to our inability to draw on the investors' commitments, we may incur financial penalties for non-performance
(including delays in the installation process and interconnection to the power grid of solar energy systems and other factors). Based on the terms of the tax equity vehicle agreements, we will either reimburse a portion of the tax equity investor's capital or pay the tax equity investor a non-performance fee.
Under the terms of certain of our tax equity vehicles, we may be required to make payments to the tax equity investors if certain tax benefits allocated to such tax equity investors are not realized as expected. Our financial condition may be adversely impacted if a tax equity vehicle is required to make any tax-related payments.
Our tax equity vehicles require that, prior to a date that is at least five years after the last project was placed in service, the tax equity investor receives substantially all the non-cash value attributable to the solar energy systems; however, we typically receive a majority of the cash distributions. In the event the tax equity investor has tax liability as a result of its investment and the cash distributions payable to the tax equity investor are not sufficient to pay such tax liability, the amount of distributions payable to us may be reduced. The amounts of potential tax liability (and the potential for a reduced distribution to us) depend on the tax benefits that accrue to such investors from the tax equity vehicles' activities and may be impacted by changes in tax law.
Additionally, we may have payment obligations to our tax equity investors under indemnity obligations contained in those financings. See "—If the IRS or the U.S. Treasury Department makes a determination that the fair market value of our solar energy systems is materially lower than what we have reported in our tax equity vehicles' tax returns, we may have to pay significant amounts to our tax equity vehicles, our tax equity investors, tax credit buyers and/or the U.S. government. Such determinations could have a material adverse effect on our business and financial condition" and "—If our solar energy systems either cease to be qualifying property or undergo certain changes in ownership within five years of the applicable placed in service date, we may have to pay significant amounts to our tax equity vehicles, our tax equity investors, tax credit buyers and/or the U.S. government. Such recapture could have a material adverse effect on our business and financial condition".
Due to uncertainties associated with estimating the timing and amounts of cash distributions and allocations of tax benefits to such investors, we cannot determine the potential impact on our cash flows under current or future arrangements. Any significant reductions in the cash we expect to receive from these structures could adversely affect our financial condition.
Changes in tax law could adversely affect our business.
U.S. tax law is always subject to change. For example, in August 2022, the U.S. enacted the IRA, which contains significant changes to U.S. tax law including, but not limited to, a corporate minimum tax and 1% excise tax on stock repurchases. Other potential changes to the Code include changes to the U.S. corporate income tax rate and provisions limiting or eliminating various deductions, credits or tax preferences. Interpretations of the Code and regulations promulgated by the IRS are likewise subject to change. As states elect to conform (or else have rolling conformity) to the Code, such interpretations and regulations (including those promulgated by state authorities) could likewise affect our state income and franchise tax obligations. Any future changes in tax law, including changes to U.S. federal, state, territorial or local tax law, could affect our tax position and adversely impact our business.
If the IRS or the U.S. Treasury Department makes a determination that the fair market value of our solar energy systems is materially lower than what we have reported in our tax equity vehicles' tax returns, we may have to pay significant amounts to our tax equity vehicles, our tax equity investors, tax credit buyers and/or the U.S. government. Such determinations could have a material adverse effect on our business and financial condition.
The basis of our solar energy systems we report in our tax equity vehicles' tax returns to claim the Section 48(a) ITC or the Section 48E ITC is based on the appraised fair market value of our solar energy systems. The IRS continues to scrutinize fair market value determinations industry-wide. We are not aware of any IRS audits or results of audits related to our appraisals or fair market value determinations of any of our tax equity vehicles. If, as part of an examination, the IRS were to review the fair market value we used to establish our basis for claiming Section 48(a) ITCs or Section 48E ITCs and successfully assert the Section 48(a) ITCs or the Section 48E ITCs previously claimed should be reduced, we would owe certain of our tax equity vehicles, our tax equity investors or a tax credit buyer an amount equal to the disallowed Section 48(a) ITCs or Section 48E ITCs attributable to each investor's share of the difference between the fair market value used to establish our basis for claiming Section 48(a) ITCs or Section 48E ITCs and the adjusted fair market value determined by the IRS, plus any costs and expenses associated with a challenge to that fair market value, plus a gross up to pay for additional taxes. We could also be subject to tax liabilities, including interest and penalties, based on our share of claimed Section 48(a) ITCs or Section 48E ITCs. To date, we have not been required to make such payments under any of our tax equity vehicles or a tax credit purchase and sale agreement. We have obtained insurance coverage with respect to certain losses that may be incurred should the Section 48(a) ITCs or
Section 48E ITCs previously claimed with respect to our tax equity vehicles be reduced. Any such losses could be outside the scope of these insurance policies or exceed insurance policy limits and we could incur unforeseen costs that could harm our business and financial condition.
If our solar energy systems either cease to be qualifying property or undergo certain changes in ownership within five years of the applicable placed in service date, we may have to pay significant amounts to our tax equity vehicles, our tax equity investors, tax credit buyers and/or the U.S. government. Such recapture could have a material adverse effect on our business and financial condition.
The Section 48(a) ITCs and the Section 48E ITCs are subject to recapture under the Code if a solar energy system either ceases to be qualifying property or undergoes certain changes in ownership within five years of its placed in service date. The amount of Section 48(a) ITCs or Section 48E ITCs subject to recapture decreases by 20% of the claimed amount on each anniversary of a solar energy system's placed in service date. If such a recapture event were to occur, we could owe certain of our tax equity vehicles, our tax equity investors or a tax credit buyer an amount equal to such vehicles' or investors' or buyers' share of the Section 48(a) ITCs or the Section 48E ITCs that were recaptured. We could also be subject to tax liabilities, including interest and penalties, based on our share of recaptured Section 48(a) ITCs or Section 48E ITCs. Any such recapture could have a material adverse effect on our business and financial condition.
Risks Related to Our Common Stock
We do not intend to pay, and our credit facilities currently prohibit us from paying, cash dividends on our common stock and, consequently, your only opportunity to achieve a return on your investment is if the price of our common stock appreciates.
We do not plan to declare dividends on shares of our common stock in the foreseeable future. Additionally, we are currently prohibited from making any cash dividends pursuant to the terms of certain of our credit facilities. Consequently, your only opportunity to achieve a return on your investment in us will be if you sell your common stock at a price greater than you paid for it. There is no guarantee the price of our common stock that will prevail in the market will ever exceed the price you paid for it.
The market priceOwnership of our common stock by current stockholders is expected to remain significant.
Due to their ownership percentages, certain key stockholders may have the ability to exercise significant influence over matters submitted to our stockholders for approval. This concentration of ownership may also have the effect of delaying or preventing a change of control of our company or discouraging others from making tender offers for our shares, which could be materially adversely affected by sales of substantial amountsprevent our stockholders from receiving an offer premium for their shares. So long as the key stockholders continue to own a significant amount of our common stock, they will continue to be able to strongly influence all matters requiring stockholder approval, regardless of whether or not other stockholders believe a potential transaction is in their own best interests. In any of these matters, the public markets, including sales by entities affiliatedinterests of the key stockholders may differ or conflict with ECP and Newlight.
As of February 22, 2021, entities affiliated with ECP owned approximately 15.6%the interests of our common stockother stockholders. In addition, certain of the key stockholders may, from time to time, acquire interests in businesses that directly or indirectly compete with our business, as well as businesses that are significant existing or potential customers. Certain of the key stockholders may acquire or seek to acquire assets we seek to acquire and, entities affiliated with Newlight, including QSIP LP, owned approximately 6.0% of our common stock. Sales by ECP, Newlightas a result, those acquisition opportunities may not be available to us or other large stockholders or the perception that such sales might occur could have a material adverse effect on the price of our common stock or could impair our abilitymay be more expensive for us to obtain capital through an offering of equity securities.pursue.
The price of our common stock is volatile and may decline in value.
The market price of our common stock may be influenced by many factors, some of which are beyond our control, including:
• public reaction to our press releases, announcements and filings with the SEC;
• our operating and financial performance;
• fluctuations in broader securities market prices and volumes, particularly among securities of technology and solar companies;
• changes in market valuations of similar companies;
• departures of key personnel;
• commencement of or involvement in litigation;
• variations in our quarterly results of operations or those of other technology and solar companies;
• changes in general economic conditions, financial markets or the technology and solar industries;
• announcements by us or our competitors of significant acquisitions or other transactions;
• changes in accounting standards, policies, guidance, interpretations or principles;
• speculation in the press or investment community;
• actions by our stockholders;
• the failure of securities analysts to cover our common stock or changes in their recommendations and estimates of our financial performance;
• future sales of our common stock;stock, including by large stockholders, or perceptions that such sales might occur; and
• the other factors described in these "Risk Factors""Risk Factors".
If securities or industry analysts do not publish research or reports about our business, or if they issue an adverse or misleading opinion regarding our common stock, our common stock price and trading volume could decline.
The trading market for our common stock is influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of the analysts currently covering our common stock ceases coverage of us, the trading price for our common stock would be negatively impacted. If any of the analysts who cover us issue an adverse or misleading opinion regarding us, our business model, our intellectual property or our common stock performance, or if our operating results fail to meet the expectations of analysts, our common stock price would likely decline. If one or more of these analysts cease coverage of us or fail to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our common stock price or trading volume to decline.
If we fail to comply with the reporting requirements under the Exchange Act or maintain adequate internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act, it could result in late or non-compliant filings or inaccurate financial reporting and have a negative impact on the price of our common stock or our business.
Effective internal controls are necessary for us to provide timely, reliable financial reporting and prevent fraud. Our accounting predecessor was not a public company and was not required to comply with the reporting requirements of the Exchange Act, or with the standards adopted by the Public Company Accounting Oversight Board in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act regarding internal controls over financial reporting. As a public company, we are required to report our financial results on the timeline and in the form prescribed by the Exchange Act and to evaluate and report on our internal control over financial reporting. This requires management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of internal control over financial reporting.
We are required to disclose material changes made in our internal controls and procedures on a quarterly basis and annually review and report on, and our independent registered public accounting firm must attest to, the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. Material weaknesses and significant deficiencies may exist when we report on the effectiveness of our internal control over financial reporting as required by reporting requirements under Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act.
The process of documenting and further developing our internal controls to become compliant with Section 404 has taken a significant amount of time and effort to complete and required significant attention of management. We are continuing to improve our internal controls over financial reporting. We have expended, and anticipate we will continue to expend, significant resources in order to maintain and enhance existing effective disclosure controls and procedures and internal controls over financial reporting. Our current controls and any new controls we develop may become inadequate because of changes in conditions in our business. We may experience higher than anticipated operating expenses, as well as increased independent auditor and other fees and expenses during the implementation of these changes and thereafter.
Certain of our directors have significant duties with, and spend significant time serving, entities that may compete with us in seeking business opportunities and, accordingly, may have conflicts of interest in allocating time or pursuing business opportunities.
Certain of our directors, who are responsible for managing the direction of our operations and acquisition activities, hold positions of responsibility with other entities whose businesses are similar to our business. The existing positions held by these directors may give rise to fiduciary or other duties in conflict with the duties they owe to us. These directors may become aware of business opportunities that may be appropriate for presentation to us as well as to the other entities with which they are or may become affiliated. Due to these existing and potential future affiliations, they may present potential business opportunities
to other entities prior to presenting them to us, which could cause additional conflicts of interest. They may also decide certain opportunities are more appropriate for other entities with which they are affiliated and as a result, they may elect not to present those opportunities to us. These conflicts may not be resolved in our favor.
Conflicts of interest could arise in the future between us, on the one hand, and any of our stockholders and its affiliates and affiliated funds and its and their current and future portfolio companies on the other hand, concerning, among other things, potential competitive business activities or business opportunities.
Conflicts of interest could arise in the future between us, on the one hand, and any of our stockholders and its affiliates and affiliated funds and its and their current and future portfolio companies, on the other hand, concerning, among other things, potential competitive business activities or business opportunities. For example, certain of our existing investors and their affiliated funds may invest in companies that operate in the traditional energy industry and solar and other renewable industries. As a result, our existing investors and their affiliates' and affiliated funds' current and future portfolio companies they control may now, or in the future, directly or indirectly, compete with us for investment or business opportunities.
Our governing documents provide that our stockholders and their affiliates and affiliated funds are not restricted from owning assets or engaging in businesses that compete directly or indirectly with us and will not have any duty to refrain from engaging, directly or indirectly, in the same or similar business activities or lines of business as us, including those business activities or lines of business deemed to be competing with us, or doing business with any of our clients, customers or vendors. In particular, subject to the limitations of applicable law, our certificate of incorporation, among other things:
•permits stockholders or their affiliates and affiliated funds and our non-employee directors to conduct business that competes with us and to make investments in any kind of property in which we may make investments; and
•provides that if any of our stockholders or any of its affiliates who is also one of our non-employee directors becomes aware of a potential business opportunity, transaction or other matter, they will have no duty to communicate or offer that opportunity to us.
Our stockholders or their affiliates or affiliated funds may become aware, from time to time, of certain business opportunities (such as acquisition opportunities) and may direct such opportunities to other businesses in which they have invested, in which case we may not become aware of or otherwise have the ability to pursue such opportunity. Further, such businesses may choose to compete with us for these opportunities, possibly causing these opportunities to not be available to us or causing them to be more expensive for us to pursue. In addition, our stockholders or their affiliates and affiliated funds may dispose of their interests in energy infrastructure or other renewable companies or other assets in the future, without any obligation to offer us the opportunity to purchase any of those assets. As a result, our renouncing our interest and expectancy in any business opportunity that may be from time to time presented to any of our stockholders or their affiliates and affiliated funds could adversely impact our business or prospects if attractive business opportunities are procured by such parties for their own benefit rather than for ours.
In any of these matters, the interests of our existing stockholders and their affiliates and affiliated funds may differ or conflict with the interests of our other shareholders. Any actual or perceived conflicts of interest with respect to the foregoing could have an adverse impact on the trading price of our common stock.
Ownership of our common stock by current stockholders is expected to remain significant.
Due to their ownership percentages, certain key stockholders may have the ability to exercise significant influence over matters submitted to our stockholders for approval. This concentration of ownership may also have the effect of delaying or preventing a change of control of our company or discouraging others from making tender offers for our shares, which could prevent our stockholders from receiving an offer premium for their shares.
So long as the key stockholders continue to own a significant amount of our common stock, they will continue to be able to strongly influence all matters requiring stockholder approval, regardless of whether or not other stockholders believe a potential transaction is in their own best interests. In any of these matters, the interests of the key stockholders may differ or conflict with the interests of our other stockholders. In addition, certain of the key stockholders may, from time to time, acquire interests in businesses that directly or indirectly compete with our business, as well as businesses that are significant existing or potential customers. Certain of the key stockholders may acquire or seek to acquire assets we seek to acquire and, as a result, those acquisition opportunities may not be available to us or may be more expensive for us to pursue.
Provisions of our charter documents and Delaware law may inhibit a takeover, which could limit the price investors might be willing to pay in the future for our common stock.
Our charter documents authorize our board of directorsBoard to issue preferred stock without stockholder approval and, relatedly, may have the effect of delaying or preventing an acquisition of us or a merger in which we are not the surviving company and may otherwise prevent or slow changes in our board of directorsBoard and management. In addition, some provisions of our certificate of incorporation, amended and restated bylaws and stockholders' agreement could make it more difficult for a third party to acquire control of us, even if the change of control would be beneficial to our stockholders, including:
•limitations on changes of control and business combinations;
•limitations on the removal of directors;
•limitations on the ability of our stockholders to call special meetings;
•establishing advance notice provisions for stockholder proposals and nominations for elections to the board of directorsBoard to be acted upon at meetings of stockholders;
•providing that the board of directorsBoard is expressly authorized to adopt, or to alter or repeal our bylaws; and
•establishing advance notice and certain information requirements for nominations for election to our board of directorsBoard or for proposing matters that can be acted upon by stockholders at stockholder meetings.
These provisions could discourage an acquisition of us or other change in control transactions and thereby negatively affect the price that investors might be willing to pay in the future for our common stock.
Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware and, to the extent enforceable, the federal district courts of the United States of America as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders' ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or agents.
Our amended and restated certificate of organization provides that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (a) any derivative action or proceeding brought on our or our stockholders' behalf, (b) any action asserting a claim of breach of a fiduciary duty owed by any of our current or former directors, officers, employees, agents and stockholders to us or our stockholders, (c) any action asserting a claim arising pursuant to any provision of the Delaware General Corporation Law, our amended and restated certificate of incorporation or our amended and restated bylaws, (d) any action as to which the Delaware General Corporation Law confers jurisdiction to the Court of Chancery of the
State of Delaware, or (e) any other action asserting a claim that is governed by the internal affairs doctrine shall be the Court of Chancery of the State of Delaware. Our amended and restated certificate of incorporation also provides that, to the fullest extent permitted by applicable law, the federal district courts of the United States are the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act, subject to and contingent upon a final adjudication in the State of Delaware of the enforceability of such exclusive forum provision.
Notwithstanding the foregoing, the exclusive forum provision does not apply to suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. Any person or entity purchasing or otherwise acquiring an interest in any shares of our capital stock shall be deemed to have notice of and to have consented to the forum provisions in our amended and restated certificate of incorporation. These choice-of-forum provisions may limit a stockholder's ability to bring a claim in a judicial forum that he, she or it believes to be favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits. Alternatively, if a court were to find these provisions of our amended and restated certificate of incorporation inapplicable or unenforceable with respect to one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could materially adversely affect our business, financial condition and results of operations and result in a diversion of the time and resources of our management and board of directors.our Board. For example, the Court of Chancery of the State of Delaware recently determined a provision stating that U.S. federal district courts are the exclusive forum for resolving any complaint asserting a cause of action arising under the Securities Act is not enforceable.
Future sales of our common stock in the public market, or the perception that such sales may occur, could reduce our stock price, and any additional capital raised by us through the sale of equity or convertible securities may dilute your ownership in us.
We may raise additional capital through the issuance of equity or debt in the future. In that event, the ownership of our existing stockholders would be diluted and the value of the stockholders' equity in common stock could be reduced. If we raise more equity capital from the sale of common stock, institutional or other investors may negotiate terms more favorable than the current prices of our common stock. If we issue debt securities, the holders of the debt would have a claim to our assets that
would be prior to the rights of stockholders until the debt is paid. Interest on these debt securities would increase costs and could negatively impact operating results.
In accordance with Delaware law and the provisions of our charter documents, we may issue preferred stock that ranks senior in right of dividends, liquidation or voting to our common stock. The issuance by us of such preferred stock may (a) reduce or eliminate the amount of cash available for payment of dividends to our holders of common stock, (b) diminish the relative voting strength of the total shares of common stock outstanding as a class, or (c) subordinate the claims of our holders of common stock to our assets in the event of our liquidation. Our amended and restated Certificate of Incorporation does not provide stockholders the pre-emptive right to buy shares from us. As a result, stockholders will not have the automatic ability to avoid dilution in their percentage ownership of us.
We cannot predict the size of future issuances of our common stock or securities convertible into common stock or the effect, if any, that future issuances and sales of shares of our common stock will have on the market price of our common stock. Sales of substantial amounts of our common stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices of our common stock.
Risks Related to TaxationThe capped call transactions may affect the value of our common stock.
Our abilityThe capped call transactions are expected generally to use NOLs and tax credit carryforwardsreduce the potential dilution to our common stock upon any conversion of notes and/or offset future income taxes isany cash payments we are required to make in excess of the principal amount of converted notes, as the case may be, with such reduction and/or offset subject to limitation anda cap. In connection with establishing their initial hedges of the amountcapped call transactions, we expect the option counterparties or their respective affiliates to purchase shares of such carryforwards may be subjectour common stock and/or enter into various derivative transactions with respect to challengeour common stock concurrently with or reduction.shortly after the pricing of the Convertible Notes. This activity could increase (or reduce the size of any decrease in) the market price of our common stock at that time.
As of December 31, 2020, we had approximately $1.2 billion of U.S. federal NOLs, a portion of which will begin to expire in 2032 and approximately $267.5 million of U.S. federal tax credit carryforwards, which begin to expire in 2033. Utilization of our NOLs and tax credit carryforwards depends on many factors, including having current or future taxable income, which cannot be assured. In addition, Section 382the option counterparties or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock or other securities of ours in secondary market transactions prior to the maturity of the Code generally imposes an annual limitation on0.25% convertible senior notes (and are likely to do so during the amount of NOLs that may be used to offset taxable income by a corporation that has undergone an "ownership change" (as determined under Section 382). An ownership change generally occurs if one or more stockholders (or groups of stockholders, including one or more groups of public stockholders) that are each deemed to own at least 5% of our stock increase their ownership percentage by more than 50 percentage points over their lowest ownership percentage during a rolling three-year period. Similar rules under Section 383observation period for conversions of the Code impose an annual limitation on the amount of tax credit carryforwards, including carryforwards of Section 48(a) ITCs, that may be used to offset U.S. federal income taxes.
We experienced an "ownership change" in August 2020 as defined by Sections 382 and 3830.25% convertible senior notes following September 1, 2026 or following any repurchase of the Code, which limits our future ability to utilize NOLs and tax credits generated before the "ownership change". While we are presently evaluating the impact of Sections 382 and 383 on our deferred tax assets as a result of the aforementioned "ownership change", we maintain a full valuation allowance to reduce our deferred tax assets to the amount expected to be realized. Another "ownership change" could occur as a result of transactions that increase the ownership percentage of any of our 5% stockholders during a rolling three-year period, including redemptions of our stock, sales of our stock by other deemed 5% stockholders or issuances of stock0.25% convertible senior notes by us whether in additional public offerings or otherwise. If such another ownership change occurs, our ability to utilize NOLs and tax credit carryforwards may be subject to further limitation under Sections 382 and 383during the observation period for conversions of the Code. The application of the aforementioned limitations may cause U.S. federal income taxes to be paid by us earlier than they otherwise would be paid if such limitations were not in effect and could cause such NOLs and tax credit carryforwards to expire unused, in each case reducing or eliminating the benefit of such NOLs and tax credit carryforwards. To the extent we are not able to offset our future taxable income with our NOLs or offset future taxes with our tax credit carryforwards, this would adversely affect our operating results and cash flows if we have taxable income in the future. These same risks can arise in the context of state income and franchise tax given many states conform to federal law and rely on federal authority for determining state NOLs.
Furthermore, the IRS or other tax authorities could successfully challenge one or more tax positions we take, such as the classification of assets under the income tax depreciation rules or the characterization of expenses for income tax purposes, which could reduce the NOLs we generate and/or are able to use.
Our tax positions are subject to challenge by the relevant tax authority.
Our federal and state tax positions may be challenged by the relevant tax authority. The process and costs, including potential penalties for nonpayment of disputed amounts, of contesting such challenges, administratively or judicially, regardless of the merits, could be material. Future tax audits or challenges by tax authorities to our tax positions may result in a material increase in our estimated future income tax or other tax liabilities, which would negatively impact our financial condition.
For example, many2.625% convertible senior notes following November 15, 2027 or following any repurchase of the 2.625% convertible senior notes by us). This activity could also cause or avoid an increase or a decrease in the market price of our solar energy systems are located in states or territories that exempt such assets from state, territorial and local sales and property taxes. We believe these solar energy systems are and should continue to be exempt from certain state, territorial and local sales and property taxes; however, some of our solar energy systems are located in certain jurisdictions where the applicability of these exemptions to solar energy systems is the subject of ongoing litigation and possible legislative change or else the jurisdiction's law is uncertain regarding the effect on property and sales tax exemptions of certain complex business reorganizations undergone by us and our subsidiaries. As such, some tax authorities could challenge the availability of these exemptions. If our solar energy systems are determined to be subject to state, territorial or local sales or property taxes, it could negatively impact our financial condition.common stock.
ChangesThe potential effect, if any, of these transactions and activities on the market price of our common stock will depend in tax law could adversely affect our business.part on market conditions and cannot be ascertained at this time.
U.S. tax law is always subject to change. Potential changes to the Code include changes to the U.S. corporate income tax rate and provisions limiting or eliminating various deductions, credits or tax preferences. Interpretations of the Code and regulations promulgated by the IRS are likewise subject to change. As states elect to conform (or else have rolling conformity) to the Code, such interpretations and regulations (including those promulgated by state authorities) could likewise affect our state income and franchise tax obligations. Any future changes in tax law, including changes to U.S. federal, state, territorial or local tax law, could affect our tax position and adversely impact our business.
