Solar Financing – The current and future catalyst behind the booming residential solar market (Part II)

February 9, 2015 by Guest Contributor

By: Scott Rhode

This is the second of a three-part blog series focused on the residential solar market looking at; 1) the history of solar technology, 2) current trends and financing mechanisms, and finally 3) overcoming market and regulatory challenges with Experian’s help.

Lets discuss the current trends in solar and, more importantly, the mechanisms used to finance solar in the US residential market.  As I discussed in the last blog, the growth in this space has been astronomical.  To illustrate this growth, there was a recent article in The Washington Post by Matt McFarland, highlighting that solar-related jobs are significantly outpacing the rest of labor market in terms of year over year growth.  The article states that since 2010 the number of solar-related jobs has doubled in the US, bring the total number of jobs in this industry to 173,807.  While this is still smaller in comparison to other sectors of our economy, it underscores how much growth has occurred in a short amount of time.

So what is driving this explosive growth?  There are a few factors that should be considered; however, in the residential solar market, financing, is the main catalyst.  As you might expect, there are a variety of financial products in the market giving the consumer lots of choices.

First, there are traditional loans like home improvement loans, home equity loans, or energy efficiency loans offered by a bank, credit union, or specialty finance company.  For homeowners that do not choose to secure their loan against their property, there are a variety of specialty lenders that will offer long-term, unsecured loans that only file a UCC against the panels themselves.  For these types of offerings, some specialty lenders will even have special credit plans for the 30% Solar Investment Tax Credit so that the homeowner can have a deferred interest plan with the expectation that once they get the tax credit from the federal government, they will pay off the special plan and all of the deferred interest will be waived.  If the customer does not pay in full, the plan rolls to their regular loan plan and the customer has a higher cost of financing.

Second, there is a lease product which offers zero to little down and a monthly payment that is less than the savings that the homeowner will experience on their utility bill.  Of all the financing options, the lease has been the biggest driver of growth since it offers an inexpensive, no-hassle way to get all the benefits of going solar without breaking the bank.  What is unusual to most people that are unfamiliar with this concept is the term of the lease, which is typically 20 years.  However, when you consider that most manufacturers warrant their panels for 25 and many have a usable life of 40 years, this term does not seem all that unusual.  The benefits of this program look something like this:

  • The homeowner has an average electric utility bill of $350 / month
  • A solar company quotes a customer a savings of $200 / month in the form of a net metering energy credit, so their bill after solar is now $150 / month
  • The lease payment for the installed solar array, metering equipment, and monitoring software is $150 / month
  • The homeowner’s net saving is an average of $50 / month with nothing out of pocket
  • Over the life of the lease, energy prices will increase which will mean more savings over time so long as there are not escalators in the contract that exceed the increase in energy prices
  • The lessor “owns” the equipment and is responsible for maintenance, performance, and insurance

With this product comes complexity.  Many companies offering this program do not have the cash or the appetite to take on massive debt, so they partner with Tax Equity investors to make this transaction possible.  Because of the 30% ITC and accelerated depreciation, this transaction is very favorable for a Tax Equity investor like Google, US Bank, or Bank of America Merrill Lynch.  There are a number of structures they can use; however, the Sale-Leaseback structure is the easiest and most efficient way to fund the transaction.  While this is not “known” to the end customer, it is important because the Tax Equity Investor effectively owns the asset and has the final say in setting credit policy.  This transaction does require that the developer have a stake as well; however, many of the developers go to the debt market for “back leverage” on their stake so that they can reduce the impact to their balance sheet.

This complexity carries a cost, as the cost of capital is higher than most traditional loan products from established financial services firms.  That said, the fact that the lease allows the customer to monetize the tax credit and accelerated depreciation in the amount financed, balances out the higher costs of capital.  In the next blog we will touch more on the challenges this product, in particular, has in the market.

Last, but not least, there is another mechanism gaining popularity in the market.  This concept is known as community solar.  One of the obstacles of the lease and Tax Equity arrangement is that the lease is only available to single family residence homeowners and, if they have multiple homes, only the homeowner’s primary residence.  That means that people who rent, own a condo, own a vacation home, or own a small business do not qualify for this type of lease.  As a result, community solar has become a great option.

With community solar, the panels are put in an ideal location for maximum exposure to the sun and they often produce 10-15% more power than panels on a rooftop.  Portions of this solar farm can be sold, rented, or sublet to consumers regardless of their living situation.  As the panels produce electricity, that power gets sold to the local utility and the customer gets money from that utility that shows up as a credit on their next bill.  In this structure, the customer is not required to put money down in most cases and they are signing up for a specific term.

Like a rooftop lease, this structure often has a Tax Equity investor that funds the project.  Again, this allows them to take the 30% ITC and accelerated depreciation which, in turn, gets monetized and lowers the costs of construction.

In the final installment of this blog series, I will discuss some of the challenges that this market faces as the ITC expiration date approaches and the market becomes more mature. Leasing is driving the market, so if the ITC does not get renewed, the market will need to have a plan in place to find other innovative ways to keep solar affordable so more consumers can realize the benefits of going solar.

Solar Financing — The current and future catalyst behind the booming