General Risk Factors
IfWe are exposed to the IRS or the U.S. Treasury Department makes a determination that the fair market valuecredit risk of our customers and payment delinquencies on our accounts receivable.
Because we have long-term, contractual relationships with our customers which require them to make monthly payments throughout the term of their contract, we are subject to the credit risk of our customers and screen our customers based upon their credit rating in an attempt to mitigate the risk of customer default. As of December 31, 2023, the average FICO® score of our customers for whom we have a FICO® score was 741 at the time of signing the customer agreement. The accuracy of independent third-party information provided to the credit reporting agency cannot be verified. A FICO® score purports only to be a measurement of the relative degree of risk a borrower represents to a lender, i.e., a borrower with a higher score may be less likely to default in payment than a borrower with a lower score.
As of December 31, 2023, approximately 0.9% of our customers were in default under their customer agreements. However, as we grow our business, the risk of customer defaults may increase as credit scores are dynamic and may deteriorate over a 25-year period. During an economic downturn or during periods of rising inflation and interest rates, the risk of customer defaults may increase. In addition, our customers may assign their solar service agreements to other customers who have lower credit scores or we may enter into new solar service agreements in the future with customers who have lower credit scores than our current customers. In addition, future developments, including competition from other renewables, could decrease the attractiveness of our current contracts. Although our solar service agreements grant us the ability to terminate the agreement with the customer and repossess the defaulting customers' solar energy systems is materially lowersystem in certain circumstances, enforcement of these rights under the solar service agreement may be difficult, expensive and time-consuming. Non-solar customer agreements may experience higher delinquency and default rates than whatour other customer agreements primarily due to the nature of the product and shorter tenor. If we have reported inexperience increased customer defaults or delinquencies, our tax equity vehicles' tax returns, werevenue, cash distributions from subsidiaries and our ability to raise new investment funds could be adversely affected. If economic conditions worsen, certain of our customers may haveface liquidity concerns and may be unable to pay significant amountssatisfy their payment obligations to our tax equity vehicles, our tax equity investors and/us on a timely basis or the U.S. government. Such determinationsat all, which could have a material adverse effect on our businessfinancial condition and financial condition.results of operations.
The basisWe are not able to insure against all potential risks and we may become subject to higher insurance premiums.
We are exposed to numerous risks inherent in the operation of solar energy systems and energy storage systems, including equipment failure, manufacturing defects, natural disasters such as hurricanes, freezes, fires and earthquakes, terrorist attacks, sabotage, vandalism and environmental risks. Furthermore, components of our solar energy systems we report in our tax equity vehicles' tax returns to claim the Section 48(a) ITC is based on the appraised fair market value ofand energy storage systems, such as panels, inverters and batteries, could be damaged by severe weather, such as tsunamis, hurricanes, tornadoes, hailstorms or lightning. If our solar energy systems. The IRS continues to scrutinize fair market value determinations industry-wide. Wesystems or energy storage systems are not awaredamaged in the event of any IRS audits or results of audits related toa natural disaster beyond our appraisals or fair market value determinations of any of our tax equity vehicles. If as part of an examination the IRS were to review the fair market value we used to establish our basis for claiming Section 48(a) ITCs and successfully assert the Section 48(a) ITCs previously claimed should be reduced, we would owe certain of our tax equity vehicles or our tax equity investors an amount equal to 30% of each investor's share of the difference between the fair market value used to establish our basis for claiming Section 48(a) ITCs and the adjusted fair market value determined by the IRS, plus any costs and expenses associated with a challenge to that fair market value, plus a gross up to pay for additional taxes. We could also be subject to tax liabilities, including interest and penalties, based on our share of claimed Section 48(a) ITCs. To date, we have not been required to make such payments under any of our tax equity vehicles. We have obtained insurance coverage with respect to certain losses that may be incurred should the Section 48(a) ITCs previously claimed with respect to our tax equity vehicles be reduced. Any suchcontrol, losses could be outside the scope of these insurance policies or exceed insurance policy limits and we could incur unforeseen costs that could harm our business and financial condition. We may also incur significant additional costs in taking actions in preparation for, or in reaction to, such events.
IfOur insurance policies also cover legal and contractual liabilities arising out of bodily injury, personal injury or property damage to third parties and are subject to policy limits. We also maintain coverage for physical damage to our solar energy systems either cease to be qualifying property or undergo certain changesassets.
However, such policies do not cover all potential losses and coverage is not always available in ownership within five years of the applicable placed in service date,insurance market on commercially reasonable terms. In addition, we may have disagreements with our insurers on the amount of our recoverable damages and the insurance proceeds received for any loss of, or any damage to, any of our assets may be claimed by lenders under our financing arrangements or otherwise may not be sufficient to restore the loss or damage without a negative impact on our results of operations. Furthermore, the receipt of insurance proceeds may be delayed, requiring us to use cash or incur financing costs in the interim. To the extent we experience covered losses under our insurance policies, the limit of our coverage for potential losses may be decreased or the insurance rates we have to pay increased. Furthermore, the losses insured through commercial insurance are subject to the credit risk of those insurance companies. While we believe our commercial insurance providers are currently creditworthy, we cannot assure you such insurance companies will remain so in the future.
We may not be able to maintain or obtain insurance of the type and amount we desire at reasonable rates. The insurance coverage we do obtain may contain large deductibles or fail to cover certain risks or all potential losses. In addition, our insurance policies are subject to annual review by our insurers and may not be renewed on similar or favorable terms, including coverage, deductibles or premiums, or at all. If a significant amountsaccident or event occurs for which we are not fully insured or we suffer losses due to one or more of our tax equity vehicles, our tax equity investors and/insurance carriers defaulting on their obligations or the U.S. government. Such recapturecontesting their coverage obligations, it could have a material adverse effect on our business, financial condition and financial condition.results of operations.
The Section 48(a) ITCs are subject to recapture under the Code if a solar energy system either ceases to be qualifying propertyloss of one or undergoes certain changes in ownership within five years of its placed in service date. The amount of Section 48(a) ITCs subject to recapture decreases by 20% of the claimed amount on each anniversary of a solar energy system's placed in service date. If such a recapture event were to occur, we could owe certainmore members of our tax equity vehiclessenior management or key employees may adversely affect our tax equity investors an amount equalability to such vehicles' or investors' share of the Section 48(a) ITCs that were recaptured. implement our strategy.
We could also be subject to tax liabilities, including interest and penalties, baseddepend on our shareexperienced management team and the loss of recaptured Section 48(a) ITCs. Any such recaptureone or more key executives could have a negative impact on our business. In particular, we are dependent on the services of our founder and CEO, William J. Berger. We also depend on our ability to retain and motivate key employees and attract qualified new employees. None of our key executives are bound by employment agreements for any specific term. We may be unable to replace key members of our management team and key employees if we lose their services. Integrating new employees into our team could prove disruptive to our operations, require substantial resources and management attention and ultimately prove unsuccessful. An inability to attract and retain sufficient managerial personnel who have critical industry experience and relationships could limit or delay our strategic efforts, which could have a material adverse effect on our business, financial condition and results of operations.
Our inability to protect our intellectual property could adversely affect our business. We may also be subject to intellectual property rights claims by third parties, which are extremely costly to defend, could require us to pay significant damages and could limit our ability to use certain technologies.
Any failure to protect our proprietary rights adequately could result in our competitors offering similar solar technology or energy storage services more quickly than anticipated, potentially resulting in the loss of some of our competitive advantage and a decrease in our revenue that would adversely affect our business prospects, financial condition.condition and operating results. Our success depends, at least in part, on our ability to protect our core technology and intellectual property. We rely on intellectual property laws, primarily a combination of copyright and trade secret laws in the U.S., as well as license agreements and other contractual provisions, to protect our proprietary technology and brand. We cannot be certain our agreements and other contractual provisions will not be breached, including a breach involving the use or disclosure of our trade secrets or know-how, or that adequate remedies will be available in the event of any breach. In addition, our trade secrets may otherwise become known or lose trade secret protection.
We cannot be certain our products and our business do not or will not violate the intellectual property rights of a third party. Third parties, including our competitors, may own patents or other intellectual property rights that cover aspects of our technology or business methods. Such parties may claim we have misappropriated, misused, violated or infringed third-party intellectual property rights and if we gain greater recognition in the market, we face a higher risk of being the subject of claims we have violated others' intellectual property rights. Any claim we violated a third party's intellectual property rights, whether with or without merit, could be time-consuming, expensive to settle or litigate and could divert our management's attention and other resources, all of which could adversely affect our business, results of operations, financial condition and cash flows. If we do not successfully settle or defend an intellectual property claim, we could be liable for significant monetary damages and could be prohibited from continuing to use certain technology, business methods, content or brands. To avoid a prohibition, we could seek a license from third parties, which could require us to pay significant royalties, increasing our operating expenses. If a license is not available at all or not available on commercially reasonable terms, we may be required to develop or license a non-violating alternative, either of which could adversely affect our business, results of operations, financial condition and cash flows.
We currently use or plan to use software that is licensed under "open source", "free" or other similar licenses that may subject us to liability or require us to release the source code of our proprietary software to the public.
We currently use open source software that is licensed under "open source", "free" or other similar licenses. Open source software is made available to the general public on an "as-is" basis under the terms of a non-negotiable license. If we fail to comply with these licenses, we may be subject to certain conditions, including requirements that we offer our services that incorporate the open source software for no cost, we make available source code for modifications or derivative works we create based upon incorporating or using the open source software and we license such modifications or alterations under the terms of the particular open source license. We do not plan to integrate our proprietary software with this open source software in ways that would require the release of the source code of our proprietary software to the public. However, our use and distribution of open source software may entail greater risks than use of third-party commercial software. Our authorized developers may contribute to this open source software community but they will be prohibited from providing any proprietary
process or proprietarily developed source code of ours. Open source licensors generally do not provide warranties or other contractual protections regarding infringement claims or the quality of the code. In addition, if we combine our proprietary software with open source software in a certain manner, we could, under certain open source licenses, be required to release the source code of our proprietary software to the public. This would allow our competitors to create similar offerings with lower development effort and time. We may also face claims alleging noncompliance with open source license terms or infringement or misappropriation of proprietary software.
These claims could result in litigation, require us to purchase a costly license or require us to devote additional research and development resources to change our software, any of which would have a negative effect on our business and operating results. In addition, if the license terms for open source software that we use change, we may be forced to re-engineer our technology platform or incur additional costs.
Although we monitor our use of open source software to avoid subjecting our technology platform to unintended conditions, few courts have interpreted open source licenses and there is a risk these licenses could be construed in a way that could impose unanticipated conditions or restrictions on our business. We cannot guarantee we have incorporated open source software in our software in a manner that will not subject us to liability or in a manner consistent with our current policies and procedures.
We may become involved in the future in legal proceedings that could adversely affect our business.
We may, from time to time, be involved in litigation and claims, such as those related to employees, customers, our dealers or other third parties with whom we contract, including consumer claims and class action lawsuits. In the ordinary course of business, we have disputes with dealers and customers. In general, litigation claims or regulatory proceedings can be expensive and time consuming to bring or defend against, may result in the diversion of management attention and resources from our business and business goals and could result in injunctions or other equitable relief, settlements, penalties, fines or damages that could significantly affect our results of operations and the conduct of our business. It is impossible to predict with certainty whether any resulting liability would have a material adverse effect on our financial position, results of operations or cash flows.
Our actual financial results may differ materially from any guidance we may publish from time to time.
We may, from time to time, provide guidance regarding our future performance that represents our management's estimates as of the date such guidance is provided. Any such guidance would be based upon a number of assumptions with respect to future business decisions (some of which may change) and estimates, while presented with numerical specificity, are inherently subject to significant business, economic and competitive uncertainties and contingencies (many of which are beyond our control). Guidance is necessarily speculative in nature and it can be expected some or all the assumptions that inform such guidance will not materialize or will vary significantly from actual results. Our ability to meet any forward-looking guidance is impacted by a number of factors including, but not limited to, the number of our solar energy systems sold versus leased, changes in installation costs, the availability of additional financing on acceptable terms, changes in the retail prices of traditional utility-generated electricity, the availability of rebates, tax credits and other incentives, changes in policies and regulations including net metering and interconnection limits or caps, the availability of solar panels, inverters, batteries and other raw materials, as well as the other risks to our business described in this "Risk Factors" section. Accordingly, our guidance is only an estimate of what management believes is realizable as of the date such guidance is provided. Actual results may vary from such guidance and the variations may be material. Investors should also recognize the reliability of any forecasted financial data diminishes the farther into the future the data is forecast. In light of the foregoing, investors should not place undue reliance on our financial guidance and should carefully consider any guidance we may publish in context.
If we are unable to make acquisitions on economically acceptable terms, our future growth and operations could be limited, and any acquisitions we may make may reduce, rather than increase, our cash flows.
We may make acquisitions of solar energy systems, energy storage systems and related businesses and joint ventures. The consummation and timing of any future acquisitions will depend upon, among other things, whether we are able to:
•identify attractive acquisition candidates;
•negotiate acceptable purchase agreements;
•obtain any required governmental or third party consents;
•obtain financing for these acquisitions on economically acceptable terms, which may be more difficult at times when the capital markets are less accessible; and
•outbid any competing bidders.
Additionally, any acquisition involves potential risks, including, among other things:
•mistaken assumptions about assets, revenues and costs of the acquired company, including synergies and potential growth;
•an inability to secure adequate customer commitments to use the acquired systems or facilities;
•an inability to successfully integrate the assets or businesses we acquire;
•coordinating geographically disparate organizations, systems and facilities;
•the assumption of unknown liabilities for which we are not indemnified or for which our indemnity is inadequate;
•mistaken assumptions about the acquired company's suppliers or dealers or other vendors;
•the diversion of management's and employees' attention from other business concerns;
•unforeseen difficulties operating in new geographic areas and business lines;
•customer or key employee losses at the acquired business; and
•poor quality assets or installation.
If we consummate any future acquisitions, our capitalization, results of operations, future growth and profitability may change significantly and our stockholders will not have the opportunity to evaluate the economic, financial and other relevant information we will consider in deciding to engage in these future acquisitions, which may not improve our results of operations or cash flow to the extent we projected.
Adverse developments affecting the financial services industry, such as actual events or concerns involving liquidity, defaults or non-performance by financial institutions or transactional counterparties, could adversely impact our business, financial condition and results of operations.
Actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems. We maintain deposits at financial institutions as a part of doing business that could be at risk if another similar event were to occur. Our ongoing cash management strategy is to maintain the majority of our deposit accounts in large "money center" financial institutions, but there can be no assurance this strategy will be successful. Increasing concerns regarding the U.S. or international financial systems, including bank failures and bailouts, and their potential broader effects and potential systemic risk on the banking sector generally, may adversely affect our access to capital. Any decline in available funding or access to our cash and liquidity resources could, among other risks, limit our ability to meet our capital needs and fund future growth and operations or fulfill our other obligations, or result in breaches of our financial and/or contractual obligations. Any of these impacts, or any other impacts resulting from the factors described above or other related or similar factors not described above, could have material adverse impacts on our business, financial condition and results of operations.
Item 1B. Unresolved Staff Comments.
Not applicable.
Item 1C. Cybersecurity.
Cybersecurity, Risk Management and Strategy
Sunnova allocates significant resources to preventing, identifying, and mitigating cybersecurity threats to our technology infrastructure and data.
Managing Material Risks and Integrated Overall Risk Management
A focused team of technology professionals works throughout the year to assess and monitor all matters of risk related to cybersecurity. This team is managed by our Chief Information Security Officer ("CISO"), who oversees cybersecurity processes and controls. We deploy a robust combination of security technologies as technical safeguards throughout our network and utilize a defense-in-depth security methodology to protect, detect and react to threats to our systems and data. We conduct cybersecurity maturity and posture assessments twice annually and adjust our efforts to adapt to the evolving industry and threat
landscape. Cybersecurity risks are also assessed as part of our Annual Enterprise Risk Assessment. Our risk management strategy includes multiple programs that manage cybersecurity risk, including the following:
•Alignment of our program with the National Institute of Standards and Technology Cybersecurity Framework ("NIST CSF") to prevent, detect and respond to cyberattacks
•Our Incident Response Program outlines how we process incidents and events from identification to completion with clear definitions on roles, classifications, materiality guidelines and additional processes to support response efforts according to the NIST CSF.
•An information security training program that requires all company employees and contractors with access to our networks to participate in regular and mandatory training on how to be aware of, and help defend against, cyber risks, combined with year-round awareness testing and re-training as necessary
•Regular and robust testing of our systems and processes to assess our cybersecurity posture and resilience, which includes internal and external penetration testing performed by third-party vendors and tabletop incident response exercises
•Coordinated engagements with the Department of Homeland Security and Cyber & Infrastructure Security Agency to ensure alignment with industry and government standards and leverage access to agency resources
•Cybersecurity insurance coverage to mitigate the risk of cybersecurity incidents and review of this coverage annually
Results of all assessments, events and test results inform cybersecurity program direction and activities taken throughout the year.
Engaging Third Parties on Risk Management
Recognizing the complexity and evolving nature of cybersecurity risk, we leverage strategic external partnerships to assist with assessing and mitigating cybersecurity threats to us. For example, we utilize a third-party managed security service provider who performs security operations center consulting and investigative duties as a backup to our in-house dedicated cybersecurity team.
Managing Third-Party Risk
We recognize the risks associated with the use of vendors, service providers and other third parties that provide information system services to us, process information on our behalf or have access to our information systems, and we have processes in place to oversee and manage these risks. We conduct thorough security assessments of these third parties engagement and maintain ongoing monitoring to ensure compliance with our cybersecurity standards.
Risks from Cybersecurity Incidents
As of December 31, 2023, we have identified no security incidents or breaches that are material, or likely to be material, to our business strategy, results or financial condition. As such, we have not allocated any material capital towards addressing information security breaches in the last three years, nor have we incurred any material expenses from penalties and settlements related to a material breach during this period. The materiality of an incident is determined by a team convened for an incident, according to guidelines set forth in our incident response policy and process documentation. We believe we are adequately insured against losses related to possible information security breaches and we maintain cybersecurity insurance coverage that we believe is appropriate for the size and complexity of our business.
Board Governance and Oversight
We involve multiple levels of oversight as a part of our approach to cybersecurity risk management.
Risk Management Personnel
Our CISO is responsible for the oversight, implementation and compliance of our cybersecurity program and mitigation of cyber-related risks. Our current CISO has more than 20 years of industry experience and over 5 years of experience with development, training and controls of effective enterprise cybersecurity programs. Our CISO's responsibilities include, but are not limited to, (a) reviewing our enterprise risk register and functional risk register, (b) maintaining adequate processes to manage the identified risks under our cybersecurity program, (c) analyzing logs of cybersecurity threats and vulnerabilities, (d) overseeing prevention, detection, mitigation and remediation efforts and (e) developing, maintaining and ensuring team familiarity with the above mentioned incident response plan. Additionally, we maintain an experienced information technology
team at the employee level that supports the implementation of our cybersecurity program and internal reporting, security and mitigation functions.
Board of Director Oversight
Our Board has delegated oversight of risks from cybersecurity threats, as well as overall Enterprise Risk Management, to our audit committee. The audit committee reviews and evaluates the effectiveness of our cybersecurity frameworks, policies, programs, opportunities and risk profile, as well as our business continuity and disaster recovery efforts. Members of our audit committee have cybersecurity experience from their principal occupation or other professional experience. Members of information technology management, including our CISO, regularly report on our cybersecurity matters to both the audit committee of our Board and the full Board, as follows:
•Management provides quarterly reports to the audit committee regarding our cybersecurity program and risks, and the audit committee in turn provides reports to the full Board as needed. All incidents with critical functional impact are escalated to the Board and audit committee.
•Current information security concerns that arise during the year are escalated in real-time to leadership based on the process defined in our Incident Response Plan. All events and incidents are evaluated against our prioritization and informational impact matrices outlined the plan.
We recognize cyber threats are a permanent part of the overall risk landscape and cybersecurity threats are constantly evolving. For these and other reasons, cybersecurity is a top risk management priority for us.
Item 2. Properties.
Our corporate headquarters is in Houston, Texas, where we occupy approximately 71,70073,800 square feet of office space pursuant to an operating lease that expires in July 2029. We lease additional offices in Texas, Guam, California, Florida, Nevada, Mississippi, New York and Puerto Rico, but do
not own any real property. We intend to procure additional space in the future as we continue to add employees and expand geographically. We believe our facilities are adequate and suitable for our current needs and, should it be needed, suitable additional or alternative space will be available to accommodate our operations.
Item 3. Legal Proceedings.
Although we may, from time to time, be involved in litigation, claims and government proceedings arising in the ordinary course of business, we are not a party to any litigation or governmental or other proceeding we believe will have a material adverse impact on our financial position, results of operations or liquidity. In the ordinary course of business, we have disputes with dealers and customers. In general, litigation claims or regulatory proceedings can be expensive and time consuming to bring or defend against, may result in the diversion of management attention and resources from our business and business goals and could result in settlement or damages that could significantly affect financial results and the conduct of our business.
On February 16, 2024, a purported stockholder class action was filed against us and certain of our individual executives in the Southern District of Texas, Houston Division. The plaintiff, who seeks to certify a class of persons who purchased our stock between February 25, 2020 and December 7, 2023, alleges that certain statements made during the class period about our business, operations and compliance policies were false and misleading, specifically that we failed to disclose we engaged in improper business practices with respect to disadvantaged homeowners and communities. We believe the lawsuit to be without merit and intend to vigorously defend ourselves. We have not yet been served with the lawsuit.
Item 4. Mine Safety Disclosures.
Not applicable.
PART II - OTHER INFORMATION
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer PurchasePurchases of Equity SecuritiesSecurities.
Market Information
Our common stock began trading on the NYSE under the symbol "NOVA" on July 25, 2019.
Holders
As of February 22, 2021,19, 2024, there were approximately 3231 holders of record of our common stock. Certain shares are held in "street" name and, accordingly, the number of beneficial owners of such shares is not known or included in the foregoing number.
Dividends
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all available funds and any future earnings for use in the operation of our business and do not expect to pay any dividends on our capital stock in the foreseeable future. Any future determination to declare dividends will be made at the discretion of our Board, subject to applicable laws, and will depend on a number of factors, including our financial condition, results of operations, capital requirements, contractual restrictions, general business conditions and other factors our Board may deem relevant. In addition, the terms of our credit agreements and indentures contain restrictions on the payment of dividends and we may also enter into other credit agreements, indentures or other borrowing arrangements in the future that will restrict our ability to declare or pay cash dividends on our capital stock.
Performance Graph
The following stock performance graph compares our total stock return with the total return for (a) the NYSE Composite Index and the (b) the Invesco Solar ETF, which represents a peer group of solar companies, for the period from July 25, 2019 (the date our common stock commenced trading on the NYSE) through December 31, 2020.2023. The figures represented below assume an investment of $100 in our common stock at the closing price of $11.25 on July 25, 2019 and in the NYSE Composite Index and the Invesco Solar ETF on July 25, 2019, including the reinvestment of dividends into shares of common stock. The comparisons in the table are required by the SEC and are not intended to forecast or be indicative of possible future performance of our common stock. This graph shall not be deemed "soliciting material" or be deemed "filed" for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities under that section, and shall not be deemed to be incorporated by reference into any of our filings under the Securities Act, whether made before or after the date hereof and irrespective of any general incorporation language in any such filing.
Item 6. Selected Financial Data.Equity Securities and Use of Proceeds
The following selected consolidated financial data should be read in conjunction with "Management's Discussion and AnalysisWe did not have any sales of Financial Condition and Results of Operations" and the consolidated financial statements, related notes and other information included elsewhere in this Annual Report on Form 10-K. The selected consolidated statements of operations data forunregistered equity securities during the years ended December 31, 2020, 20192023, 2022 and 2018, and the selected consolidated balance sheet data as of December 31, 2020 and 2019 are derived from our audited consolidated financial statements included elsewhere in this2021 that we have not previously reported on an Annual Report on Form 10-K. The selected consolidated statements of operations data for the year ended December 31, 2017 and the selected consolidated balance sheet data as of December 31, 2018 and 2017 are derived from audited consolidated financial statements not included in this Annual10-K, Quarterly Report on Form 10-K. Our historical results are not necessarily indicative of our future results. The selected consolidated financial data in this section are not intended to replace, and are qualified in their entirety, by the consolidated financial statements and related notes thereto included elsewhere in this Annual10-Q or Current Report on Form 10-K.8-K.
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 | | 2017 | | |
| (in thousands, except share and per share amounts) |
Consolidated Statement of Operations Data: | | | | | | | | | |
Revenue | $ | 160,820 | | | $ | 131,556 | | | $ | 104,382 | | | $ | 76,856 | | | |
Net loss | $ | (307,818) | | | $ | (133,434) | | | $ | (68,409) | | | $ | (90,182) | | | |
Net loss attributable to common stockholders—basic and diluted | $ | (252,284) | | | $ | (169,076) | | | $ | (135,872) | | | $ | (121,288) | | | |
Net loss per share attributable to common stockholders—basic and diluted | $ | (2.87) | | | $ | (4.14) | | | $ | (15.74) | | | $ | (14.05) | | | |
Weighted average common shares outstanding—basic and diluted | 87,871,457 | | | 40,797,976 | | | 8,634,477 | | | 8,632,936 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, |
| 2020 | | 2019 | | 2018 | | 2017 | | |
| (in thousands) |
Consolidated Balance Sheet Data: | | | | | | | | | |
Cash and restricted cash | $ | 377,893 | | | $ | 150,291 | | | $ | 87,046 | | | $ | 81,778 | | | |
Property and equipment, net | $ | 2,323,169 | | | $ | 1,745,060 | | | $ | 1,328,457 | | | $ | 1,113,073 | | | |
Total assets | $ | 3,587,582 | | | $ | 2,487,067 | | | $ | 1,665,085 | | | $ | 1,328,788 | | | |
Current portion of long-term debt | $ | 110,883 | | | $ | 97,464 | | | $ | 26,965 | | | $ | 25,837 | | | |
Current portion of long-term debt—affiliates | $ | — | | | $ | — | | | $ | 16,500 | | | $ | 81,791 | | | |
Long-term debt, net | $ | 1,924,653 | | | $ | 1,346,419 | | | $ | 872,249 | | | $ | 723,697 | | | |
Long-term debt, net—affiliates | $ | — | | | $ | — | | | $ | 44,181 | | | $ | — | | | |
Total equity | $ | 1,144,557 | | | $ | 691,111 | | | $ | 501,118 | | | $ | 371,183 | | | |
Item 6. [Reserved]
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis contain forward-looking statements that are subject to risks, uncertainties and assumptions. Our actual results and timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of many factors, including but not limited to those discussed under "Special Note Regarding Forward-Looking Statements", "Risk Factors" and elsewhere in this Annual Report on Form 10-K. Moreover, we operate in a very competitive and rapidly changing environment and new risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this Annual Report on Form 10-K may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. Unless the context otherwise requires, the terms "Sunnova," "the Company," "we," "us" and "our" refer to SEI and its consolidated subsidiaries.
Company Overview
We are a leading residential solaran industry-leading energy services company focused on making clean energy more accessible, reliable and energy storage service provider,affordable for homeowners and businesses, serving over 107,000419,000 customers in more than 2045 U.S. states and territories. Our goal is to be the leading provider of clean, affordable and reliableThrough our adaptive energy for consumers, andplatform, we operate with a simple mission: to power energy independence so homeowners have the freedom to live life uninterrupted. We were founded to deliver customersprovide a better energy service at a better price; and, throughprice to deliver our solar and solar plusmission of powering energy storage service offerings, we are disrupting the traditional energy landscape and the way the 21st century customer generates and consumes electricity.independence.
We have a differentiated residential solar dealer model in which we partner with local dealers and contractors who originate, design and install our customers' solar energy systems, and energy storage systems and related products and services on our behalf.behalf, as well as other sustainable home solutions, such as home security and monitoring, smart home devices, modern HVAC, generators, upgraded roofing, water systems, water heaters, main panel upgrades and electric vehicle chargers. Our focus on our dealer and contractor model enables us to leverage our dealers' and contractors' specialized knowledge, connections and experience in local markets to drive customer origination while providing our dealers and contractors with access to high quality products at competitive prices, as well as technical oversight and expertise. We believe this structure provides operational flexibility, reduces exposure to labor shortages and lowers fixed costs relative to our peers, furthering our competitive advantage.true vertically integrated models.
We offer customers products to power and improve the energy efficiency and sustainability of their homes and businesses with affordable solar energy.energy and related products and services. We are able to offer energy generation savings compared to utility-based retail rates with little to no up-front expense to the customer in conjunction with solar and solar plus energy storage products, and, in the case of the latter, are able to also provide energy resiliency. Our customer agreements typically take the form of a lease, PPA, loan or cash purchase; however, we also offer service plans for systems we did not originate. We also make it possible in some states for a customer to obtain a new roof andand/or other ancillarysustainable home products as part of their solar loan. Ourloan agreement or as an accessory loan to their lease or PPA. Customers who are not interested in a new solar service agreements takeenergy system or energy storage system may also finance a new roof and other sustainable home products via a stand-alone loan from us. We also allow customers originated through our homebuilder channel the formoption of purchasing the products when the customer closes on the purchase of a lease, PPA or loan. The initial term of our solar service agreements is typically 10, 15 or 25 years.new home. Service is an integral part of our agreements and includes operations and maintenance, monitoring, repairs and replacements, equipment upgrades, on-site power optimization for the customer (for both supply and demand), the ability to efficiently switch power sources amongbetween the solar panel,energy system and/or energy storage system, and the grid, as appropriate, and also the solar energy system and energy storage system as appropriate, and diagnostics. During the life of the contract, we have the opportunity to integrate related and evolving home servicing and monitoring technologies and other sustainable home products to upgrade the flexibility and reduce the cost of our customers' energy supply.
In the case of leases and PPAs, we also currently receive tax benefits and other incentives from federal, state and local governments, a portion of which we finance through tax equity, tax credit sales, non-recourse debt structures and hedging arrangements in order to fund our upfront costs, overhead and growth investments. We have an established track record of attracting capital from diverse sources. From our inception through December 31, 2020, we have raised more than $6.7 billion in total capital commitments from equity, debt and tax equity investors.
In addition to providing ongoing service as a standard component of our solar servicecustomer agreements, we also offer ongoing energy services to customers who purchased their solar energy system through third parties. Under these arrangements, we agree to provide monitoring, maintenance andand/or repair services to these customers for the life of the service contract they sign with us. In addition, we offer one-time repair services to customers who purchased their solar energy systems or sustainable home products through third parties that are not otherwise covered by warranty. We also offer complementary products as well as non-solar financing. Specifically, our offerings include a non-solar loan program enabling customers to finance the purchase of products independent of a solar energy system or energy storage system. We believe the quality and scope of our comprehensive energy service offerings, whether to customers that obtained their solar energy system through us or through another party, is a key differentiator between us and our competitors.
We continue to expand our offerings to include additional sustainable home products to our agreements, including non-solar financing. Specifically, we have expanded our offerings to include a non-solar loan program enabling customers to finance the purchase of products independent of a solar energy system or energy storage system. We believe the quality and scope of our expanding sustainable home product offerings, whether to customers that obtained their solar energy system or energy storage system through us or through a third party, is a key differentiator between us and our competitors.
We also enter into leases with third-party owners of pools of solar energy systems to receive such third party's interest in those systems. In connection therewith, we assume the related customer PPA and lease obligations, entitling us to future customer cash flows as well as certain credits, rebates and incentives (including SRECs) under those agreements, in exchange for a lease payment, whether upfront or over time, to the third-party owner, which may be made in the form of cash or shares of our common stock. We believe such arrangements enhance our long-term contracted cash flows and are complementary to our overall business model.
We commenced operations in January 2013 and began providing solar energy services under our first solar energy system in April 2013. Since then, our brand, innovation and focused execution have driven significant, rapid growth in our market share and in the number of customers on our platform. We operate one of the largest residential fleets of residential solar energy systems in the U.S., comprising more than 7902,292 megawatts of generation capacity and servingour diversified offerings of sustainable home solutions serve over 107,000 customers.419,000 customers as of December 31, 2023.
Recent Developments
Acquisition of SunStreet
In February 2021, we entered into a Merger Agreement with certain of our subsidiaries, SunStreet and Lenx. Pursuant to the Merger Agreement, we will acquire SunStreet, Lennar Corporation's residential solar platform, in exchange for up to 7,222,229 shares of our common stock, comprised of 3,333,333 shares in initial consideration to be issued at closing, subject to purchase price adjustment, and up to 3,888,896 shares issuable as earnout consideration after closing of the Acquisition. The Acquisition is expected to provide a new strategic path to further scale our business and develop clean and resilient residential microgrids across the U.S.
The completion of the Acquisition is subject to, among other customary mutual conditions, our entry into (a) a transition services agreement, (b) a stockholders agreement, which will provide for certain registration rights and standstill provisions, (c) a master management and services agreement with an affiliate of Lennar Corporation, which will provide for SunStreet's continued provision of operating, maintenance and servicing services for solar service agreements of Lennar Corporation customers, (d) an exclusivity agreement with Lennar Corporation and (e) initial tax equity fund documents. The Merger Agreement contains termination rights if, among other things, the Acquisition does not close on or before September 1, 2021. The Acquisition is expected to close in the second quarter of 2021. See "Item 1A. Risk Factors" for discussion of risks related to the Acquisition.
Earnout Agreement
Pursuant to the Earnout Agreement entered into between us and Lenx, Lenx will have the ability to earn up to 3,888,896 additional shares of common stock over a five-year period in connection with the Acquisition. The earnout payments are conditioned on SunStreet meeting certain commercial milestones tied to achieving specified origination targets. There are two elements to the earnout arrangement. First, we will issue up to 2,777,784 shares if we and our subsidiaries (including SunStreet) place target amounts of solar energy systems into service and enter into qualifying customer agreements related to such solar energy systems through SunStreet's existing homebuilding process. The 2,777,784 shares of common stock issuable under this prong of the earnout can be earned in four installments on a yearly basis (if the origination target for each such year is achieved) or at the end of the four-year period (if the aggregate origination target is achieved in the fourth and final year), with the annual periods commencing on the closing date of the Acquisition. The second element of the earnout is related to the development of microgrid communities. Pursuant to this portion of the earnout, we will issue up to 1,111,112 shares if, prior to the fifth anniversary of the closing date of the Acquisition, we enter into binding agreements for the development of microgrid communities.
Exclusivity Agreement
In connection with the Acquisition, we will become Lennar Corporation's exclusive residential solar and storage service provider for new home communities with solar across the U.S. for a period of four years. Under the exclusivity agreement, Lennar Corporation will agree to exclusively use us or our subsidiaries as its solar and storage service provider. In addition, through the exclusivity agreement we will have the opportunity to leverage Lennar Corporation's existing customer relationships to offer solar service agreements to those customers without an existing solar energy system. Lennar Corporation will retain the ability to terminate the exclusivity agreement if we fail to maintain certain specified performance obligations on a regular basis, including the failure to timely install solar and storage equipment across its new home communities. We are also required to offer competitive prices to Lennar Corporation's homebuyers and incentives to Lennar Corporation.
Tax Equity Commitment
In connection with the Acquisition, Lennar Corporation has committed to contribute an aggregate $200.0 million to four Sunnova tax equity funds, each formed annually during a period of four consecutive years commencing in 2021. The solar service agreements and related solar energy systems acquired by each of these four tax equity funds will generally be originated by SunStreet, though a certain number of solar service agreements may be originated by our dealers if those originated by SunStreet do not fully utilize Lennar Corporation's Funding Commitment for a given Contribution Year. Any amount not utilized during the first and second Contribution Years will increase the Funding Commitment during the third Contribution Year by that amount, and any amount not utilized during the third Contribution Year will increase the Funding Commitment during the fourth Contribution Year by that amount. In connection with the Funding Commitment, each of the tax equity funds will enter into typical tax equity fund transaction documentation, including development and purchase agreements, servicing agreements and limited liability company agreements.
COVID-19 Pandemic
The ongoing COVID-19 pandemic has resulted and may continue to result in widespread adverse impacts on the global economy. Our first priority in our response to this pandemic has been the health and safety of our employees, customers and dealers. To that end, we quickly implemented preventative measures to minimize unnecessary risk of exposure, which we have continued to follow. We have experienced some resulting disruptions to our business operations as the COVID-19 pandemic has continued to spread through the states and U.S. territories in which we operate.
Social distancing guidelines, stay-at-home orders and similar government measures associated with the COVID-19 pandemic, as well as actions by individuals to reduce their potential exposure to the virus, contributed to a decline in origination, with new contract origination, net of cancelations, declining in each of March and April 2020 from the previous month. This decline reflected an inability by our dealers to perform in-person sales calls based on the stay-at-home orders in some locations. To adjust to these government measures, our dealers expanded the use of digital tools and origination channels and created new methods that offset restrictions on their ability to meet with potential new customers in person. Such efforts drove an increase in new contract origination, net of cancelations, in May through November 2020, with each of the months from June 2020 to November 2020 exceeding the number of new contracts originated, net of cancelations, in February 2020. We have seen the use of websites, video conferencing and other virtual tools as part of our origination process expand widely and contribute to our growth. However, local, state or federal government extensions of COVID-19 pandemic response measures may further disrupt the return to in-person sales, which may have a material adverse effect on our business, cash flows, liquidity, financial condition and results of operations due to an inability by our dealers to adjust to virtual sales methods or because such methods prove to be less successful with potential customers.
The service and installation of solar energy systems has continued during the COVID-19 pandemic. This reflects residential solar services' designation as an essential service in all of our service territories. In order to adhere to all applicable state and federal health and safety guidelines, we and our dealers have moved to a contact-free process for installers and service technicians. In addition, an increasing number of jurisdictional authorities, as well as local utilities, are accepting electronic submissions for permits, and inspections are being performed in many locations through video calls and other electronic means. We expect our dealers' ability to install and our ability to service solar energy systems will continue in this manner. However, if there are additional outbreaks of the COVID-19 virus or more stringent health and safety guidelines are adopted, our and our dealers' ability to continue performing installations and service calls may be adversely impacted.
Throughout the COVID-19 pandemic, we have seen minimal impact to our supply chain as our technicians and dealers have largely been able to successfully procure the equipment needed to service and install solar energy systems. We have established a geographically diverse group of suppliers, which helps ensure our dealers and customers have access to affordable and effective solar energy and storage options despite potential trade, geopolitical or event-driven risks. Further, we implemented a strategy in 2019, as a result of which the equipment necessary to install and service a significant majority of solar energy systems for the duration of 2021 is already available to us. Currently, we do not anticipate an inability to source parts for our solar energy systems or energy storage systems. However, if supply chains become significantly disrupted due to additional outbreaks of the COVID-19 virus or more stringent health and safety guidelines are implemented, our ability to install and service solar energy systems could become adversely impacted.
As part of our preventative measures to minimize unnecessary risk of exposure and prevent infection, we have continued our work-from-home policy for employees in our Houston headquarters. In May 2020, we re-established critical operations that rely on infrastructure available at headquarters. All employees are required to follow strict social distancing and health safety guidelines in conformity with the restrictions and best practices encouraged by the Centers for Disease Control and Prevention, the World Health Organization and other governmental and regulatory authorities. Throughout the COVID-19 pandemic, our call center has remained open and properly staffed to meet our customers' needs. If a customer requires a visit from a service technician, those technicians are available and in almost all cases can complete the service without entering the customer's home. We are continuing to address concerns to protect the health and safety of our employees and those of our customers and dealers, and this includes changes to comply with health-related guidelines as they are modified and supplemented.
There is considerable uncertainty regarding the extent and duration of governmental and other measures implemented to try to slow the spread of the COVID-19 virus, such as large-scale travel bans and restrictions, border closures, quarantines, shelter-in-place orders and business and government shutdowns. Some states that had begun taking steps to reopen their economies experienced a subsequent surge in cases of COVID-19, causing these states to cease such reopening measures in some cases and reinstitute restrictions in others. Restrictions of this nature have caused, and may continue to cause, us and our dealers to experience operational delays and may cause milestones or deadlines relating to our exclusivity arrangements to be missed. To date, we have not received notices from our dealers regarding performance delays resulting from the COVID-19 pandemic. However, worsening economic conditions could result in such outcomes over time, which would impact our future financial
performance. Further, the effects of the economic downturn associated with the COVID-19 pandemic may increase unemployment and reduce consumer credit ratings and credit availability, which may adversely affect new customer origination and our existing customers' ability to make payments on their solar service agreements. Periods of high unemployment and a lack of availability of credit may lead to increased delinquency and default rates. We have not experienced a significant increase in default or delinquency rates to date. However, if existing economic conditions continue for a prolonged period of time or worsen, delinquencies on solar service agreements could increase, which would also negatively impact our future financial performance.
As of the date of this report, our responses to the challenges presented by the conditions described above to minimize the impacts to our business have yielded encouraging results. However, our future success also depends on our ability to raise capital from third-party investors and commercial sources. In the initial weeks of the COVID-19 pandemic we saw access to capital markets reduced generally. Although the capital markets have not returned to full strength, we have since been able to raise funding during this challenging time. During 2020, we closed five tax equity funds, closed three securitizations, expanded capacity under one of our existing credit facilities, closed one additional credit facility, raised additional equity capital and continue to have access to capacity under certain of our existing tax equity funds and warehouse facilities. If we are unable to regain access to the capital markets or are unable to raise funds through our tax equity and warehouse financing transactions at competitive terms, it would adversely impact our ability to finance the deployment of our solar energy systems and energy storage systems and our future financial performance.
We cannot predict the full impact the COVID-19 pandemic or the significant disruption and volatility currently being experienced in the capital markets will have on our business, cash flows, liquidity, financial condition and results of operations at this time due to numerous uncertainties. The ultimate impact will depend on future developments, including, among other things, the ultimate duration of the COVID-19 virus, the distribution, acceptance and efficacy of the vaccine, the depth and duration of the economic downturn and other economic effects of the COVID-19 pandemic, the consequences of governmental and other measures designed to prevent the spread of the COVID-19 virus, actions taken by governmental authorities, customers, suppliers, dealers and other third parties, our ability and the ability of our customers, potential customers and dealers to adapt to operating in a changed environment and the timing and extent to which normal economic and operating conditions resume. For additional discussion regarding risks associated with the COVID-19 pandemic, see "Risk Factors" elsewhere in this Annual Report on Form 10-K.
Financing Transactions
In November 2020,December 2023, we admitted three tax equity investors with a total capital commitment of approximately $463.0 million. In February 2024, we admitted a tax equity investor with a total capital commitment of $100.0 million. In December 2020, weapproximately $195.0 million and a tax equity investor increased the totalits capital commitment from an existing tax equity investor from $75.0approximately $59.0 million to $155.0approximately $61.4 million. See "—Liquidity and Capital Resources—Financing Arrangements—Tax Equity Fund Commitments" below.
In October 2020,2023, we amended the revolving credit facility associated with oneby and among Sunnova EZ-Own Portfolio, LLC ("EZOP"), certain of our financingother subsidiaries that owns certain tax equity fundsparty thereto, Atlas Securitized Products Holdings, L.P., as administrative agent, and the lenders and other financial institutions party thereto, to, among other things, reallocate commitments among the lenders. In February 2024, we amended the EZOP revolving credit facility to, among other things, (a) reflect certain assignments of commitments occurring within the Atlas Lender Group (as defined by such revolving credit facility) without increasing the existing commitments, and the assignment of the role of the Atlas funding agent for the Atlas Lender Group, (b) amend the thresholds for certain "Amortization Events" (as defined by such revolving credit facility) and (c) modify the "Liquidity Reserve Account Required Balance" (as defined by such revolving credit facility).
In November 2023, we amended and restated the revolving credit facility by and among Sunnova TEP Holdings, LLC ("TEPH"), certain of our other subsidiaries party thereto, Atlas Securitized Products Holdings, L.P., as administrative agent, and the lenders and other financial institutions party thereto, to, among other things, (a) increase the aggregate commitment amount from $437.5$769.3 million to $460.7 million$1.309 billion and (b) increase the uncommitted maximum commitmentfacility amount from $437.5$859.0 million to $600.0 million.$1.575 billion. In January 2021, thisDecember 2023, an additional lender joined the TEPH revolving credit facility and the aggregate commitment amount was furtherincreased from $1.309 billion to $1.311 billion. In February 2024, we amended the TEPH revolving credit facility to, among other things, (a) permit certain transactions in SRECs (or proceeds therefrom)reflect an assignment of commitments occurring within the Atlas Lender Group (as defined by such revolving credit facility) without increasing the existing commitments and related hedging arrangements and exclude certainthe appointment of such amounts froma new Atlas funding agent for the calculation of net cash flow available to service the indebtedness and (b) allow for borrowings with respect to certain ancillary components. See "—Liquidity and Capital Resources—Financing Arrangements—Warehouse and Other Debt Financings" below.Atlas Lender Group.
In December 2023, we entered into a revolving credit facility by and among Sunnova Business Markets Borrower, LLC ("BMB"), certain of our other subsidiaries party thereto, Mitsubishi HC Capital America, Inc., as administrative agent, and the lenders party thereto from time to time, for an aggregate principal amount of up to $25.0 million. The proceeds of the loans under the BMB revolving credit facility are available to, among other things, finance project costs related to commercial, industrial and other solar energy systems and energy storage systems owned by BMB or one of its subsidiaries or by a customer (each, a "Project"). The BMB revolving credit facility is also available to finance completed Projects. Borrowings under the BMB revolving credit facility bear interest at an annual rate (which can vary for different Projects) based on Term SOFR plus a specified margin, or in the case of certain term loans for completed Projects, a fixed margin.
In November 2020, October 2023, one of our subsidiaries issued $209.1 million in aggregate principal amount of Series 2020-2 Class A solar asset-backed notes and $45.6$219.6 million in aggregate principal amount of Series 2020-2 Class B solar asset-backed notes (collectively, the "SOLII Notes") with a maturity date of November 2055. The SOLII Notes bear interest at an annual rate of 2.73% and 5.47% for the2023-GRID1 Class A solar loan-backed notes and Class B notes, respectively. In February 2021, one of our subsidiaries issued $150.1$24.4 million in aggregate principal amount of Series 2021-A Class A solar loan-backed notes and $38.6 million in aggregate principal amount of Series 2021-A2023-GRID1 Class B solar loan-backed notes (collectively, the "HELV Notes") with a maturity date of February 2048. The HELV Notes bear interest at an annual rate of 1.80% and 3.15% for the Class A and Class B notes, respectively. See "—Liquidity and Capital Resources—Financing Arrangements—Securitizations" below.
During the fourth quarter of 2020, certain of the holders of our 9.75% convertible senior notes converted approximately $66.0 million aggregate principal amount, including accrued and unpaid interest to the date of each conversion, of our 9.75% convertible senior notes into 4,890,892 shares of our common stock. In January and February 2021, the remaining holders of our 9.75% convertible senior notes converted approximately $97.1 million aggregate principal amount, including accrued and unpaid interest to the date of each conversion, of our 9.75% convertible senior notes into 7,196,035 shares of our common stock. As of February 23, 2021, all of the holders of our 9.75% convertible senior notes have converted their notes into common
stock. As such, there are no longer any 9.75% convertible senior notes outstanding. (collectively, the "HESI Notes") with a maturity date of December 2050. The HESI Notes bear interest at an annual rate of 5.75% and 8.25% for the Class A and Class B notes, respectively. In February 2024, one of our subsidiaries issued $194.5 million in aggregate principal amount of Series 2024-1 Class A solar asset-backed notes, $16.5 million in aggregate principal amount of Series 2024-1 Class B solar asset-backed notes and $15.0 million in aggregate principal amount of Series 2024-1 Class C solar asset-backed notes (collectively, the "SOLVI Notes") with a maturity date of January 2059. The SOLVI Notes bear interest at an annual rate of 5.65%, 7.00% and 9.00% for the Class A, Class B and Class C notes, respectively. See "—Liquidity and Capital Resources—Financing Arrangements—Convertible Senior NotesSecuritizations" below.
In December 2020, we sold 4,025,000 shares of common stock at a public offering price of $37.00 per share. We received aggregate net proceeds of approximately $142.7 million, after deducting underwriting discounts and commissions of approximately $6.0 million and offering expenses of approximately $0.3 million. See "—Liquidity and Capital Resources—Financing Arrangements—Public Offerings" below.
Securitizations
As a source of long-term financing, we securitize qualifying solar energy systems, energy storage systems and related solar servicecustomer agreements into special purpose entities who issue solar asset-backed and solar loan-backed notes to institutional investors. We also securitize the cash flows generated by the membership interests in certain of our indirect, wholly-owned subsidiaries that are the managing member of a tax equity fund that owns a pool of solar energy systems, energy storage systems and related solar servicecustomer agreements that were originated by one of our wholly-owned subsidiaries. The federal government currently provides business investment tax credits under Section 48(a) (the "Section 48(a) ITC") and residential energy credits under Section 25D (the "Section 25D Credit") of the U.S. Internal Revenue Code of 1986, as amended. For projects that begin construction after December 31, 2024, the Section 48(a) ITC will be replaced with investment tax credits under Section 48E(a) (the "Section 48E ITC"). We do not securitize the Section 48(a) ITC incentives, and currently do not plan to securitize any Section 48E ITC incentives, associated with the solar energy systems and energy storage systems as part of these arrangements. However, we may in the future securitize the expected proceeds from the sale of such tax credits. We use the cash flows these solar energy systems and energy storage systems generate to service the monthly, quarterly or semi-annual principal and interest payments on the notes and satisfy the expenses and reserve requirements of the special purpose entities, with any remaining cash distributed to their sole members, who are typically our indirect wholly-owned subsidiaries. In connection with these securitizations, certain of our affiliates receive a fee for managing and servicing the solar energy systems and energy storage systems pursuant to management, servicing, facility administration and asset management agreements. The special purpose entities are also typically required to maintain a liquidity reserve account and a reserve account for equipment replacements and, in certain cases, reserve accounts for financing fund purchase option/withdrawal right exercises or storage system replacement for the benefit of the holders under the applicable series of notes, each of which are funded from initial deposits or cash flows to the levels specified therein. The creditors of these special purpose entities have no recourse to our other assets except as expressly set forth in the terms of the notes. From our inception through December 31, 2020,2023, we have issued $1.7$4.7 billion in solar asset-backed and solar loan-backed notes.
Tax Equity Funds
Our ability to offer long-term solar service agreements depends in part on our ability to finance the installation of the solar energy systems and energy storage systems by co-investing with tax equity investors, such as large banks who value the resulting customer receivables and Section 48(a) ITCs or, in the future, Section 48E ITCs, accelerated tax depreciation and other incentives related to the solar energy systems and energy storage systems, primarily through structured investments known as "tax equity". Tax equity investments are generally structured as non-recourse project financings known as "tax equity funds". In the context of distributed generation solar energy, tax equity investors make contributions upfront or in stages based on milestones in exchange for a share of the tax attributes and cash flows emanating from an underlying portfolio of solar energy systems and energy storage systems. In these tax equity funds, the U.S. federal income tax attributes offset taxes that otherwise would have been payable on the investors' other operations. The terms and conditions of each tax equity fund vary significantly by investor and by fund. We continue to negotiate with potential investors to create additional tax equity funds.
In general, our tax equity funds are structured using the "partnership flip" structure. Under partnership flip structures, we and our tax equity investors contribute cash into a partnership. The partnership uses this cash to acquire long-term solar service agreements, solar energy systems and energy storage systems developed by us and sells energy from such solar energy systems and energy storage systems, as applicable, to customers or directly leases the solar energy systems and energy storage systems, as applicable, to customers. We assign these solar service agreements, solar energy systems, energy storage systems and related incentives to our tax equity funds in accordance with the criteria of the specific funds. Upon such assignment and the satisfaction of certain conditions precedent, we are able to draw down on the tax equity fund commitments. The conditions precedent to funding vary across our tax equity funds but generally require that we have entered into a solar service agreement with the customer, the customer meets certain credit criteria, the solar energy system is expected to be eligible for the Section 48(a) ITC or the Section 48E ITC, as applicable, we have a recent appraisal from an independent appraiser establishing the fair market value of the solar energy system and the property is in an approved state or territory. Certain tax equity investors agree to receive a minimum target rate of return, typically on an after-tax basis, which varies by tax equity fund. Prior to receiving a contractual rate of return or a date specified in the contractual arrangements, the tax equity investor receives substantially all of
the non-cash value attributable to the solar energy systems and energy storage systems, which includes accelerated depreciation and Section 48(a) ITCs and a significant portion of the value attributable to customer payments;or Section 48E ITCs, as applicable; however, we typically receive a majority of the cash distributions, which are typically paid quarterly. After the tax equity investor receives its contractual rate of return or after a specified date, we receive substantially all of the cash. Under the partnership flip structure, in part owing to the allocation of depreciation benefits to the investor, the investor's pre-tax return is much lower than the investor's after-tax return.
cash and tax allocations.
We have determined we are the primary beneficiary in these tax equity funds for accounting purposes. Accordingly, we consolidate the assets and liabilities and operating results of these partnerships in our consolidated financial statements. We recognize the tax equity investors' share of the net assets of the tax equity funds as redeemable noncontrolling interests and noncontrolling interests in our consolidated balance sheets. TheseThe income or loss allocations reflected in our consolidated statements of operations may create significant volatility in our reported results of operations, including potentially changing net loss attributable to stockholders to net income attributable to stockholders, or vice versa, from quarter to quarter.
We typically have an option to acquire, and our tax equity investors may have an option to withdraw and require us to purchase, all the equity interests our tax equity investor holds in the tax equity funds starting approximately sixfive years after the last solar energy system in eachthe applicable tax equity fund is operational. If we or our tax equity investors exercise this option, we are typically required to pay at least the fair market value of the tax equity investor's equity interest and, in certain cases, a contractual minimum amount. Following such exercise, we would receive 100% of the customer payments for the remainder of the term of the solar service agreements. From our inception through December 31, 2020,2023, we have received commitments of $789.5 millionapproximately $2.7 billion through the use of tax equity funds, of which an aggregate of $628.6 million$2.1 billion has been funded.funded and $439.4 million remains available for use.
Key Financial and Operational Metrics
We regularly review a number of metrics, including the following key operational and financial metrics, to evaluate our business, measure our performance, and liquidity, identify trends affecting our business, formulate our financial projections and make strategic decisions.
Number of Customers. Customers. We define number of customers to include eachevery unique customer thatpremises on which a Sunnova product or Sunnova-financed product is partyinstalled or on which Sunnova is obligated to perform services for a solar service agreement or purchased a solar energy system from us outright, which we subsequently placed in service. For all solar energy systems installed by us, in-service means the related solar energy system and, if applicable, energy storage system, must have met all the requirements to begin operation and be interconnected to the electrical grid. We do not include in our number of customers any customer under a lease, PPA or loan agreement that has reached mechanical completion but has not received permission to operate from the local utility or for whom we have terminated the contract and removed the solar energy system. We also do not include in our number of customers any customer that has been in default under his or her solar service agreement in excess of six months.counterparty. We track the total number of customers as an indicator of our historical growth and our rate of growth from period to period.
| | | | | | | | | | | | | | | | | |
| | | | | |
| As of December 31, | | |
| 2020 | | 2019 | | Change |
Number of customers | 107,500 | | | 78,600 | | | 28,900 | |
| | | | | | | | | | | | | | | | | |
| | | | | |
| As of December 31, | | |
| 2023 | | 2022 | | Change |
Number of customers | 419,200 | | 279,400 | | 139,800 |
Weighted Average Number of Customers. Systems.We calculate the weighted average number of customerssystems based on the number of months a given customer and any additional service obligation related to a solar energy system is in-service during a given measurement period. The weighted average number of customerssystems reflects the number of customerssystems at the beginning of a period, plus the total number of new customerssystems added in the period adjusted by a factor that accounts for the partial period nature of those new customers.systems. For purposes of this calculation, we assume all new customerssystems added during a month were added in the middle of that month. The number of systems for any end of period will exceed the number of customers, as defined above, for that same end of period as we are also including any additional services and/or contracts a customer or third party executed for the additional work for the same residence or business. We track the weighted average customersystem count in order to accurately reflect the contribution of the appropriate number of customerssystems to key financial metrics over the measurement period.
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2020 | | 2019 | | 2018 |
Weighted average number of customers (excluding loan agreements) | | | | | 77,900 | | | 60,100 | | | 49,200 | |
Weighted average number of customers with loan agreements | | | | | 14,200 | | | 8,400 | | | 4,200 | |
Weighted average number of customers | | | | | 92,100 | | | 68,500 | | | 53,400 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2023 | | 2022 | | 2021 |
Weighted average number of systems (excluding loan agreements and cash sales) | | | | | 219,100 | | | 168,400 | | | 125,100 | |
Weighted average number of systems with loan agreements | | | | | 120,400 | | | 56,500 | | | 27,200 | |
Weighted average number of systems with cash sales | | | | | 9,300 | | | 4,000 | | | 600 | |
Weighted average number of systems | | | | | 348,800 | | | 228,900 | | | 152,900 | |
Adjusted EBITDA. We define Adjusted EBITDA as net income (loss) plus netexcluding the impacts of interest expense, income tax (benefit) expense, depreciation and amortization expense, income taxnon-cash compensation expense, asset retirement obligation ("ARO") accretion expense, financing deal costs, natural disaster losses and related charges, net, amortization of payments to dealers for exclusivity and other bonus arrangements, legal settlements and excluding the effect of certain non-recurring items we do not consider to be indicative of our ongoing operating performance such as, but not limited to,acquisition costs, of our initial public offering ("IPO"), losses on unenforceable contracts, losses on extinguishment of long-term debt, realized and unrealized gains and losses on fair value option instruments and equity securities, amortization of payments to dealers for exclusivity and other non-cash items such as non-cash compensation expense,bonus arrangements, legal
asset retirement obligation ("ARO") accretion expense,settlements, provision for current expected credit losses, and non-cash inventory impairment.and other impairments and indemnification payments to tax equity investors and including the impacts of investment tax credit ("ITC") sales.
Adjusted EBITDA is a non-GAAP financial measure we use as a performance measure. We believe investors and securities analysts also use Adjusted EBITDA in evaluating our operating performance. This measurement is not recognized in accordance with accounting principles generally accepted in the United States of America ("GAAP") and should not be viewed as an alternative to GAAP measures of performance. The GAAP measure most directly comparable to Adjusted EBITDA is net income (loss). The presentation of Adjusted EBITDA should not be construed to suggest our future results will be unaffected by non-cash or non-recurring items. In addition, our calculation of Adjusted EBITDA is not necessarily comparable to Adjusted EBITDA as calculated by other companies.
We believe Adjusted EBITDA is useful to management, investors and analysts in providing a measure of core financial performance adjusted to allow for comparisons of results of operations across reporting periods on a consistent basis. These adjustments are intended to exclude items that are not indicative of the ongoing operating performance of the business. Adjusted EBITDA is also used by our management for internal planning purposes, including our consolidated operating budget, and by our Boardboard of directors in setting performance-based compensation targets. Adjusted EBITDA should not be considered an alternative to but viewed in conjunction with GAAP results, as we believe it provides a more complete understanding of ongoing business performance and trends than GAAP measures alone. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP.
We use per customer metrics, including Adjusted Operating Expense per weighted average customer (as described below), as an additional way to evaluate our performance. Specifically, we consider the change in these metrics from period to period as a way to evaluate our performance in the context of changes we experience in the overall customer base. While the Adjusted Operating Expense figure provides a valuable indicator of our overall performance, evaluating this metric on a per unit basis allows for further nuanced understanding by management, investors and analysts of the financial impact of each additional customer.
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2020 | | 2019 | | 2018 |
| | | | | (in thousands) |
Reconciliation of Net Loss to Adjusted EBITDA: | | | | | | | | | |
Net loss | | | | | $ | (307,818) | | | $ | (133,434) | | | $ | (68,409) | |
Interest expense, net | | | | | 154,580 | | | 108,024 | | | 51,582 | |
Interest expense, net—affiliates | | | | | — | | | 4,098 | | | 9,548 | |
Interest income | | | | | (23,741) | | | (12,483) | | | (6,450) | |
Income tax expense | | | | | 181 | | | — | | | — | |
Depreciation expense | | | | | 66,066 | | | 49,340 | | | 39,290 | |
Amortization expense | | | | | 32 | | | 29 | | | 133 | |
EBITDA | | | | | (110,700) | | | 15,574 | | | 25,694 | |
Non-cash compensation expense (1) | | | | | 10,873 | | | 10,512 | | | 3,410 | |
ARO accretion expense | | | | | 2,186 | | | 1,443 | | | 1,183 | |
Financing deal costs | | | | | 4,454 | | | 1,161 | | | 1,902 | |
Natural disaster losses and related charges, net | | | | | 31 | | | 54 | | | 8,217 | |
IPO costs | | | | | — | | | 3,804 | | | 563 | |
Loss on unenforceable contracts | | | | | — | | | 2,381 | | | — | |
Loss on extinguishment of long-term debt, net | | | | | 142,772 | | | — | | | — | |
Loss on extinguishment of long-term debt, net—affiliates | | | | | — | | | 10,645 | | | — | |
Unrealized (gain) loss on fair value option instruments | | | | | (907) | | | 150 | | | — | |
Realized (gain) loss on fair value option instruments | | | | | (835) | | | 730 | | | — | |
Amortization of payments to dealers for exclusivity and other bonus arrangements | | | | | 1,820 | | | 583 | | | — | |
Legal settlements | | | | | — | | | 1,260 | | | 150 | |
Provision for current expected credit losses | | | | | 7,969 | | | — | | | — | |
Non-cash inventory impairment | | | | | 1,934 | | | — | | | — | |
| | | | | | | | | |
Adjusted EBITDA | | | | | $ | 59,597 | | | $ | 48,297 | | | $ | 41,119 | |
(1) Amount includes the non-cash effect of equity-based compensation plans of $10.9 million, $9.2 million and $3.0 million for the years ended December 31, 2020, 2019 and 2018, respectively, and partial forgiveness of a loan to an executive officer used to purchase our capital stock of $1.3 million and $0.4 million for the years ended December 31, 2019 and 2018, respectively. | | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2023 | | 2022 | | 2021 |
| | | | | (in thousands) |
Reconciliation of Net Loss to Adjusted EBITDA: | | | | | | | | | |
Net loss | | | | | $ | (502,426) | | | $ | (130,276) | | | $ | (147,510) | |
Interest expense, net | | | | | 371,937 | | | 107,775 | | | 116,248 | |
| | | | | | | | | |
Interest income | | | | | (115,872) | | | (59,799) | | | (34,228) | |
Income tax (benefit) expense | | | | | (1,023) | | | 3,886 | | | 260 | |
Depreciation expense | | | | | 153,387 | | | 108,167 | | | 85,600 | |
Amortization expense | | | | | 29,583 | | | 29,224 | | | 21,771 | |
EBITDA | | | | | (64,414) | | | 58,977 | | | 42,141 | |
Non-cash compensation expense | | | | | 25,535 | | | 24,218 | | | 17,236 | |
ARO accretion expense | | | | | 4,905 | | | 3,701 | | | 2,897 | |
Financing deal costs | | | | | 1,723 | | | 930 | | | 1,411 | |
Natural disaster losses and related charges, net | | | | | 2,831 | | | 1,164 | | | — | |
| | | | | | | | | |
Acquisition costs | | | | | 1,224 | | | 7,801 | | | 6,709 | |
| | | | | | | | | |
Loss on extinguishment of long-term debt, net | | | | | — | | | — | | | 9,824 | |
| | | | | | | | | |
Unrealized (gain) loss on fair value instruments and equity securities | | | | | 188 | | | (29,279) | | | (21,988) | |
| | | | | | | | | |
Amortization of payments to dealers for exclusivity and other bonus arrangements | | | | | 6,944 | | | 4,327 | | | 2,968 | |
Legal settlements | | | | | 1,680 | | | (1,001) | | | — | |
Provision for current expected credit losses | | | | | 35,515 | | | 40,160 | | | 23,679 | |
Non-cash inventory and other impairments | | | | | 50,995 | | | 5,375 | | | 982 | |
Indemnification payments to tax equity investors | | | | | (22) | | | 2,737 | | | — | |
ITC sales | | | | | 207,425 | | | — | | | — | |
| | | | | | | | | |
| | | | | | | | | |
Adjusted EBITDA | | | | | $ | 274,529 | | | $ | 119,110 | | | $ | 85,859 | |
Interest Income andIncome; Principal PaymentsProceeds from Customer Notes Receivable.Receivable, Net of Related Revenue; and Proceeds from Investments in Solar Receivables. Under our loan agreements, the customer obtains financing for the purchase of a solar energy system from us and we agree to operate and maintain the solar energy system throughout the duration of the agreement. Pursuant to the terms of the loan agreement, the customer makes scheduled principal and interest payments to us and has the option to prepay principal at any time in part or in full. Whereas we typically recognize payments from customers under our leases and PPAs as revenue, we recognize payments received from customers under our loan agreements (a) as interest income,
to the extent attributable to earned interest on the contract that financed the customer's purchase of the solar energy system; (b) as a reduction of a note receivable on the balance sheet, to the extent attributable to a return of principal (whether scheduled or prepaid) on the contract that financed the customer's purchase of the solar energy system; and (c) as revenue, to the extent attributable to payments for operations and maintenance services provided by us. Interest income also includes income on short term investments with financial institutions. We also enter into leases with third-party owners of pools of solar energy systems to receive such third party's interest in those systems. In connection therewith, we assume the related customer PPA and lease obligations, entitling us to future customer cash flows as well as certain credits, rebates and incentives (including SRECs) under those agreements. We recognize payments received from such third parties as proceeds from investments in solar receivables.
While Adjusted EBITDA effectively captures the operating performance of our leases and PPAs, it only reflects the service portion of the operating performance under our loan agreements. We do not consider our types of solar servicecustomer agreements differently when evaluating our operating performance. In order to present a measure of operating performance that provides comparability without regard to the different accounting treatment among our threedifferent types of solar servicecustomer agreements, we consider interest income, from customer notes receivable and principal proceeds from customer notes receivable, net of related revenue, and proceeds from investments in solar receivables as key performance metrics. We believe these two metrics provide a more meaningful and uniform method of
analyzing our operating performance when viewed in light of our other key performance metrics across the three primary types of solar servicecustomer agreements.
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2020 | | 2019 | | 2018 |
| | | | | (in thousands) |
Interest income from customer notes receivable | | | | | $ | 23,239 | | | $ | 11,588 | | | $ | 6,147 | |
Principal proceeds from customer notes receivable, net of related revenue | | | | | $ | 32,580 | | | $ | 20,044 | | | $ | 6,812 | |
Adjusted Operating Cash Flow. We define Adjusted Operating Cash Flow as net cash used in operating activities plus principal proceeds from customer notes receivable, financed insurance payments and distributions to redeemable noncontrolling interests and noncontrolling interests less derivative breakage fees from financing structure changes, payments to dealers for exclusivity and other bonus arrangements, net inventory and prepaid inventory (sales) purchases, payments of non-capitalized costs related to our IPO and equity offerings and direct sales costs to the extent the related solar energy system is financed through a loan. Adjusted Operating Cash Flow is a non-GAAP financial measure we use as a liquidity measure. This measurement is not recognized in accordance with GAAP and should not be viewed as an alternative to GAAP measures of liquidity. The GAAP measure most directly comparable to Adjusted Operating Cash Flow is net cash used in operating activities. We believe Adjusted Operating Cash Flow is a supplemental financial measure useful to management, analysts, investors, lenders and rating agencies as an indicator of our ability to internally fund origination activities, service or incur additional debt and service our contractual obligations. We believe investors and analysts will use Adjusted Operating Cash Flow to evaluate our liquidity and ability to service our contractual obligations. However, Adjusted Operating Cash Flow has limitations as an analytical tool because it does not account for all future expenditures and financial obligations of the business or reflect unforeseen circumstances that may impact our future cash flows, all of which could have a material effect on our financial condition and results from operations. In addition, our calculations of Adjusted Operating Cash Flow are not necessarily comparable to liquidity measures presented by other companies. Investors should not rely on these measures as a substitute for any GAAP measure, including net cash used in operating activities.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2020 | | 2019 | | 2018 |
| (in thousands) |
Reconciliation of Net Cash Used in Operating Activities to Adjusted Operating Cash Flow: | | | | | |
Net cash used in operating activities | $ | (131,466) | | | $ | (170,262) | | | $ | (11,570) | |
Principal proceeds from customer notes receivable | 35,479 | | | 21,604 | | | $ | 7,715 | |
Financed insurance payments | (4,981) | | | (4,672) | | | $ | — | |
Derivative breakage fees from financing structure changes | 48,672 | | | 12,080 | | | $ | (17,793) | |
Distributions to redeemable noncontrolling interests and noncontrolling interests | (6,527) | | | (7,559) | | | $ | (2,017) | |
Payments to dealers for exclusivity and other bonus arrangements | 25,849 | | | 31,733 | | | $ | — | |
Net inventory and prepaid inventory purchases | 41,548 | | | 118,549 | | | $ | 13,100 | |
Payments of non-capitalized costs related to IPO | — | | | 4,944 | | | — | |
Payments of non-capitalized costs related to equity offerings | 2,031 | | | — | | | — | |
Direct sales costs | 108 | | | — | | | — | |
| | | | | |
Adjusted Operating Cash Flow | $ | 10,713 | | | $ | 6,417 | | | $ | (10,565) | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2023 | | 2022 | | 2021 |
| | | | | (in thousands) |
Interest income | | | | | $ | 115,872 | | | $ | 59,799 | | | $ | 34,228 | |
Principal proceeds from customer notes receivable, net of related revenue | | | | | $ | 146,701 | | | $ | 91,455 | | | $ | 59,274 | |
Proceeds from investments in solar receivables | | | | | $ | 11,582 | | | $ | 12,394 | | | $ | 3,231 | |
Adjusted Operating Expense. We define Adjusted Operating Expense as total operating expense less depreciation and amortization expense, financing deal costs, natural disaster losses and related charges, net, amortization of payments to dealers for exclusivity and other bonus arrangements, legal settlements, direct sales costs, cost of revenue related to cash sales, cost of revenue related to inventory sales, unrealized gains and losses on fair value instruments, gains and losses on held-for-sale loans and excluding the effect of certain non-recurring items we do not consider to be indicative of our ongoing operating performance such as, but not limited to, acquisition costs, of our IPO, losses on unenforceable contracts, indemnification payments to tax equity investors and other non-cash items such as non-cash compensation expense, ARO accretion expense, provision for current expected credit losses and non-cash inventory impairment.and other impairments. Adjusted Operating Expense is a non-GAAP financial measure we use as a performance measure. We believe investors and securities analysts will also use Adjusted Operating Expense in evaluating our performance. This measurement is not recognized in accordance with GAAP and should not be viewed as an alternative to GAAP measures of performance. The GAAP measure most directly comparable to Adjusted Operating Expense is total operating expense.expense, net. We believe Adjusted Operating Expense is a supplemental financial measure
useful to management, analysts, investors, lenders and rating agencies as an indicator of the efficiency of our operations between reporting periods. Adjusted Operating Expense should not be considered an alternative to but viewed in conjunction with GAAP total operating expense, net, as we believe it provides a more complete understanding of our performance than GAAP measures alone. Adjusted Operating Expense has limitations as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP, including total operating expense.
We use per system metrics, including Adjusted Operating Expense per weighted average customersystem, as an additional way to evaluate our performance. Specifically, we consider the change in this metric from period to period as a way to evaluate our performance in the context of changes we experience in the overall customer base. While the Adjusted Operating Expense figure provides a valuable indicator of our overall performance, evaluating this metric on a per customersystem basis provides a more contextualized allows for further nuanced understanding of our performance to us,by management, investors and analysts of the financial impact of each additional customer.system.
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| | | Year Ended December 31, |
| | | | | 2020 | | 2019 | | 2018 |
| | | | | (in thousands, except per customer data) |
Reconciliation of Total Operating Expense, Net to Adjusted Operating Expense: | | | | | | | | | |
Total operating expense, net | | | | | $ | 196,598 | | | $ | 153,826 | | | $ | 118,112 | |
Depreciation expense | | | | | (66,066) | | | (49,340) | | | (39,290) | |
Amortization expense | | | | | (32) | | | (29) | | | (133) | |
Non-cash compensation expense | | | | | (10,873) | | | (10,512) | | | (3,410) | |
ARO accretion expense | | | | | (2,186) | | | (1,443) | | | (1,183) | |
Financing deal costs | | | | | (4,454) | | | (1,161) | | | (1,902) | |
Natural disaster losses and related charges, net | | | | | (31) | | | (54) | | | (8,217) | |
IPO costs | | | | | — | | | (3,804) | | | (563) | |
Loss on unenforceable contracts | | | | | — | | | (2,381) | | | — | |
Amortization of payments to dealers for exclusivity and other bonus arrangements | | | | | (1,820) | | | (583) | | | — | |
Legal settlements | | | | | — | | | (1,260) | | | (150) | |
Provision for current expected credit losses | | | | | (7,969) | | | — | | | — | |
Non-cash inventory impairment | | | | | (1,934) | | | — | | | — | |
| | | | | | | | | |
Adjusted Operating Expense | | | | | $ | 101,233 | | | $ | 83,259 | | | $ | 63,264 | |
Adjusted Operating Expense per weighted average customer | | | | | $ | 1,099 | | | $ | 1,215 | | | $ | 1,185 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | Year Ended December 31, |
| | | | | 2023 | | 2022 | | 2021 |
| | | | | (in thousands, except per system data) |
Reconciliation of Total Operating Expense, Net to Adjusted Operating Expense: | | | | | | | | | |
Total operating expense, net | | | | | $ | 964,088 | | | $ | 639,194 | | | $ | 296,642 | |
Depreciation expense | | | | | (153,387) | | | (108,167) | | | (85,600) | |
Amortization expense | | | | | (29,583) | | | (29,224) | | | (21,771) | |
Non-cash compensation expense | | | | | (25,535) | | | (24,218) | | | (17,236) | |
ARO accretion expense | | | | | (4,905) | | | (3,701) | | | (2,897) | |
Financing deal costs | | | | | (1,723) | | | (930) | | | (1,411) | |
Natural disaster losses and related charges, net | | | | | (2,831) | | | (1,164) | | | — | |
| | | | | | | | | |
Acquisition costs | | | | | (1,224) | | | (7,801) | | | (6,709) | |
| | | | | | | | | |
Amortization of payments to dealers for exclusivity and other bonus arrangements | | | | | (6,944) | | | (4,327) | | | (2,968) | |
Legal settlements | | | | | (1,680) | | | 1,001 | | | — | |
Provision for current expected credit losses | | | | | (35,515) | | | (40,160) | | | (23,679) | |
Non-cash inventory and other impairments | | | | | (50,995) | | | (5,375) | | | (982) | |
Direct sales costs | | | | | (48,049) | | | (6,262) | | | (733) | |
Cost of revenue related to cash sales | | | | | (52,644) | | | (38,766) | | | (14,525) | |
Cost of revenue related to inventory sales | | | | | (176,371) | | | (178,310) | | | — | |
Unrealized gain on fair value instruments | | | | | 3,761 | | | 26,189 | | | 22,504 | |
Indemnification payments to tax equity investors | | | | | 22 | | | (2,737) | | | — | |
Gain on held-for-sale loans | | | | | 19 | | | — | | | — | |
| | | | | | | | | |
Adjusted Operating Expense | | | | | $ | 376,504 | | | $ | 215,242 | | | $ | 140,635 | |
Adjusted Operating Expense per weighted average system | | | | | $ | 1,079 | | | $ | 940 | | | $ | 920 | |
Estimated Gross Contracted Customer Value. We calculate estimated gross contracted customer value as defined below. We believe estimated gross contracted customer value can serve as a useful tool for investors and analysts in comparing the remaining value of our customer contracts to that of our peers.
Estimated gross contracted customer value as of a specific measurement date represents the sum of the present value of the remaining estimated future net cash flows we expect to receive from existing customers during the initial contract term of our leases and PPAs,customer agreements, which are typically 25 years in length, plus the present value of future net cash flows we expect to receive from the sale of related SRECs, either under existing contracts or in future sales, plus the cash flows we expect to receive from energy services programs such as grid services, plus the carrying value of outstanding customer loans on our balance sheet. From these aggregate estimated initial cash flows, we subtract the present value of estimated net cash distributions to redeemable noncontrolling interests and noncontrolling interests and estimated operating, maintenance and administrative expenses associated with the solar servicecustomer agreements. These estimated future cash flows reflect the projected monthly customer payments over the life of our solar servicecustomer agreements and depend on various factors including but not limited to solar service agreement type, contracted rates, expected sun hours and the projected production capacity of the solar equipment installed. For the purpose of calculating this metric, we discount all future cash flows at 6%.
The anticipated operating, maintenance and administrative expenses included in the calculation of estimated gross contracted customer value include, among other things, expenses related to accounting, reporting, audit, insurance, maintenance and repairs. In the aggregate, we estimate these expenses are $20 per kilowatt per year initially, with 2% annual increases for inflation, and an additional $81 per year non-escalating expense included for energy storage systems. We do not include maintenance and repair costs for inverters and similar equipment as those are largely covered by the applicable product and dealer warranties for the life of the product, but we do include additional cost for energy storage systems, which are only
covered by a 10-year warranty. Expected distributions to tax equity investors vary among the different tax equity funds and are based on individual tax equity fund contract provisions.
Estimated gross contracted customer value is forecasted as of a specific date. It is forward-looking and we use judgment in developing the assumptions used to calculate it. Factors that could impact estimated gross contracted customer value include, but are not limited to, customer payment defaults, or declines in utility rates or early termination of a contract in certain circumstances, including prior to installation. The following table presents the calculation of estimated gross contracted customer value as of December 31, 20202023 and 2019,2022, calculated using a 6% discount rate.
| | | | | | | | | | | |
| | | |
| As of December 31, |
| 2020 | | 2019 |
| (in millions) |
Estimated gross contracted customer value | $ | 2,607 | | | $ | 1,879 | |
| | | | | | | | | | | |
| | | |
| As of December 31, |
| 2023 | | 2022 |
| (in millions) |
Estimated gross contracted customer value | $ | 9,097 | | | $ | 5,875 | |
Sensitivity Analysis. The calculation of estimated gross contracted customer value and associated operational metrics requires us to make a number of assumptions regarding future revenues and costs whichthat may not prove accurate. Accordingly, we present below a sensitivity analysis with a range of assumptions. We consider a discount rate of 4%6% to be appropriate based on recent transactions that demonstrate a portfolio of residential solar servicecustomer agreements is an asset class that can be securitized successfully on a long-term basis with a weighted-average coupon of less than 4%6%. We also present these metrics with a discount rate of 6% based on industry practice. The appropriate discount rate for these estimates may change in the future due to the level of inflation, rising interest rates, our cost of capital and consumer demand for solar energy systems. In addition, the table below provides a range of estimated gross contracted customer value amounts if different cumulative customer loss rate assumptions were used. We are presenting this information for illustrative purposes only and as a comparison to information published by our peers.
| | | | | | | | | | | | | | | | | |
Estimated Gross Contracted Customer Value |
| As of December 31, 2020 |
| Discount rate |
Cumulative customer loss rate | 4% | | 6% | | 8% |
| (in millions) |
5% | $ | 2,949 | | | $ | 2,569 | | | $ | 2,279 | |
0% | $ | 2,997 | | | $ | 2,607 | | | $ | 2,309 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Estimated Gross Contracted Customer Value |
| As of December 31, 2023 |
| Discount rate |
Cumulative customer loss rate | 4% | | 5% | | 6% | | 7% | | 8% |
| (in millions) |
5% | $ | 9,665 | | | $ | 9,215 | | | $ | 8,821 | | | $ | 8,476 | | | $ | 8,172 | |
0% | $ | 10,032 | | | $ | 9,532 | | | $ | 9,097 | | | $ | 8,716 | | | $ | 8,382 | |
Significant Factors and Trends Affecting Our Business
Our results of operations and our ability to grow our business over time could be impacted by a number of factors and trends that affect our industry generally, as well as new offerings of services and products we may acquire or seek to acquire in the future. Additionally, our business is concentrated in certain markets, putting us at risk of region-specific disruptions such as adverse economic, regulatory, political, weather and other conditions. See "Item 1A. Risk Factors" for further discussion of risks affecting our business.
Financing Availability. Our future growth and profitability depends, in significant part, on our ability to raise capital from third-party investors on competitive terms to help finance the origination of our solar energy systems under our solar service agreements. We have historically used debt, such as convertible senior notes, senior notes, asset-backed and loan-backed securitizations and warehouse facilities, tax equity, preferred equity, common equity and other financing strategies to help fund our operations. From our inception through December 31, 2020, we have raised more than $6.7 billion in total capital commitments from equity, debt and tax equity investors. With respect to tax equity, there are a limited number of potential tax equity investors, and the competition for this investment capital is intense. The principal tax credit on which tax equity investors in our industry rely is the Section 48(a) ITC. Starting January 1, 2020,Prior to the Inflation Reduction Act of 2022 ("IRA"), which was enacted in August 2022, the amount for the Section 48(a) ITC was equal to (a) 30% of the basis of eligible solar property that began construction before 2020 if placed in service before 2026. By statute,or (b) 26% of the basis of eligible solar property that began construction during 2020, 2021 or 2022. Under the IRA, the Section 48(a) ITC percentage decreases to is (a) 26% for eligible solar property that began construction after 2019 and was placed in service before 2022 and (b) 30% for eligible solar property or eligible energy storage property that begins construction during 2020, 2021before 2025 provided (i) the project satisfies certain labor and apprenticeship requirements, (ii) the project has a maximum net output of less than one megawatt (as measured in alternating current) or 2022, 22% for 2023 and 10% if(iii) the project began construction begins after 2023 or ifprior to January 29, 2023. If no criterion is satisfied, the property is placed into service after 2025. This reduction inbase amount of the Section 48(a) ITC will likely reduce our use of tax equity financing in the future unlessbe equal to 6%. In addition, the Section 48(a) ITC is increased or replaced. IRS guidance includes a safe harbor that may apply when a taxpayer (or in certain cases, a contractor) pays or incurs 5% or more ofwill be replaced by the costs of aSection 48E ITC for eligible solar energy system beforeproperty or eligible energy storage property that begins construction after 2024, and the end ofSection 48E ITC percentage will be the applicablesame as the percentage for the Section 48(a) ITC and subject to the same requirements in order to receive the full benefit. The Section 48E ITC percentage will begin to phase down for projects that begin construction after (a) 2033 or (b) if later, the first year even though the solar energy system is not placed in service until after the endyear in which the U.S. Department of that year. For installationsTreasury determines greenhouse gas emissions from the production of electricity in 2021, we purchased prior to 2020 substantially all the inverters that we estimated would be deployed underUnited States are no more than 25% of 2022 levels. We believe our lease and PPA agreements that we expected would allow the related solar energy systems to qualify for the 30% Section 48(a) ITC by satisfying the 5% ITC Safe Harbor. Based on various market factors, however, not all solar energyand
energy storage systems installed in 2021generally will qualify fornot be subject to the labor and apprenticeship requirements of the IRA due to the maximum net output of most of our solar energy systems and energy storage systems. However, solar energy systems and energy storage systems financed by Hestia securitizations will be subject to applicable labor and other requirements imposed by the DOE and the U.S. Department of Labor. In addition, the IRA added a new provision that allows taxpayers to transfer certain federal income tax credits that arise after 2022, such as the Section 48(a) ITC, at 30%. For solar energy systems installedto third parties for cash. In September 2023, we entered into our first tax credit purchase and sale agreements and subsequently entered into another tax credit purchase and sale agreement in 2021 not meeting all requirements forDecember 2023. It is unclear what long-term effect the 30%ability to transfer Section 48(a) ITC,ITCs will have on tax equity structures, although we expect the market for tax equity structures to continue for investors who will continue to value benefits that are not transferable, such solar energy systems will qualify foras accelerated depreciation. We are continuing to evaluate the 26% Section 48(a) ITC. Additionally, we may make further inventory purchases in future periodsoverall impact and applicability of the IRA to extend the availability of each period's Section 48(a) ITC. our ability to raise capital from third-party investors.
Our ability to raise capital from third-party investors is also affected by general economic conditions, the state of the capital markets, inflation levels and concerns about our industry or business. Specifically, interest rates have risen over the past few years and remain subject to volatility that may result from action taken by the Federal Reserve.
Cost of Solar Energy Systems and Energy Storage Systems.Although the solar panel market has seen an increase in supply,we have experienced a prolonged period of component cost declines, upward pressure on prices of solar energy systems and energy storage systems may still occur due to growth in the solar industry, regulatory policy changes, tariffs and duties and an increase in demand.or inflationary cost pressures. As a result of these developments, we may pay higher prices on imported solar modules and other cost components, which may make it less economical for us to serve certain markets. Attachment rates forWhile lower costs of components may benefit our growth and profitability, downward pressure on prices of solar energy systems and energy storage systems have trended higher while the pricemay lead to acquire has trended downward making the additionimpairment of energy storage systems a potential area of growth for us.our inventory.
Energy Storage Systems. Our energy storage systems increase our customers' independence from the centralized utility and provide on-site backup power when there is a grid outage due to storms, wildfires, other natural disasters and general power failures caused by supply or transmission issues. In addition, at times it can be more economic to consume less energy from the grid or, alternatively, to export solar energy back to the grid. Recent technological advancements for energy storage systems allow the energy storage system to adapt to pricing and utility rate shifts by controlling the inflows and outflows of power, allowing customers to increase the value of their solar energy system plus energy storage system. The energy storage system charges during the day, making the energy it stores available to the home or business when needed. It also features software that can customize power usage for the individual customer, providing backup power, optimizing solar energy consumption versus grid consumption or preventing export to the grid as appropriate. The software is tailored based on utility regulation, economic indicators and grid conditions. The combination of energy control, increased energy resilience and independence from the grid is strong incentive for customers to adopt solar and energy storage. Attachment rates for energy storage systems have trended higher while the price to acquire has trended lower making the addition of energy storage systems a potential area of growth and profitability for us. As energy storage systems and their related software features become more advanced, we expect to see increased adoption of energy storage systems.
Climate Change Action. As a result of increasing global awareness of and aversion to climate change impacts, we believe the renewable energy market in which we operate, and investment in climate solutions more broadly, will continue to grow as the impact of climate change increases. This trend, along with increasing commitments to reduce carbon emissions, is expected to result in increased demand for our products and services. Under the current presidential administration, the focus on cleaner energy sources and technology to decarbonize the U.S. economy continues to accelerate. The federal government's administration under President Joe Biden ("Biden administration") has taken immediate steps that we believe signify support for cleaner energy sources, including, but not limited to, rejoining the Paris Climate Accord, re-establishing a social price on carbon used in cost/benefit analysis for policy making and announcing a commitment to transition the U.S. economy to a net-zero carbon economy by 2050. We expect the Biden administration, combined with a closely divided Congress, to continue to take actions that are supportive of the renewable energy industry, such as incentivizing clean energy sources and supporting new investment in areas like renewables. There is no guarantee a new administration or a change in the makeup of Congress would continue to take supportive actions, and such a changed administration may make decisions and/or pass laws that are detrimental to our industry.
Government Regulations, Policies and Incentives. Our growth and operations strategy depends in significant part on government policies and incentives that promote and support solar energy and enhance the economic viability of distributed residential solar. These policies and incentives come in various forms, including net metering, eligibility for accelerated depreciation such as the modified accelerated cost recovery system, SRECs, tax abatements, rebates, renewable targets, DOE loan guarantee programs, incentive programs and tax credits, particularly the Section 48(a) ITC and the Section 25D Credit. The IRA expanded and extended the tax credits available to solar energy projects in an effort to achieve the Biden administration's non-binding target of net-zero emissions by 2050, which we expect will increase demand for our services. The Section 25D Credit allows qualifying homeowners to deduct up to 30% of the cost of installing residential solar energy systems from their U.S.
federal income taxes, thereby returning a significant portion of the purchase price of the residential solar energy system to homeowners that may participate in our solar loan programs. Under the terms of the current extension, the residential tax credit will remain at 30% through the end of 2032, reduce to 26% for 2033, reduce to 22% for 2034, and further reduce to 0% after the end of 2034 for residential solar energy systems, unless it is extended before that time. The IRA also extended the investment tax credit for solar energy projects through at least 2033 and, depending on the location of a particular project, its size, its ability to satisfy certain labor and domestic content requirements and the category of consumers it serves, the investment tax credit percentage can range between 6% and 70%. Policies requiring solar on new homes or new roofs, such as those enacted in California and New York City, also support the growth of distributed solar. The sale of SRECs has constituted a significant portion of our revenue historically. A change in the value of net metering credits or SRECs or changes in other policies or a loss or reduction in such incentives could decrease the attractiveness of distributed residential solar to us, our dealers and our customers in applicable markets, which could reduce our customer acquisition opportunities. Such a lossor reduction could also reduce our willingness to pursue certain customer acquisitions due to decreased revenue or income under our solar servicecustomer agreements. Additionally, such a loss or reduction may also impact the terms of and availability of third-party financing. If any of these government regulations, policies or incentives are adversely amended, delayed, eliminated, reduced, retroactively changed or not extended beyond their current expiration dates or there is a negative impact from the recent federal law changes or proposals, our operating results and the demand for, and the economics of, distributed residential solar energy may decline, which could harm our business.
Components of Results of Operations
Revenue. We recognize revenue from contracts with customers as we satisfy our performance obligations at a transaction price reflecting an amount of consideration based upon an estimated rate of return.return, net of cash incentives. We express this rate of return as the solar rate per kWh in the customer contract. The amount of revenue we recognize does not equal customer cash payments because we satisfy performance obligations ahead of cash receipt or evenly as we provide continuous access on a stand-ready basis to the solar energy system. We reflect the differences between revenue recognition and cash payments received in accounts receivable, other assets or deferred revenue, as appropriate.
PPAs. We have determined solar service agreements under which customers purchase electricity from us should be accounted for as revenue from contracts with customers. We recognize revenue based upon the amount of electricity delivered as determined by remote monitoring equipment at solar rates specified under the contracts. The PPAs generally have a term of 20 or 25 years with an opportunity for customers to renew for up to an additional 10 years, via two five-year or one 10-year renewal options.
Lease Agreements. We are the lessor under lease agreements for solar energy systems and energy storage systems, which we account for as revenue from contracts with customers. We recognize revenue on a straight-line basis over the contract term as we satisfy our obligation to provide continuous access to the solar energy system. The lease agreements generally have a term of 20 or 25 years with an opportunity for customers to renew for up to an additional 10 years, via two five-year or one 10-year renewal options.
We provide customers under our lease agreements a performance guarantee that each solar energy system will achieve a certain specified minimum solar energy production output. The specified minimum solar energy production output may not be achieved due to natural fluctuations in the weather or equipment failures from exposure and wear and tear outside of our control, among other factors. We determine the amount of guaranteed output based on a number of different factors, including (a) the specific site information relatingrelated to the tilt of the panels, azimuth (a horizontal angle measured clockwise in degrees from a reference direction) of the panels, size of the solar energy system and shading on site; (b) the calculated amount of available irradiance (amount of energy for a given flat surface facing a specific direction) based on historical average weather data and (c) the calculated amount of energy output of the solar energy system.
If the solar energy system does not produce the guaranteed production amount, we are required to provide a bill credit or refund a portion of the previously remitted customer payments, where the bill credit or repayment is calculated as the product of (a) the shortfall production amount and (b) the dollar amount (guaranteed rate) per kWh that is fixed throughout the term of the contract. These bill credits or remittances of a customer's payments, if needed, are payable in January following the end of the first three years of the solar energy system's placed in service date and then every annual period thereafter. See Note 16,17, Commitments and Contingencies, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Loan AgreementsInventory Sales. Inventory sales revenue represents revenue from the direct sale of inventory to our dealers or other parties. We recognize payments receivedthe related revenue under ASC 606 upon shipment or upon sale when a bill and hold agreement is in place.
Service Revenue. Service revenue includes sales of service plans and repair services. Service plans are available to customers whose solar energy system was not originally sold by Sunnova. We recognize revenue from customers under loan agreements (a) as interest income, toservice plan contracts on a straight-line basis over the extent attributable to earned interest onlife of the contract, that financedwhich is typically 10 years. We recognize revenue from repair services in the customer's purchaseperiod in which the service was performed.
Direct Sales Revenue. Direct sales revenue includes revenue from the direct sale of the solar energy system; (b) as a reduction of a note receivable on the balance sheet,systems and energy storage systems to the extent attributable to a return of principal (whether scheduled or prepaid) on the contract that financed the customer's purchase of the solar energy system; and (c) as revenue, to the extent attributable to payments for operations and maintenance servicescustomers with financing provided by us. Similar to our lease agreements, we provide customers under our loan agreements a performance guarantee that eachWe recognize revenue from the direct sale of solar energy system will achieve a certain specified minimum solarsystems and energy production output,storage systems in the period in which is a significant proportion of its expected output.the systems are placed in service.
SRECs. Each SREC represents the environmental benefit of one megawatt hour (1,000 kWh) generated by a solar energy system. We sell SRECs to utilities and other third parties who use the SRECs to meet renewable portfolio standards and can do so with or withoutseparate from the actual electricity associated withgenerated by the renewable-based generation source. We account for SRECs generated from solar energy systems owned by us, as opposed to those owned by our customers, as governmental incentives with no costs incurred to obtain them and do not consider those SRECs output of the underlying solar energy systems. We classify SRECs as inventory held until sold and delivered to third parties. We enter into economic hedges with major financial institutions related to expected production of SRECs through forward contracts to partially mitigate the risk of decreases in SREC market rates. While these fixed price forward contracts serve as an economic hedge against spot price fluctuations for the SRECs, the contracts do not qualify for hedge accounting and are not designated as cash flow hedges or fair value hedges. The contracts require us to physically deliver the SRECs upon settlement. We recognize the related revenue upon the transfer of the SRECs to the counterparty. The costs related to the sales of SRECs are generally limited to fees for brokered transactions. Accordingly, the sale of SRECs in a period generally has a favorable impact on our operating results for that period. In certain circumstances we are required to purchase SRECs on the open market to fulfill minimum delivery requirements under our forward contracts.
Cash Sales. Cash sales revenue represents revenue from a customer's purchase of a solar energy system from us typically when purchasing a new home. We recognize the related revenue upon verification of the home closing.
Loan Agreements. We recognize payments received from customers under loan agreements (a) as interest income, to the extent attributable to earned interest on the contract that financed the customer's purchase; (b) as a reduction of a note receivable on the balance sheet, to the extent attributable to a return of principal (whether scheduled or prepaid) on the contract that financed the customer's purchase; and (c) as revenue, to the extent attributable to payments for operations and maintenance services provided by us. Similar to our lease agreements, we provide customers under our loan agreements a performance guarantee that each solar energy system will achieve a certain specified minimum solar energy production output, which is a significant proportion of its expected output.
Other Revenue. Other revenue includes certain state and utility incentives, revenue from the direct sale of energy storage systems to customers and sales of service plans.incentives. We recognize revenue from state and utility incentives in the periods in which they are earned. We recognize revenue from the direct sale of energy storage systems in the period in which the storage components are placed in service. Service plans are available to customers whose solar energy system was not originally sold by Sunnova. We recognize revenue from service plan contracts over the life of the contract, which is typically five years or ten years.
Cost of Revenue—Depreciation.Revenue—Depreciation. Cost of revenue—revenue—depreciation represents depreciation on solar energy systems under lease agreements and PPAs that have been placed in service.
Cost of RevenueRevenue—Inventory Sales. —OCost of revenue—inventory sales represents costs related to the procurement and direct sale of inventory to our dealers or other parties, including shipping and handling costs.
ther.
Cost of Revenue—Other. Cost of revenue—revenue—other represents costs related to cash sales, costs to purchase SRECs on the open market, SREC broker fees, payroll and related costs for Sunnova personnel who install solar energy systems and energy storage systems and other items deemed to be a cost of providing the service of selling power to customers or potential customers, such as certain costs to service loan agreements, costs for filing under the Uniform Commercial Code to maintain title, title searches, credit checks on potential customers at the time of initial contract and other similar costs, typically directly related to the volume of customers and potential customers.
Operations and Maintenance Expense. Operations and maintenance expense represents costs paid tofrom third parties for maintaining and servicing the solar energy systems, property insurance, property taxes and property taxes.warranties. When services for maintaining and servicing solar energy systems are provided by Sunnova personnel rather than third parties, those amounts are included in payroll costs classified within general and administrative expense. During the years ended December 31, 2023, 2022 and 2021, we incurred $49.9 million, $21.2 million and $14.3 million, respectively, of Sunnova personnel costs related to maintaining and servicing solar energy systems, which are classified in general and administrative expense. In addition, operations and maintenance expense includes write downs and write-offs related to inventory adjustments, gains and losses on disposals and other impairments and impairments and costs due to natural disaster losses net of insurance proceeds recovered
under our business interruption and property damage insurance coverage for natural disasters, write downs and write-offs related to inventory adjustments, losses on disposals and other impairments.
General and Administrative Expense. General and administrative expense represents costs for our employees, such as salaries, bonuses, benefits and all other employee-related costs, including stock-based compensation, professional fees related to legal, accounting, human resources, finance and training, information technology and software services, marketing and communications, acquisition costs, travel and rent and other office-related expenses. General and administrative expense also includes depreciation on assets not classified as solar energy systems, including information technology software and development projects, vehicles, furniture, fixtures, computer equipment and leasehold improvements and accretion expense on AROs. We capitalize a portion of general and administrative costs, such as payroll-related costs, that is related to employees who are directly involved in the design, construction, installation and testing of the solar energy systems but not directly associated with a particular asset. We also capitalize a portion of general and administrative costs, such as payroll-related costs, that is related to employees who are directly associated with and devote time to internal information technology software and development projects, to the extent of the time spent directly on the application and development stage of such software project.
Goodwill Impairment. Goodwill impairment represents impairment charges as a result of the carrying amount being greater than the fair value.
Other Operating Income. Other operating income primarily represents changes in the fair values of certain financial instruments related to our investments in solar receivables and contingent consideration related to the installation and microgrid earnouts.
Interest Expense, Net. Interest expense, net represents interest on our borrowings under our various debt facilities, and amortization of debt discounts and deferred financing costs.
Interest Expense, Net—Affiliates. Interest expense, net—affiliates represents interest expensecosts and realized and unrealized gains and losses on our debt facilities, including the amortization of the debt discounts, held by our affiliates.derivative instruments.
Interest Income. Interest income represents interest income from the notes receivable under our loan program and income on short term investments with financial institutions.
Loss on Extinguishment of Long-Term Debt, Net. Loss on extinguishment of long-term debt, net resulted from the GAAP treatment of conversions of our 9.75% convertible senior notes into shares of our common stock and represents the difference between the net carrying value of the 9.75% convertible senior notes, including accrued and unpaid interest to the date of each conversion, and the fair value of the common stock issued for the converted notes. See Note 13, Stockholders' Equity, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Loss on Extinguishment of Long-Term Debt, Net—Affiliates. Loss on extinguishment of long-term debt, net—affiliates resulted from the GAAP treatment of the amendment to the senior secured notes in April 2019 and represents the difference between the net carrying value of the senior secured notes prior to the amendment and the fair value of the notes after the amendment.
Other (Income) Expense. Other (income) expense primarily represents changes in the fair value of certain financial instruments.instruments related to non-operating assets.
Income Tax (Benefit) Expense. We account for income taxes under Accounting Standards Codification 740, Income Taxes. As such, we determine deferred tax assets and liabilities based on temporary differences resulting from the different treatment of items for tax and financial reporting purposes. We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to reverse. Additionally, we must assess the likelihood that deferred tax assets will be recovered as deductions from future taxable income. We have a full valuation allowance on our deferred tax assets because we believe it is more likely than not that our deferred tax assets will not be realized. We evaluate the recoverability of our deferred tax assets on a quarterly basis. Currently, for U.S.The income tax purposes, there is no provision or benefit for income taxes as we have incurred losses to date. The income tax(benefit) expense includes the effects of taxes paidincurred in U.S. territories where the tax code for the respective territory may have separate tax reporting requirements.requirements, as applicable. We do not, however, report financial information on a jurisdictional basis.account for ITCs using the flow-through method. For tax credit purchase and sale agreements entered into by certain of our consolidated tax equity partnerships, we record our share of the sale as income tax benefit and the tax equity investor's share as an increase to redeemable noncontrolling interest or noncontrolling interest.
Net Income (Loss) Attributable to Redeemable Noncontrolling Interests and Noncontrolling Interests. Net income (loss) attributable to redeemable noncontrolling interests and noncontrolling interests represents third-partytax equity interests in the net income or loss of certain consolidated subsidiaries based on hypothetical liquidation at book value.
Results of Operations—Year Ended December 31, 20202023 Compared to Year Ended December 31, 20192022
The following table sets forth our consolidated statements of operations data for the periods indicated.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2020 | | 2019 | | Change |
| (in thousands) |
Revenue | $ | 160,820 | | | $ | 131,556 | | | $ | 29,264 | |
| | | | | |
Operating expense: | | | | | |
Cost of revenue—depreciation | 58,431 | | | 43,536 | | | 14,895 | |
Cost of revenue—other | 6,747 | | | 3,877 | | | 2,870 | |
Operations and maintenance | 16,313 | | | 8,588 | | | 7,725 | |
General and administrative | 115,148 | | | 97,986 | | | 17,162 | |
Other operating income | (41) | | | (161) | | | 120 | |
Total operating expense, net | 196,598 | | | 153,826 | | | 42,772 | |
| | | | | |
Operating loss | (35,778) | | | (22,270) | | | (13,508) | |
| | | | | |
Interest expense, net | 154,580 | | | 108,024 | | | 46,556 | |
Interest expense, net—affiliates | — | | | 4,098 | | | (4,098) | |
Interest income | (23,741) | | | (12,483) | | | (11,258) | |
Loss on extinguishment of long-term debt, net | 142,772 | | | — | | | 142,772 | |
Loss on extinguishment of long-term debt, net—affiliates | — | | | 10,645 | | | (10,645) | |
Other (income) expense | (1,752) | | | 880 | | | (2,632) | |
Loss before income tax | (307,637) | | | (133,434) | | | (174,203) | |
| | | | | |
Income tax expense | 181 | | | — | | | 181 | |
Net loss | (307,818) | | | (133,434) | | | (174,384) | |
Net income (loss) attributable to redeemable noncontrolling interests and noncontrolling interests | (55,534) | | | 10,917 | | | (66,451) | |
Net loss attributable to stockholders | $ | (252,284) | | | $ | (144,351) | | | $ | (107,933) | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2023 | | 2022 | | Change |
| (in thousands) |
Revenue | $ | 720,653 | | | $ | 557,690 | | | $ | 162,963 | |
| | | | | |
Operating expense: | | | | | |
Cost of revenue—depreciation | 130,261 | | | 96,280 | | | 33,981 | |
Cost of revenue—inventory sales | 176,371 | | | 178,310 | | | (1,939) | |
Cost of revenue—other | 120,865 | | | 52,487 | | | 68,378 | |
Operations and maintenance | 96,997 | | | 36,679 | | | 60,318 | |
General and administrative | 430,422 | | | 302,004 | | | 128,418 | |
Goodwill impairment | 13,150 | | | — | | | 13,150 | |
Other operating income | (3,978) | | | (26,566) | | | 22,588 | |
Total operating expense, net | 964,088 | | | 639,194 | | | 324,894 | |
| | | | | |
Operating loss | (243,435) | | | (81,504) | | | (161,931) | |
| | | | | |
Interest expense, net | 371,937 | | | 107,775 | | | 264,162 | |
| | | | | |
Interest income | (115,872) | | | (59,799) | | | (56,073) | |
| | | | | |
| | | | | |
Other (income) expense | 3,949 | | | (3,090) | | | 7,039 | |
Loss before income tax | (503,449) | | | (126,390) | | | (377,059) | |
| | | | | |
Income tax (benefit) expense | (1,023) | | | 3,886 | | | (4,909) | |
Net loss | (502,426) | | | (130,276) | | | (372,150) | |
Net income (loss) attributable to redeemable noncontrolling interests and noncontrolling interests | (84,465) | | | 31,366 | | | (115,831) | |
Net loss attributable to stockholders | $ | (417,961) | | | $ | (161,642) | | | $ | (256,319) | |
Revenue
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2020 | | 2019 | | Change |
| (in thousands) |
PPA revenue | $ | 65,760 | | | $ | 48,041 | | | $ | 17,719 | |
Lease revenue | 51,650 | | | 40,191 | | | 11,459 | |
SREC revenue | 35,747 | | | 38,453 | | | (2,706) | |
Loan revenue | 3,032 | | | 1,645 | | | 1,387 | |
Other revenue | 4,631 | | | 3,226 | | | 1,405 | |
Total | $ | 160,820 | | | $ | 131,556 | | | $ | 29,264 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2023 | | 2022 | | Change |
| (in thousands) |
PPA revenue | $ | 123,646 | | | $ | 104,563 | | | $ | 19,083 | |
Lease revenue | 147,788 | | | 100,070 | | | 47,718 | |
Inventory sales revenue | 185,855 | | | 195,979 | | | (10,124) | |
Service revenue | 16,197 | | | 4,178 | | | 12,019 | |
Direct sales revenue | 60,590 | | | 8,484 | | | 52,106 | |
SREC revenue | 50,375 | | | 48,698 | | | 1,677 | |
Cash sales revenue | 96,072 | | | 72,425 | | | 23,647 | |
Loan revenue | 34,716 | | | 18,601 | | | 16,115 | |
Other revenue | 5,414 | | | 4,692 | | | 722 | |
Total | $ | 720,653 | | | $ | 557,690 | | | $ | 162,963 | |
Revenue increased by $29.3$163.0 million in the year ended December 31, 20202023 compared to the year ended December 31, 20192022 primarily as a result ofdue to an increased number of solar energy systems in service. The weighted average number of customerssystems (excluding customerssystems with loan agreements)agreements, service-only agreements and cash sales) increased from approximately 60,100128,300 for the year ended December 31, 20192022 to approximately 77,900168,500 for the year ended December 31, 2020.2023. Excluding SREC revenue, and revenue under our loan agreements, inventory sales revenue, cash sales revenue, direct sales revenue and service revenue, on a weighted average number of customerssystems basis, revenue remained relatively flat at $1,522$1,632 per customersystem for the
year endedDecember 31, 20192022 compared to $1,567$1,643 per customersystem for the same period in 2020 (3%2023 (1% increase). SRECInventory sales revenue decreased by $2.7$10.1 million in the year ended December 31, 20202023 compared to the year ended December 31, 2019 primarily2022 due to $3.0 million related to certain forward sales of SRECs recognized in December 2019. This decrease was partially offset by an increase in the number of solar energy systems in service, which resulted in additional SREC production. The fluctuations in SRECour dealers having sufficient inventory on hand from prior purchases. Service revenue from period to period are also affected by the total number of solar energy systems, weather seasonality and hedge and spot prices associated with the timing of the sale of SRECs. On a weighted average number of customers basis, revenues under our loan agreements increased from $196 per customer for the year endedDecember 31, 2019 to $214 per customer for the same period in 2020 (9% increase) primarily due to market changes and an increase in system sizes and battery attachment rates resulting in larger customer loan balances added during 2020.
Cost of Revenue—Depreciation
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2020 | | 2019 | | Change |
| (in thousands) |
Cost of revenue—depreciation | $ | 58,431 | | | $ | 43,536 | | | $ | 14,895 | |
Cost of revenue—depreciation increased by $14.9$12.0 million in the year ended December 31, 20202023 compared to the year ended December 31, 2019.2022 primarily due to an increase in repair service revenue. Direct sales revenue increased by $52.1 million in the year ended December 31, 2023 compared to the year ended December 31, 2022 due to an increased focus on direct sales of additional services to existing customers. On a weighted average number of systems basis, revenues under our loan agreements (excluding accessory loans, which do not generate revenue) increased from $345 per system for the year ended December 31, 2022 to $405 per system for the same period in 2023 (17% increase) primarily due to an increase in the fees charged for operations and maintenance services.
Cost of Revenue—Depreciation
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2023 | | 2022 | | Change |
| (in thousands) |
Cost of revenue—depreciation | $ | 130,261 | | | $ | 96,280 | | | $ | 33,981 | |
Cost of revenue—depreciation increased by $34.0 million in the year ended December 31, 2023 compared to the year ended December 31, 2022. This increase was primarily due to an increase in the weighted average number of customerssystems (excluding customerssystems with loan agreements)agreements, service-only agreements and cash sales) from approximately 60,100128,300 for the year ended December 31, 20192022 to approximately 77,900168,500 for the year ended December 31, 2020.2023. On a weighted average number of customerssystems basis, cost of revenue—revenue—depreciation remained relatively flat at $724$750 per customersystem for the year endedDecember 31, 20192022 compared to $750$773 per customersystem for the same period in 2020 (4%2023 (3% increase).
Cost of Revenue—Inventory Sales
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2023 | | 2022 | | Change |
| (in thousands) |
Cost of revenue—inventory sales | $ | 176,371 | | | $ | 178,310 | | | $ | (1,939) | |
Cost of revenue—inventory sales decreased by $1.9 million in the year ended December 31, 2023 compared to the year ended December 31, 2022. This decrease was due to our dealers having sufficient inventory on hand from prior purchases.
Cost of Revenue—Other
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2020 | | 2019 | | Change |
| (in thousands) |
Cost of revenue—other | $ | 6,747 | | | $ | 3,877 | | | $ | 2,870 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2023 | | 2022 | | Change |
| (in thousands) |
Cost of revenue—other | $ | 120,865 | | | $ | 52,487 | | | $ | 68,378 | |
Cost of revenue—revenue—other increased by $2.9$68.4 million in the year ended December 31, 20202023 compared to the year ended December 31, 2019.2022. This increase was primarily due to the purchase of SRECs of $1.9 million to fulfill minimum delivery requirements under our forward contracts and an increase in feescosts related to filings required under the Uniform Commercial Codedirect sales revenue of $41.8 million, costs related to maintain title duecash sales revenue of $13.9 million and costs related to higher volumes.services of $9.1 million.
Operations and Maintenance Expense
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2020 | | 2019 | | Change |
| (in thousands) |
Operations and maintenance | $ | 16,313 | | | $ | 8,588 | | | $ | 7,725 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2023 | | 2022 | | Change |
| (in thousands) |
Operations and maintenance | $ | 96,997 | | | $ | 36,679 | | | $ | 60,318 | |
Operations and maintenance expense increased by $7.7$60.3 million in the year endedDecember 31, 2020 compared to the year ended December 31, 2019 2023 compared to the year ended December 31, 2022 primarily due to higher impairments and losslosses on disposals, meter replacementtruck roll costs and property insurance and property tax.costs. Operations and maintenance expense per customer,weighted average system, excluding net natural disaster losses and non-cash inventory impairment,and other impairments, increased from $142$178 per customersystem for the year ended December 31, 2019 2022 to $184$251 per customersystem for the year endedDecember 31, 2020.2023 primarily due to higher truck roll costs and property insurance costs.
General and Administrative Expense
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2020 | | 2019 | | Change |
| (in thousands) |
General and administrative | $ | 115,148 | | | $ | 97,986 | | | $ | 17,162 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2023 | | 2022 | | Change |
| (in thousands) |
General and administrative | $ | 430,422 | | | $ | 302,004 | | | $ | 128,418 | |
General and administrative expense increased by $17.2$128.4 million in the year ended December 31, 20202023 compared to the year ended December 31, 20192022 primarily due to increases ofin (a) $8.0 million of provision for current expected credit losses related to the adoption of the new accounting standard in 2020, (b) $4.9 million of payroll and employee related expenses primarily due to the hiring of personnel to support growth (c) $3.5of $74.3 million, of insurance expenses, (d) $3.3 million of financing deal costs and (e) $2.8 million of(b) consultants, contractors and professional fees. These increases were partially offsetfees of $11.2 million, (c) depreciation expense of $11.2 million, (d) information technology expense of $10.7 million, (e) legal expense of $7.2 million, (f) marketing expense of $5.9 million and (g) fees of $2.1 million.
Goodwill Impairment
Goodwill impairment increased by a decrease$13.2 million in the year ended December 31, 2023 compared to the year ended December 31, 2022 due to the write off of $3.8$13.2 million of IPO costs.goodwill in 2023 as the carrying amount exceeded the fair value.
Other Operating Income
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2023 | | 2022 | | Change |
| (in thousands) |
Other operating income | $ | (3,978) | | | $ | (26,566) | | | $ | 22,588 | |
Other operating income decreased by $22.6 million in the year ended December 31, 2023 compared to the year ended December 31, 2022 primarily due to changes in the fair value of certain financial instruments and contingent consideration.
Interest Expense, Net
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2020 | | 2019 | | Change |
| (in thousands) |
Interest expense, net | $ | 154,580 | | | $ | 108,024 | | | $ | 46,556 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2023 | | 2022 | | Change |
| (in thousands) |
Interest expense, net | $ | 371,937 | | | $ | 107,775 | | | $ | 264,162 | |
Interest expense, net increased by $46.6$264.2 million in the year ended December 31, 20202023 compared to the year ended December 31, 2019.2022. This increase was primarily due to increasesan increase inrealized loss on interest rate swaps of$38.1 million due to the termination of certain debt facilities in 2020, interest expense of $28.9$160.8 million primarily due to higher levels of debt outstanding in 2023 compared to 2022 and an increase in the principal debt balance after entering into new financing arrangements anddebt discount amortizationunrealized losses on derivatives of $12.7$86.8 million,. These increases were partially offset by an increase in unrealized gainrealized gains on interest rate swapsderivatives of $33.0$5.4 million.
Interest Expense, Net—Affiliates
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2020 | | 2019 | | Change |
| (in thousands) |
Interest expense, net—affiliates | $ | — | | | $ | 4,098 | | | $ | (4,098) | |
Income
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2023 | | 2022 | | Change |
| (in thousands) |
Interest income | $ | 115,872 | | | $ | 59,799 | | | $ | 56,073 | |
Interest expense, net—affiliates decreasedincome increased by $4.1$56.1 million in the year ended December 31, 20202023 compared to the year ended December 31, 2019 primarily due to a decrease in interest expense due to the redemption of the senior secured notes and conversion of the convertible notes in July 2019.
Interest Income
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2020 | | 2019 | | Change |
| (in thousands) |
Interest income | $ | 23,741 | | | $ | 12,483 | | | $ | 11,258 | |
Interest income increased by $11.3 million in the year ended December 31, 2020 compared to the year ended December 31, 2019.2022. This increase was primarily due to an increase in the weighted average number of customerssystems with loan agreements from approximately 8,40056,500 for the year ended December 31, 20192022 to approximately 14,200120,400 for the year ended December 31, 2020.2023. On a weighted average number of customerssystems basis, loan interest income increaseddecreased from $1,380$999 per customersystem for the year ended December 31, 20192022 to $1,637$821 per customersystem for the year ended December 31, 20202023 primarily due to higher average loan storagean increase in the volume of accessory loans, which have smaller principal balances.
Loss on Extinguishment of Long-Term Debt, NetIncome Tax (Benefit) Expense
Loss on extinguishment of long-term debt, net increasedIncome tax (benefit) expense changed by $142.8$4.9 million in the year ended December 31, 20202023 compared to the year ended December 31, 2019 due to the conversion of approximately $150.8 million aggregate principal amount, including accrued and unpaid interest to the date of each conversion, of our 9.75% convertible senior notes that met the criteria for extinguishment accounting under GAAP.
Loss on Extinguishment of Long-Term Debt, Net—Affiliates
Loss on extinguishment of long-term debt, net—affiliates decreased by $10.6 million in the year ended December 31, 2020 compared to the year ended December 31, 2019 due to the amendment of the senior secured notes in April 2019 that met the criteria for extinguishment accounting under GAAP.
Income Tax Expense
Income tax expense increased by $0.2 million in the year ended December 31, 2020 compared to the year ended December 31, 20192022 primarily due to ITC sales that resulted in an income tax benefit offset by an increase in taxable income related to tax gains recognized on the effectssale of taxes incurredsolar energy systems and energy storage systems located in jurisdictions where the tax code for the respective jurisdiction may have separate tax-reporting requirements.jurisdictions.
Net Income (Loss) Attributable to Redeemable Noncontrolling Interests and Noncontrolling Interests
Net income (loss) attributable to redeemable noncontrolling interests and noncontrolling interests changed by $66.5$115.8 million in the year ended December 31, 20202023 compared to the year ended December 31, 20192022 primarily due to lossesan increase in loss attributable to noncontrolling interests from tax equity funds added in late 20192021, 2022 and in 2020.2023.
Results of Operations—Year Ended December 31, 20192022 Compared to Year Ended December 31, 20182021
See "Management's Discussion and Analysis of Financial Condition and Results of Operations—Results of Operations—Year Ended December 31, 20192022 Compared to Year Ended December 31, 20182021" in our Annual Report on Form 10-K filed with the SEC on February 25, 2020.23, 2023.
Liquidity and Capital Resources
As of December 31, 2020,2023, we had total cash of $377.9$494.4 million, of which $209.9$212.8 million was unrestricted, and $402.4$733.0 million of available borrowing capacity under our various financing arrangements.arrangements. We seek to maintain diversified and cost-effective funding sources to finance and maintain our operations, fund capital expenditures, including customer acquisitions, and satisfy obligations arising from our indebtedness.indebtedness, which may include reducing debt prior to scheduled maturities through debt repurchases, either in the open market or in privately negotiated transactions, through debt redemptions or tender offers, or through repayments of bank borrowings. For a discussion of cash requirements from contractual and other obligations, see Note 17, Commitments and Contingencies, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Historically, our primary sources of liquidity have included non-recourse and recourse debt, investor asset-backed and loan-backed securitizations and cash generated from operations. Our business model requires substantial outside financing arrangements to grow the business and facilitate the deployment of additional solar energy systems. We will seek to raise additional required capital, including from new and existing tax equity investors, additional borrowings, securitizations and other potential debt and equity financing sources. We believe our cash and financing arrangements, as further described below, will be sufficient to meet our anticipated cash needs for at least the next twelve months. As of December 31, 2020,2023, we were in compliance with all debt covenants under our financing arrangements.
Additionally, from time-to-time we evaluateAs of December 31, 2023, our liquidity and financial condition had not been materially affected by the adverse developments affecting financial institutions and companies in the financial services industry, including Silicon Valley Bank and Credit Suisse. For a discussion of the potential acquisition of solar energy systems, energy storage systems and related businesses and joint ventures. As a partimpact of these efforts, we may engageadverse developments, see Item 1A. Risk Factors included elsewhere in discussions with potential sellers or other parties regarding the possible purchase of or investment in assets and operations that are strategic and complementary to our existing operations. In addition, we have in the past evaluated and pursued, and may in the future evaluate and pursue, the acquisition of or investment in other energy-related assets that have characteristics and opportunities similar to our existing business lines and enable us to leverage our assets, knowledge and skill sets. Such efforts may involve participation by us in processes that have been made public and involve a number of potential buyers or investors, commonly referred to as "auction" processes, as well as situations in which we believe we are the only party or one of a limited number of parties who are in negotiations with the potential seller or other party. These acquisition and investment efforts may involve assets which, if acquired or constructed, could have a material effectthis Annual Report on our financial condition and results of operations.Form 10-K.
We expect our solar energy systems in service to generate a positive return rate over the customer agreement, typically 10, 15 or 25 years. Typically, once residential solar energy systems commence operations, they do not require significant additional capital expenditures to maintain operating performance. However, in order to grow, we are currently dependent on financing from outside parties. We believe we will have sufficient cash,investment fund commitments and securitization commitments, as described below, together with cash flows from operations to meet our working capital, debt service obligations, contingencies and anticipated required capital expenditures, including customer acquisitions, for at least the next 12 months. However, we are subject to business and operational risks that could adversely affect our ability to raise additional financing. If financing is not available to us on acceptable terms if and when needed, we may be unable to finance installation of our new customers' solar energy systems in a manner consistent with our past performance, our cost of capital could increase, or we may be required to significantly reduce the scope of our operations, any of which would have a material adverse effect on our business, financial condition, results of operations and prospects. In addition, our tax equity funds and debt instruments impose restrictions on our ability to draw on financing commitments. If we are unable to satisfy such conditions, we may incur
penalties for non-performance under certain tax equity funds, experience installation delays, or be unable to make installations in accordance with our plans or at all. Any of these factors could also impact customer satisfaction, our business, operating results, prospects and financial condition.
Financing Arrangements
The following is a description of our various financing arrangements. For a complete description of the facilities in place as of December 31, 20202023 see Note 8,9, Long-Term Debt, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.10-K.
Tax Equity Fund Commitments
As of December 31, 2020,2023, we had undrawn committed capital of approximately $135.8$439.4 million under our tax equity funds, which may only be used to purchase and install solar energy systems. We intend to establish new tax equity funds in the future depending on their attractiveness, including the availability and size of Section 48(a) ITCs and related safe harbors,Section 48E ITCs, and on investor demand for such funding. The terms of the tax equity funds' operating agreements contain allocations of taxable income (loss) and Section 48(a) ITCs that vary over time and adjust between the members after either the tax equity investor receives its contractual rate of return or after a specified date. The following table summarizes our tax equity commitments as of December 31, 2020:2023:
| | | | | | | | | | | | |
| | | | Date Class A Member Admitted | | Class A Member Capital Commitment |
| | | | | | (in thousands) |
| | | | March 2017 | | $ | 97,500 | |
| | | | December 2017 | | $ | 45,000 | |
| | | | December 2017 | | $ | 57,000 | |
| | | | January 2019 | | $ | 50,000 | |
| | | | August 2019 | | $ | 75,000 | |
| | | | December 2019 | | $ | 50,000 | |
| | | | February 2020 | | $ | 75,000 | |
| | | | May 2020 | | $ | 155,000 | |
| | | | July 2020 | | $ | 10,000 | |
| | | | September 2020 | | $ | 75,000 | |
| | | | November 2020 | | $ | 100,000 | |
| | | | April 2021 | | $ | 50,000 | |
| | | | April 2021 | | $ | 25,000 | |
| | | | May 2021 | | $ | 150,000 | |
| | | | July 2021 | | $ | 150,152 | |
| | | | October 2021 | | $ | 11,634 | |
| | | | December 2021 | | $ | 57,676 | |
| | | | February 2022 | | $ | 150,000 | |
| | | | May 2022 | | $ | 17,452 | |
| | | | September 2022 | | $ | 75,000 | |
| | | | October 2022 | | $ | 30,000 | |
| | | | November 2022 | | $ | 51,250 | |
| | | | December 2022 | | $ | 59,000 | |
| | | | December 2022 | | $ | 125,000 | |
| | | | December 2022 | | $ | 250,000 | |
| | | | May 2023 | | $ | 51,000 | |
| | | | August 2023 | | $ | 103,950 | |
| | | | September 2023 | | $ | 134,937 | |
| | | | December 2023 | | $ | 59,000 | |
| | | | December 2023 | | $ | 300,000 | |
| | | | December 2023 | | $ | 103,950 | |
| | | | | | |
Additionally, in connection with and subject to closing the Acquisition, Lennar Corporation has committed to contribute an aggregate $200.0 million to four Sunnova tax equity funds, each formed annually during a period
For additional information regarding our tax equity fund commitments, see Note 12,13, Redeemable Noncontrolling Interests and Noncontrolling Interests, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Warehouse and Other Debt Financings
We from time to time enter into warehouse credit facilities as a source of funding. Under the warehouse credit facilities, revolving or term financing is provided to special purpose entities, which are typically our wholly-owned subsidiaries, and secured, directly or indirectly, by qualifying solar energy systems, (including, if applicable, energy storage systems)systems and/or other sustainable home products and the related solar servicecustomer agreements. The cash flows generated by these solar servicecustomer agreements are used to cover required debt service payments under the related credit facility and satisfy the expenses and reserve requirements of the special purpose entities. The warehouse credit facilities allow for the pooling and transfer of eligible solar energy systems, energy storage systems and/or other sustainable home products and related solar servicecustomer agreements, as applicable, on a non-recourse basis to the subsidiary or us, subject to certain limited exceptions. In connection with these warehouse credit facilities, certain of our affiliates receive a fee for managing and servicing the solar energy systems, energy storage systems and/or other sustainable home products, as applicable, pursuant to management and servicing agreements. The special purpose entities are also typically required to maintain reserve accounts, including, among other reserve accounts that may be required, a liquidity reserve account and a reserve account for equipment replacements, each of which are funded from initial deposits or cash flows to the levels specified therein.
The warehouse credit facility structures include certain features designed to protect lenders. One of the common primary
features relates to certain events, such as the insufficiency of cash flows in the collateral pool of assets to meet contractual requirements, the occurrence of which triggers an early repayment of the loans and limits the relevant borrower's ability to obtain additional advances or distribute funds to us. We refer to this as an "amortization event", which may be based on, among other things, a debt service coverage ratio falling or remaining below certain levels, default or delinquency levels of solar assetsloans, home improvement loans, solar energy systems and/or energy storage systems, as applicable, exceeding certain thresholds or excess spread falling below certain levels over a multiple month period. In the event of an amortization event, the availability period under a revolving warehouse credit facility may terminate and the borrower may be required to repay the affected outstanding borrowings using available collections received from the asset pool. However, the period of ultimate repayment would be determined by the amount and timing of collections received. An amortization event would impair our liquidity and may require us to utilize our other available contingent liquidity or rely on alternative funding sources, which may or may not be available at the time. The debt agreements of our warehouse credit facilities also typically contain customary events of default for solar warehouse financings that entitle the lenders to take various actions, including the acceleration of amounts due under the related debt agreement and foreclosure on the borrower's assets.
In July 2014,April 2017, one of our subsidiaries, EZOP, entered into a collateral-based financing agreementsecured revolving credit facility with Texas Capital Bank, N.A.,Credit Suisse AG, New York Branch, as administrative agent, and the lenders party thereto. Outstanding advances under theThe EZOP revolving credit facility bore interest at LIBOR plus an applicable margin. Thewas previously amended in 2019, 2020, 2021 and 2022 and was amended and restated in 2023 as described below. Under the amended EZOP revolving credit facility, hadEZOP may borrow up to an aggregate committed amount of $875.0 million, with an uncommitted maximum facility amount of $1.0 billion, subject to a borrowing base amount determined at each borrowing and calculated based on the net outstanding principal balance of the eligible solar loans securing the EZOP revolving credit facility multiplied by the weighted average advance rate. The EZOP revolving credit facility has a maturity date occurring in January 2021. November 2025. The proceeds of the loans under the EZOP revolving credit facility are available for funding the purchase of solar loans and related solar assets, making deposits in EZOP's reserve accounts and paying fees and expenses in connection with the EZOP revolving credit facility. The EZOP revolving credit facility bears interest at an annual rate based on Term SOFR (as defined by such revolving credit facility) plus a margin specific to each lender. Sunnova Energy Corporation guarantees the performance obligations of certain affiliates under agreements entered into in connection with the EZOP revolving credit facility, as well as certain indemnity and refund obligations. In February 2020,2023, we fully repaidamended the EZOP revolving credit facility to, among other things, (a) increase the aggregate principalcommitment amount outstanding from $450.0 million to $675.0 million, (b) increase the uncommitted maximum facility amount from $575.0 million to $800.0 million, (c) amend certain provisions related to the allocation of $92.0 millioncertain payments made to the lenders, (d) amend certain provisions related to excess concentration limits and terminatedeligibility criteria to permit us and our affiliates to provide warranties of, and replacements for, load controllers and generators in connection with the related solar loan contracts and (e) add provisions to allow EZOP to request an increase in the aggregate commitment amount (subject to certain conditions) by adding additional lenders to the EZOP revolving credit facility. In February 2023, Credit Suisse AG ("Credit Suisse") sold a significant part of its Securitized Products Group (the "Credit Suisse Securitized Products Sale") to Apollo Global Management ("Apollo"). Subsequently, Apollo publicly announced the majority of the assets and professionals associated with the sale are now part of or managed by ATLAS SP Partners, a new stand-alone credit firm focused on asset-backed financing and capital markets solutions ("Atlas"). In March 2023, in connection with the Credit Suisse Securitized Products Sale, certain of our subsidiaries consented to the assignment of the loans and commitments of the Credit Suisse lenders to the Atlas lenders (such assignment, the "EZOP Assignment") under the EZOP revolving credit facility. In connection
with the EZOP Assignment, Credit Suisse AG, New York Branch ("CSNYB") resigned as the agent under the EZOP revolving credit facility, Atlas Securitized Products Holdings, L.P. (the "Successor Agent") was appointed as the successor agent thereunder and, in connection with such appointment, the Successor Agent assumed the agent roles under the EZOP revolving credit facility. In connection with the appointment of Atlas as Successor Agent, the borrowers and the lenders party to the applicable agency resignation and appointment agreements consented to, among other things, Atlas' ability to assign the agent role under the EZOP revolving credit facility to one of its affiliates subject to certain conditions set forth therein. In March 2023, after the EZOP Assignment, we amended the EZOP revolving credit facility to, among other things, (a) increase the aggregate commitment amount from $675.0 million to $775.0 million, (b) increase the uncommitted maximum facility amount from $800.0 million to $900.0 million, (c) amend and supplement certain defaulting lender provisions and (d) update the references from CSNYB, the predecessor agent, to Atlas, the successor agent, and remove or modify certain provisions related to the borrowing, funding and allocation of payments among the previous lender syndicate (that previously included lenders affiliated with Credit Suisse that, prior to the date of the amendment to the EZOP revolving credit facility and pursuant to the EZOP Assignment, had assigned their loans and commitments to lenders affiliated with Atlas). In August 2023, we amended and restated the EZOP revolving credit facility to, among other things, (a) increase the aggregate commitment amount from $775.0 million to $875.0 million, (b) increase the uncommitted maximum facility amount from $900.0 million to $1.0 billion, (c) extend the maturity date from November 2024 to November 2025 and (d) amend the Advance Rate (as defined therein). In October 2023, we amended the EZOP revolving credit facility to, among other things, reallocate commitments among the lenders. In February 2024, we amended the EZOP revolving credit facility to, among other things, (a) reflect certain assignments of commitments occurring within the Atlas Lender Group (as defined by such revolving credit facility) without increasing the existing commitments, and the assignment of the role of the Atlas funding agent for the Atlas Lender Group, (b) amend the thresholds for certain "Amortization Events" (as defined by such revolving credit facility) and (c) modify the "Liquidity Reserve Account Required Balance" (as defined by such revolving credit facility). As of December 31, 2023, we had $364.0 million of available borrowing capacity under the EZOP revolving credit facility.
In April 2017,September 2019, one of our subsidiaries, TEPH, entered into a secured revolving credit facility with Credit Suisse AG, New York Branch, as administrative agent, and the lenders party thereto. The TEPH revolving credit facility was previously amended in 2019, 2020, 2021 and 2022 and was amended and restated in March 2019 and further amended in September 2019, December 2019, January 2020, March 2020 and September 2020.2023 as described below. Under the amended TEPH revolving credit facility, the subsidiaryTEPH may borrow up to $200.0 million,an aggregate committed amount of $1.311 billion with an uncommitted maximum facility amount of $1.575 billion, subject to a borrowing base calculated based on a specifiedthe aggregate discounted solar asset balance of eligible solar assets multiplied by the applicable advance rate applied to the net outstanding principal balance of the solar loans securing the credit facility. The proceeds of the loans under the credit facility are available for funding the purchaseeach type of solar loans, making deposits in the subsidiary's reserve accounts and paying fees in connection with the credit facility.asset. The credit facility bears interest at an annual rate of adjusted LIBOR plus an applicable margin.eligible solar assets are owned by TEPH's subsidiaries, which are primarily tax equity funds, subject to certain concentration limitations. The TEPH revolving credit facility has a maturity date occurring in November 2022. In June 2020, we used2025. The proceeds from the HELIV NotesTEPH revolving credit facility are available for funding certain reserve accounts required by the TEPH revolving credit facility, making distributions to us and paying fees incurred in connection with closing the TEPH revolving credit facility. The TEPH revolving credit facility bears interest at an annual rate based on either (a) Term SOFR (as defined below)by such revolving credit facility) plus a margin specific to repay $149.3 millioneach lender or (b) in aggregate principal amount outstanding. In October 2020, we used proceeds from anotherthe case of certain conduit lenders and other lenders, such lender's Commercial Paper Rate (as defined by such revolving credit facility entered into in September 2020 to repay $28.0 million in aggregate principal amount outstanding.facility). Sunnova Energy Corporation guarantees the performance obligations of certain affiliates under agreements entered into in connection with the credit facility, as well as certain indemnity and refund obligations.As of December 31, 2020, we had $28.4 million of available borrowing capacity under the credit facility. In February 2021, we used proceeds from the HELV Notes to repay $107.3 million in aggregate principal amount outstanding.
In April 2017, three of our subsidiaries entered into a secured term loan credit facility with Credit Suisse AG, New York Branch, as administrative agent, and the lenders party thereto. The credit facility was amended and restated in November 2018. Outstanding advances under the credit facility bore interest at LIBOR plus an applicable margin. The credit facility had a maturity date occurring in November 2022. In February 2020, we used proceeds from the SOLI Notes (as defined below) to repay $32.0 million in aggregate principal amount outstanding. In November 2020, we fully repaid the aggregate principal amount outstanding of $10.6 million and terminated the credit facility. Sunnova Energy Corporation had guaranteed the performance obligations of certain affiliates under the agreements entered into in connection with the credit facility, as well as certain indemnity obligations.
In August 2018, one of our subsidiaries entered into a securedTEPH revolving credit facility with Credit Suisse AG, New York Branch, as administrative agent, and the lenders party thereto. The credit facility was amended and restated in March 2019 and further amended in September 2019. Under the credit facility, the subsidiary could borrow up to an initial $150.0 million with a maximum commitment amount of $250.0 million based on the aggregate value of solar assets owned by the borrower's subsidiaries, which were primarily tax equity funds, subject to certain concentration limitations. The proceeds of the loan after fees and expenses were available for funding certain reserve accounts required by the credit facility, making distributions to us and paying fees incurred in connection with closing the credit facility. The credit facility bore interest at an annual rate of adjusted LIBOR or, if such rate was not available, a base rate, plus an applicable margin. The credit facility had a maturity date occurring in November 2022. Sunnova Energy Corporation had guaranteed the performance obligations of certain affiliates under agreements entered into in connection with the credit facility, as well as certain indemnity and repurchase obligations.In February 2020, we fully repaidMarch 2023, in connection with the aggregate principal amount outstanding of $226.6 million and terminated the credit facility.
In September 2019, oneCredit Suisse Securitized Products Sale, certain of our subsidiaries entered into a securedconsented to the assignment of the loans and commitments of the Credit Suisse lenders to the Atlas lenders (such assignment, the "TEPH Assignment") under the revolving credit facility with Credit Suisse AG, New York Branch,by and among TEPH, certain of our other subsidiaries party thereto, Atlas Securitized Products Holdings, L.P. (as successor to CSNYB), as administrative agent, and the lenders and other financial institutions party thereto. TheIn connection with the TEPH Assignment, CSNYB resigned as the agent under the TEPH revolving credit facility, Atlas was amendedappointed as the successor agent thereunder and, in December 2019connection with such appointment, the Successor Agent assumed the agent roles under the TEPH revolving credit facility. In connection with the appointment of Atlas as Successor Agent, the borrowers and further amended in January 2020, February 2020, March 2020, May 2020, June 2020, October 2020, November 2020the lenders party to the applicable agency resignation and January 2021. Underappointment agreements consented to, among other things, Atlas' ability to assign the agent role under the TEPH revolving credit facility to one of its affiliates subject to certain conditions set forth therein. In March 2023, after the subsidiary may borrow upTEPH Assignment, we amended the TEPH revolving credit facility to, an initial $460.7 million with a maximumamong other things, (a) increase the aggregate commitment amount offrom $600.0 million based onto $700.0 million, (b) increase the uncommitted maximum facility amount from $689.7 million to $789.7 million, (c) add provisions to allow TEPH to request an increase in the aggregate valuecommitment amount (subject to certain conditions) by adding additional lenders to the TEPH revolving credit facility, (d) amend and supplement certain defaulting lender provisions, (e) modify the hedging provisions to give all hedge counterparties the benefit of solar assets ownedcertain payment priorities and certain other terms previously limited to qualifying hedge counterparties (as defined by such revolving credit facility), to extend the borrower's subsidiaries, which aretime period for the event of default resulting from hedge counterparties ceasing to be qualifying hedge counterparties and to make other hedge-related amendments, (f) update the references from CSNYB, the predecessor administrative agent, to Atlas, the successor administrative agent, and remove or modify certain provisions related to the borrowing, funding and allocation of payments among the previous lender syndicate (that previously included lenders affiliated with Credit Suisse that, prior to the date of the amendment to the TEPH revolving credit facility and pursuant to the TEPH Assignment, had assigned their loans and commitments to lenders affiliated
with Atlas), (g) add European Union bail-in provisions and (h) add certain syndication-related provisions. In August 2023, we amended the TEPH revolving credit facility to, among other things, (a) increase the aggregate commitment amount from $700.0 million to $769.3 million, (b) increase the uncommitted maximum facility amount from $789.7 million to $859.0 million and (c) extend the maturity date from November 2024 to November 2025. In November 2023, we amended and restated the TEPH revolving credit facility to, among other things, (a) increase the aggregate commitment amount from $769.3 million to $1.309 billion and (b) increase the uncommitted maximum facility amount from $859.0 million to $1.575 billion. In December 2023, an additional lender joined the TEPH revolving credit facility and the aggregate commitment amount was increased from $1.309 billion to $1.311 billion. In February 2024, we amended the TEPH revolving credit facility to, among other things, reflect an assignment of commitments occurring within the Atlas Lender Group (as defined by such revolving credit facility) without increasing the existing commitments and the appointment of a new Atlas funding agent for the Atlas Lender Group. As of December 31, 2023, we had $272.4 million of available borrowing capacity under the TEPH revolving credit facility.
In September 2020, one of our subsidiaries, Sunnova Asset Portfolio 8, LLC ("AP8"), entered into a secured revolving credit facility with Banco Popular de Puerto Rico, as agent, and the lenders party thereto. The AP8 revolving credit facility was previously amended in 2021 and 2022 and was amended in 2023 as described below. Under the amended AP8 revolving credit facility, AP8 may borrow up to an initial aggregate committed amount of $215.0 million, subject to a borrowing base calculated based on the sum of a specified advance rate applied to the net outstanding principal balance of the solar loans securing the AP8 revolving credit facility and the aggregate value of the solar energy systems owned by AP8's subsidiaries, which are primarily tax equity funds, subject to certain concentration limitations. The AP8 revolving credit facility has a maturity date occurring in September 2024. The proceeds fromof the loans under the AP8 revolving credit facility are available for funding certainthe purchase of solar loans, making deposits in AP8's reserve accounts required by the credit facility, making distributions to usaccount and paying fees incurred in connection with closing the AP8 revolving credit facility. The AP8 revolving credit facility bears interest at an annual rate of adjusted LIBORbased on Term SOFR (as defined by such revolving credit facility) plus a weighted average margin of 4.15%. The credit facility has a maturity date occurring in November 2022.3.00% per annum. Sunnova Energy Corporation guarantees the performance obligations of certain affiliates under agreements entered into in connection with the AP8 revolving credit facility, as well as certain indemnity and repurchase obligations. In November 2020,March 2023, we used proceedsamended the AP8 revolving credit facility to, among other things, increase the aggregate commitment amount from $75.0 million to $150.0 million. In June 2023, we amended the SOLII NotesAP8 revolving credit facility to, repay $211.5among other things, increase the aggregate commitment amount from $150.0 million to $185.0 million. In August 2023, we amended the AP8 revolving credit facility to, among other things, increase the aggregate commitment amount from $185.0 million to $215.0 million. We believe we will be able to satisfy this obligation due in aggregate principal amount outstanding. September 2024 through refinancing of the facility or alternatively through the use of our existing cash resources and liquidity. As of December 31, 2020,2023, we had $360.4 million ofno available borrowing capacity under the AP8 revolving credit facility.
In December 2019,March 2023, one of our subsidiaries, Sunnova Inventory Supply, LLC ("IS"), entered into a secured revolving credit facility with Credit Suisse AG, New York Branch,Texas Capital Bank, as agent, and the lenders party thereto, for an aggregate commitment amount of $50.0 million with a maturity date of the earlier of (a) March 2026 and (b) six months from the latest maturity date of any material parent credit facility (defined as a parent credit facility with a commitment of $250.0 million or more that, if terminated could individually be expected to result in a liquidity event (as defined by such revolving credit facility)). The proceeds of the loans under the IS revolving credit facility are available to purchase or otherwise acquire certain accounts receivable and inventory, fund certain reserve accounts that are required to be maintained by IS in accordance with the revolving credit agreement and pay fees and expenses incurred in connection with the IS revolving credit facility. Interest on the borrowings under the IS revolving credit facility is due monthly. Borrowings under the IS revolving credit facility bear interest at an annual rate based on Term SOFR (as defined by such revolving credit facility). As of December 31, 2023, we had $18.7 million of available borrowing capacity under the IS revolving credit facility.
In September 2023, one of our subsidiaries, Sunnova Asset Portfolio 9, LLC ("AP9"), entered into a secured revolving credit facility with Citibank, N.A., as administrative agent, and the lenders party thereto. The credit facility was amended in September 2020 and November 2020. Under the credit facility, the subsidiary could borrow up tothereto, for an initial $95.2 million with a maximumaggregate commitment amount of $137.6$65.0 million, subject to lender consent and certain other conditions. The proceeds froma borrowing base calculated based on the credit facility were available for purchasing certain eligible equipmentsum of a specified advance rate applied to the borrower intends will allow certain related solar energy systems to qualify fornet aggregate balance of the 30% Section 48(a) ITC by satisfyinghome improvement loans securing the 5% ITC Safe Harbor outlined in IRS Notice 2018-59, funding a reserve account required by the credit facility and paying fees incurred in connection with closing theAP9 revolving credit facility. The credit facility bears interest at an annual rate of either LIBOR divided by a percentage equal to 100% minus a reserve percentage or a base rate, plus an applicable margin. The AP9 revolving credit facility has a maturity date occurring in December 2022.October 2027. The proceeds of the loans under the AP9 revolving credit facility are available for funding the purchase of home improvement loans and the related home improvement assets, making deposits in AP9's reserve account and paying fees and expenses in connection with the AP9 revolving credit facility. Interest on the borrowings under the AP9 revolving credit facility is due monthly. Borrowings under the AP9 revolving credit facility bear interest at an annual rate based on Term SOFR (as defined by such revolving credit facility) plus a margin specific to each lender. In connection with the AP9 revolving credit facility, one of our affiliates receives a fee for servicing the home improvement loans and related home improvement assets pursuant to a servicing agreement. In addition, Sunnova Energy Corporation guarantees the performance obligations of certain affiliates under agreements entered into in connection with the AP9 revolving credit facility, as well as certain indemnity and also provides a limited payment guarantee in respectrepurchase obligations. Obligations of AP9 under the AP9 revolving credit facility are secured by first priority liens on substantially all of the borrower'sassets of AP9. Certain obligations of AP9H under the credit facility that is subject tosale and contribution agreement are secured by a capfirst priority lien on the equity of $9.5AP9 owned by AP9H. As of December 31, 2023, we
had $52.9 million which equates to 10% of the initial commitments. The availability period for additional borrowingsavailable borrowing capacity under the AP9 revolving credit facility ended in December 2020.facility.
In September 2020,December 2023, one of our subsidiaries, BMB, along with its two wholly-owned subsidiaries, entered into a secured revolving credit facility with Banco Popular de Puerto Rico. UnderMitsubishi HC Capital America, Inc., as administrative agent, and the lenders party thereto from time to time, for an aggregate principal amount of up to $25.0 million with a maturity date for each loan thereunder as set forth in the BMB revolving credit facility the subsidiary may borrow upand, in any event, no later than December 27, 2025 (after giving effect to $60.0 million, subjectany extension thereof pursuant to a borrowing base calculated based on a specified advance rate applied to the net outstanding principal balance of the solar loans securing thethat aforementioned BMB revolving credit facility.facility). The proceeds of the loans under the BMB revolving credit facility are available for fundingto, among other things, finance project costs related to commercial, industrial and other solar energy systems and energy storage systems owned by BMB or one of its subsidiaries or by a customer (each, a "Project"). The BMB revolving credit facility is also available to finance completed Projects. Interest on the purchase of solar loans, making depositsborrowings under the BMB revolving credit facility is due monthly (or, in the subsidiary's reserve account and paying feescase of borrowings for construction loans, paid in connection withkind monthly). Borrowings under the credit facility. TheBMB revolving credit facility bearsbear interest at an annual rate (which can vary for different Projects) based on Term SOFR plus a specified margin or, in the case of adjusted LIBOR plus an applicablecertain term loans for completed Projects, a fixed margin. TheIn connection with the BMB revolving credit facility, has a maturity date occurring in September 2023.certain of our affiliates receive fees for managing and servicing the Projects pursuant to certain management and servicing agreements. In addition, Sunnova Energy Corporation guarantees the performance obligations of certain of its affiliates under those certain management agreements, entered into in connection with the credit facility.servicing agreements, a sale and contribution agreement and a development and purchase agreement. As of December 31, 2020, we had $13.6 million of available borrowing capacity under the credit facility.In February 2021, we used proceeds2023, no borrowings have been made from the HELV Notes to repay $29.5 million in aggregate principal amount outstanding.BMB revolving credit facility.
Securitizations
We from time to time securitize solar servicecustomer agreements and related assets as a source of funding. We access the Rule 144A asset-backed securitization market using wholly-owned special purpose entities to securitize pools of assets, which historically have been solar energy systems and the related lease agreements and PPAs and ancillary rights and agreements both directly or indirectly through interests in the managing member of our tax equity funds. We also securitize our loan agreements and ancillary rights and agreements.
In April 2017, one of our subsidiaries issued $191.8 million in aggregate principal amount of Series 2017-1 Class A solar asset-backed notes, $18.0 million in aggregate principal amount of Series 2017-1 Class B solar asset-backed notes, and $45.0 million in aggregate principal amount of 2017-1 Class C solar asset-backed notes (collectively, the "Notes") with a maturity date of September 2049. The Notes bear interest at an annual rate of 4.94%, 6.00% and 8.00% for the Class A, Class B and Class C notes, respectively.
In November 2018, one of our subsidiaries issued $202.0 million in aggregate principal amount of Series 2018-1 Class A solar asset-backed notes and $60.7 million in aggregate principal amount of Series 2018-1 Class B solar asset-backed notes (collectively, the "Notes II") with a maturity date of July 2048. The Notes II bear interest at an annual rate of 4.87% and 7.71% for the Class A and Class B notes, respectively.
In March 2019, one of our subsidiaries entered into a note purchase agreement pursuant to which certain institutional investors committed to purchase up to $358.0 million principal amount of notes ("RAYSI Notes") in one or more asset-backed private placement securitizations. In March 2019, our subsidiary, the RAYSI Notes issuer, issued an aggregate $133.1 million principal amount of RAYSI Notes pursuant to this note purchase agreement. In June 2019, the RAYSI Notes issuer issued an aggregate $6.4 million in principal amount of RAYSI Notes pursuant to a supplemental note purchase agreement.
In June 2019, one of our subsidiaries issued $139.7 million in aggregate principal amount of Series 2019-A Class A solar loan-backed notes, $14.9 million in aggregate principal amount of Series 2019-A Class B solar loan-backed notes and $13.0 million in aggregate principal amount of Series 2019-A Class C solar loan-backed notes (collectively, the "HELIII Notes") with a maturity date of June 2046. The HELIII Notes bear interest at an annual rate of 3.75%, 4.49% and 5.32% for the Class A, Class B and Class C notes, respectively.
In February 2020, one of our subsidiaries issued $337.1 million in aggregate principal amount of Series 2020-1 Class A solar asset-backed notes and $75.4 million in aggregate principal amount of Series 2020-1 Class B solar asset-backed notes (collectively, the "SOLI Notes") with a maturity date of January 2055. The SOLI Notes bear interest at an annual rate of 3.35% and 5.54% for the Class A and Class B notes, respectively.
In June 2020, one of our subsidiaries issued $135.9 million in aggregate principal amount of Series 2020-A Class A solar loan-backed notes and $22.6 million in aggregate principal amount of Series 2020-A Class B solar loan-backed notes (collectively, the "HELIV Notes") with a maturity date of June 2047. The HELIV Notes bear interest at an annual rate of 2.98% and 7.25% for the Class A and Class B notes, respectively.
In November 2020, one our subsidiaries issued $209.1 million in aggregate principal amount of Series 2020-2 Class A solar asset-backed notes and $45.6 million in aggregate principal amount of Series 2020-2 Class B solar asset-backed notes with a maturity date of November 2055. The SOLII Notes bear interest at an annual rate of 2.73% and 5.47% for the Class A and Class B notes, respectively.
In February 2021, one of our subsidiaries issued $150.1 million in aggregate principal amount of Series 2021-A Class A solar loan-backed notes and $38.6 million in aggregate principal amount of Series 2021-A Class B solar loan-backed notes (collectively, the "HELV Notes") with a maturity date of February 2048. The HELV Notes bear interest at an annual rate of 1.80% and 3.15% for the Class A and Class B notes, respectively.
In June 2021, one of our subsidiaries issued $319.0 million in aggregate principal amount of Series 2021-1 solar asset-backed notes (the "SOLIII Notes") with a maturity date of April 2056. The SOLIII Notes bear interest at an annual rate of 2.58%.
In July 2021, one of our subsidiaries issued $106.2 million in aggregate principal amount of Series 2021-B Class A solar loan-backed notes and $106.2 million in aggregate principal amount of Series 2021-B Class B solar loan-backed notes (collectively the "HELVI Notes") with a maturity date of July 2048. The HELVI Notes bear interest at an annual rate of 1.62% and 2.01% for the Class A and Class B notes, respectively.
In October 2021, one of our subsidiaries issued $68.4 million in aggregate principal amount of Series 2021-C Class A solar loan-backed notes, $55.9 million in aggregate principal amount of Series 2021-C Class B solar loan-backed notes and $31.5 million in aggregate principal amount of Series 2021-C Class C solar loan-backed notes (collectively, the "HELVII Notes") with a maturity date of October 2048. The HELVII Notes bear interest at an annual rate of 2.03%, 2.33% and 2.63% for the Class A, Class B and Class C notes, respectively.
In February 2022, one of our subsidiaries entered into a Note Purchase Agreement related to the sale of $131.9 million in aggregate principal amount of Series 2022-A Class A solar loan-backed notes, $102.2 million in aggregate principal amount of Series 2022-A Class B solar loan-backed notes and $63.8 million in aggregate principal amount of Series 2022-A Class C solar loan-backed notes (collectively, the "HELVIII Notes") with a maturity date of February 2049. The HELVIII Notes bear interest at an annual rate of 2.79%, 3.13% and 3.53% for the Class A, Class B and Class C notes, respectively.
In June 2022, one of our subsidiaries issued $317.0 million in aggregate principal amount of Series 2022-1 Class A solar asset-backed notes and $38.0 million in aggregate principal amount of Series 2022-1 Class B solar asset-backed notes (collectively, the "SOLIV Notes") with a maturity date of April 2057. The SOLIV Notes bear interest at an annual rate of 4.95% and 6.35% for the Class A and Class B notes, respectively.
In August 2022, one of our subsidiaries issued $178.0 million in aggregate principal amount of Series 2022-B Class A solar
loan-backed notes and $49.7 million in aggregate principal amount of Series 2022-B Class B solar loan-backed notes (collectively, the "HELIX Notes") with a maturity date of August 2049. The HELIX Notes bear interest at an annual rate of 5.00% and 6.00% for the Class A and Class B notes, respectively.
In November 2022, one of our subsidiaries issued $103.4 million in aggregate principal amount of Series 2022-C Class A solar loan-backed notes, $80.6 million in aggregate principal amount of Series 2022-C Class B solar loan-backed notes and $51.7 million in aggregate principal amount of Series 2022-C Class C solar loan-backed notes (collectively, the "HELX Notes") with a maturity date of November 2049. The HELX Notes bear interest at an annual rate of 5.30%, 5.60% and 6.00% for the Class A, Class B and Class C notes, respectively.
In April 2023, one of our subsidiaries issued $300.0 million in aggregate principal amount of Series 2023-1 Class A solar asset-backed notes and $23.5 million in aggregate principal amount of Series 2023-1 Class B solar asset-backed notes (collectively, the "SOLV Notes") with a maturity date of April 2058. The SOLV Notes bear interest at an annual rate of 5.40% and 7.35% for the Class A and Class B notes, respectively.
In May 2023, one of our subsidiaries issued $174.9 million in aggregate principal amount of Series 2023-A Class A solar loan-backed notes, $80.1 million in aggregate principal amount of Series 2023-A Class B solar loan-backed notes and $31.7 million in aggregate principal amount of Series 2023-A Class C solar loan-backed notes (collectively, the "HELXI Notes") with a maturity date of May 2050. The HELXI Notes bear interest at an annual rate of 5.30%, 5.60% and 6.00% for the Class A, Class B and Class C notes, respectively.
In August 2023, one of our subsidiaries issued $148.5 million in aggregate principal amount of Series 2023-B Class A solar loan-backed notes, $71.1 million in aggregate principal amount of Series 2023-B Class B solar loan-backed notes and $23.1 million in aggregate principal amount of Series 2023-B Class C solar loan-backed notes (collectively, the "HELXII Notes") with a maturity date of August 2050. The HELXII Notes bear interest at an annual rate of 5.30%, 5.60% and 6.00%, for the Class A, Class B and Class C notes, respectively.
In September 2023, we entered into a $3.0 billion partial loan guarantee agreement (the "Hestia Agreement") with the DOE representing a commitment to guarantee 90% of up to approximately $3.3 billion of certain of our future financing arrangements. We anticipate the Hestia Agreement will support future loan originations, reduce our weighted average cost of capital and generate interest savings. Before the DOE issues loan guarantees under the Hestia Agreement, various customary conditions must be fulfilled. There is no assurance of the DOE's conditional commitment will be fulfilled on the terms announced or at all or that the related guarantees will provide the anticipated benefits to us. In October 2023, one of our subsidiaries issued $219.6 million in aggregate principal amount of Series 2023-GRID1 Class A solar loan-backed notes and $24.4 million in aggregate principal amount of Series 2023-GRID1 Class B solar loan-backed notes with a maturity date of December 2050. The HESI Notes bear interest at an annual rate of 5.75% and 8.25% for the Class A and Class B notes, respectively. The Class A notes indirectly benefit from a partial guarantee provided by the DOE Loan Programs Office pursuant to the Hestia Agreement. The HESI Notes are not directly guaranteed by the DOE.
In February 2024, one of our subsidiaries issued $194.5 million in aggregate principal amount of Series 2024-1 Class A solar asset-backed notes, $16.5 million in aggregate principal amount of Series 2024-1 Class B solar asset-backed notes and $15.0 million in aggregate principal amount of Series 2024-1 Class C solar asset-backed notes with a maturity date of January 2059. The SOLVI Notes bear interest at an annual rate of 5.65%, 7.00% and 9.00% for the Class A, Class B and Class C notes, respectively.
The securitization structures include certain features designed to protect investors. The primary feature relates to the availability and adequacy of cash flows in the securitized pool of assets to meet contractual requirements, the insufficiency of which triggers an early repayment of the notes. We refer to this as "early amortization", which may be based on, among other things, a debt service coverage ratio falling or remaining below certain levels. As of December 31, 2020,2023, we have not had any early amortizations under any of our securitizations. In the event of an early amortization, the notes issuer would be required to repay the affected outstanding securitized borrowings using available collections received from the asset pool. However, the period of ultimate repayment would be determined based on the amount and timing of collections received and, in limited circumstances, early amortization may be cured prior to full repayment. An early amortization event would impair our liquidity and may require us to utilize our available non-securitization related contingent liquidity or rely on alternative funding sources, which may or may not be available at the time. The indentures of our securitizations also typically contain customary events of default for solar securitizations that may entitle the noteholders to take various actions, including the acceleration of amounts due under the related indenture and foreclosure on the issuer's assets.
Senior Notes
In December 2019,May 2021, we issued and sold an aggregate principal amount of $55.0$575.0 million of our 7.75%0.25% convertible senior notes ("0.25% convertible senior notes") in a private placement at an issue pricea discount to the initial purchasers of 95%2.5%, for an aggregate purchase price of $52.3$560.6 million. The 0.25% convertible senior notes mature in December 2026 unless earlier redeemed, repurchased or converted. In May 2020,connection with the pricing of the 0.25% convertible senior notes, we used proceeds of $91.7 million to enter into privately negotiated capped call transactions, which are expected to reduce the potential dilution to common shares and/or offset potential cash payments that could be required to be made in excess of the principal amount upon any exchange of notes. Such reduction and/or offset is subject to a cap initially equal to $60.00 per share, subject to adjustments.
In August 2021, we issued and sold an aggregate principal amount of $130.0$400.0 million of our 9.75% convertible5.875% senior notes ("5.875% senior notes") in a private placement at an issue pricea discount to the initial purchasers of 95%1.24%, for an aggregate purchase price of $123.5$395.0 million. The 9.75%5.875% senior notes mature in September 2026.
In August 2022, we issued and sold an aggregate principal amount of $600.0 million of our 2.625% convertible senior notes ("2.625% convertible senior notes") in a private placement at a discount to the initial purchasers of 2.5%, for an aggregate purchase price of $585.0 million. The 2.625% convertible senior notes mature in April 2025February 2028 unless earlier redeemed, repurchased or converted. We grantedIn connection with the investorspricing of the 9.75%2.625% convertible senior notes, an optionwe used proceeds of $48.4 million to purchase upenter into privately negotiated capped call transactions, which are expected to reduce the potential dilution to common shares and/or offset potential cash payments that could be required to be made in excess of the principal amount upon any exchange of notes. Such reduction and/or offset is subject to a cap initially equal to $34.24 per share, subject to adjustments.
In September 2023, we issued and sold an additional $60.0 million aggregate principal amount of 9.75% convertible$400.0 million of 11.75% senior notes onat a discount to the same terms and conditions, and the investors exercised this option and completed theinitial purchasers of approximately 2.74%, for an aggregate purchase price of such additional 9.75% convertibleapproximately $389.0 million. The 11.75% senior notes mature in June 2020. In May 2020, we also entered into privately negotiated exchanges with a small number of institutional investors in our 7.75% convertible senior notes whereby such investors exchanged all $55.0 million aggregate principal amount outstanding of our 7.75% convertible senior notes for an equal principal amount of our 9.75% convertible senior notes.October 2028.
During the year ended December 31, 2020, certain of the holders of our 9.75% convertible senior notes converted approximately $150.8 million aggregate principal amount, including accrued and unpaid interest to the date of each conversion, of our 9.75% convertible senior notes into 11,168,874 shares of our common stock. In January and February 2021, the remaining holders of our 9.75% convertible senior notes converted approximately $97.1 million aggregate principal amount, including accrued and unpaid interest to the date of each conversion, of our 9.75% convertible senior notes into 7,196,035 shares of our common stock. As of February 23, 2021, all of the holders of our 9.75% convertible senior notes have converted
their notes into common stock. As such, there are no longer any 9.75% convertible senior notes outstanding. See Note 13, Stockholders' Equity, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Public Offerings
In July and August 2019,2023, we sold 14,865,2675,865,000 shares of common stock at a public offering price of $12.00$14.75 per share and on July 25, 2019 our common stock began trading on the New York Stock Exchange under the symbol "NOVA".share. We received aggregate net proceeds from our IPO of approximately $162.3$82.2 million, after deducting underwriting discounts and commissions of approximately $10.7$3.9 million and offering expenses of approximately $5.4 million. We used the proceeds from our IPO to repay indebtedness and for working capital purposes.
In December 2020, we sold 4,025,000 shares of common stock at a public offering price of $37.00 per share. We received aggregate net proceeds of approximately $142.7 million, after deducting underwriting discounts and commissions of approximately $6.0 million and offering expenses of approximately $0.3 million. We used the net proceeds from the offering to acquire solar equipment, repay indebtedness and for working capital purposes.$400,000.
Contractual Obligations
The following unaudited table summarizes our contractual obligations as of December 31, 2020:2023:
| | Payments Due by Period (1) |
| Total | | 2021 | | 2022-2023 | | 2024-2025 | | Beyond 2025 |
| (in thousands) |
| | | Payments Due by Period (1) | | | | | Payments Due by Period (1) |
| Total | | | Total | | 2024 | | 2025-2026 | | 2027-2028 | | Beyond 2028 |
| (in thousands) | | | (in thousands) |
Debt obligations (including future interest) (2) | Debt obligations (including future interest) (2) | $ | 2,619,717 | | | $ | 207,158 | | | $ | 772,891 | | | $ | 327,653 | | | $ | 1,312,015 | |
AROs | 41,788 | | | — | | | — | | | — | | | 41,788 | |
Operating lease payments (3) | 12,972 | | | 586 | | | 3,153 | | | 3,249 | | | 5,984 | |
AROs (3) | |
Operating lease payments (4) | |
Finance lease payments | Finance lease payments | 334 | | | 122 | | | 157 | | | 55 | | | — | |
Guaranteed performance obligations | Guaranteed performance obligations | 5,717 | | | 3,308 | | | 2,303 | | | 106 | | | — | |
Inventory purchase obligations | Inventory purchase obligations | 101,719 | | | 28,497 | | | 53,415 | | | 19,807 | | | — | |
Other obligations (4) | 12,870 | | | 10,698 | | | 2,138 | | | 34 | | | — | |
Other obligations (5) | |
Total | Total | $ | 2,795,117 | | | $ | 250,369 | | | $ | 834,057 | | | $ | 350,904 | | | $ | 1,359,787 | |
Our discussion and analysis of our financial condition and results of operations areis based upon our consolidated annual financial statements, which have been prepared in accordance with GAAP which requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, and expenses, cash flows and related disclosures. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. In many instances, we could have reasonably used different accounting estimates, and in other instances, changes in the accounting estimates are reasonably likely to occur from period-to-period. Actual results may differ from these estimates. Our future consolidated financial statements will be affected to the extent our actual results materially differ from these estimates.
We identify our most critical accounting policies as those that are the most pervasive and important to the portrayal of our financial position and results of operations, and that require the most difficult, subjective, and/or complex judgments by management regarding estimates about matters that are inherently uncertain. We believe the assumptions and estimates associated with our principles of consolidation, the valuation of assets acquired and liabilities assumed in acquisitions, the estimated useful life of our solar energy systems, the valuation of the removal assumptions, regardingincluding costs, associated with AROs, and the valuation of redeemable noncontrolling interests and noncontrolling interests and our allowance for current expected credit losses have the greatest subjectivity and impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates and discuss these items are discussedin detail below. See Note 2, Significant Accounting Policies, to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for further discussion of our accounting policies.
Our consolidated financial statements reflect our accounts and those of our subsidiaries in which we have a controlling financial interest. The typical condition for a controlling financial interest is holding a majority of the voting interests of an entity. However, a controlling financial interest may also exist in entities, such as variable interest entities ("VIEs"), through arrangements that do not involve holding a majority of the voting interests. We consolidate any VIE of which we are the primary beneficiary, which is defined as the party that has (a) the power to direct the activities of a VIE that most significantly impact the VIE's economic performance and (b) the obligation to absorb losses or receive benefits from the VIE that could potentially be significant to the VIE. We evaluate our relationships with our VIEs on an ongoing basis to determine whether we continue to be the primary beneficiary. We have eliminated all intercompany transactions in consolidation.
Our solar energy systems have an estimated useful life of 35 years. We considered both (a) available information related to the technology currently being employed in the solar energy systems and (b) the terms of the solar leases that have a 25 year term with two five-year renewal options to conclude a 35 year useful life is appropriate. In addition, we reviewed numerous published and online sources from academia, government institutions and private industry and held discussions with certain manufacturers of our solar energy systems to support our estimated useful life of 35 years for the crystalline silicone solar modules we use. We define the useful life of a solar module as the duration for which a solar module operates at or above 80% of its initial power output, which we understand to be the generally accepted standard used by government, academia and the solar industry.
Depreciation and amortization of solar energy systems are calculated using the straight-line method over the estimated useful lives of the solar energy systems and are recorded in cost of revenue—depreciation. Depreciation begins when a solar energy system is placed in service. Costs associated with improvements to a solar energy system, which extend the life, increase the capacity or improve the efficiency of the solar energy systems, are capitalized and depreciated over the remaining life of the asset.
We have AROs arising from contractual or regulatory requirements to perform certain asset retirement activities at the time the solar energy systems are disposed. We recognize an ARO at the point an obligating event takes place, typically when the solar energy system is placed in service. An asset is considered retired when it is permanently taken out of service, such as
through a sale or disposal.
The liability is initially measured at fair value based on the present value of estimated removal costs and subsequently adjusted for changes in the underlying assumptions and for accretion expense. We estimate approximately half of our solar energy systems will require removal at our expense in the future. The corresponding asset retirement costs are capitalized as part of the carrying amount of the solar energy system and depreciated over the solar energy system's remaining useful life. We may revise our estimated future liabilities based on recent actual experiences, changes in certain customer-specific estimates and other cost estimate changes. If there are changes in estimated future costs, those changes will be recorded as either a reduction or addition in the carrying amount of the remaining unamortized asset and the ARO and either decrease or increase depreciation and accretion expense amounts prospectively. Inherent in the calculation of the fair value of our AROs are numerous assumptions and judgments, including the ultimate settlement amounts, inflation factors, credit adjusted discount rates, timing of settlement and changes in the legal, regulatory, environmental and political environments. Due to the intrinsic uncertainties present when estimating asset retirement costs, as well as asset retirement dates, our ARO estimates are subject to ongoing volatility.
Our allowance for current expected credit losses is deducted from the customer notes receivable amortized cost to present the net amount expected to be collected. It is measured on a collective (pool) basis when similar risk characteristics (such as financial asset type, customer credit rating, contractual term and vintage) exist. In determining the allowance for credit losses, we identify customers with potential disputes or collection issues and consider our historical level of credit losses and current economic trends that might impact the level of future credit losses. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics, such as differences in underwriting standards. Expected credit losses are estimated over the contractual term of the loan agreements based on the best available data at the time, and are adjusted for expected prepayments when appropriate. The contractual term excludes expected extensions, renewals and modifications unless either of the following applies: (a) we have a reasonable expectation at the reporting date that a troubled debt restructuring will be executed with an individual customer or (b) the extension or renewal options are included in the original or modified contract at the reporting date and are not unconditionally cancelable by us. We review the allowance quarterly for any significant macroeconomic trends that might be developing inaffecting the market but not yet impacting us. Assessments done
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Item 8. Financial Statements and Supplementary Data.
To the Board of Directors and Stockholders of Sunnova Energy International Inc.
Opinions on the Financial Statements and Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
The principal considerations for our determination that performing procedures relating to the initial accounting assessment of new TEP arrangements is a critical audit matter are (i) the significant judgment by management in the assessment of whether the Company is the primary beneficiary of the TEP, thus requiring consolidation of the entity, as well as whether the application of the HLBV method ismethodology based on the appropriate methodology for determiningterms of the noncontrolling interest balances,operating agreements in the initial year, which in turn led to (ii) a high degree of auditor judgment, subjectivity, and effort in performing procedures and evaluating the audit evidence obtained related to the initial accounting assessment of whether the Company is the primary beneficiary of the new TEP and the application of the HLBV methodology based on the substantive economic arrangements of the TEP operating agreements. In addition, the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management's assessment of the initial accounting for the new TEPs. These procedures also included, among others, (i) using professionals with specialized skill and knowledge to evaluate management's assessment of whether the Company qualifies as the primary beneficiary of the TEP, and therefore consolidates the TEP, as well as evaluating the appropriateness of management's application of the HLBV methodology based on the substantive economic arrangements of the TEP operating agreements.agreements and (ii) evaluating management's assessment of whether the Company qualifies as the primary beneficiary of the TEP, and therefore consolidates the TEP.
We have served as the Company's auditor since 2014, which includes periods before the Company became subject to SEC reporting requirements.
SUNNOVA ENERGY INTERNATIONAL INC.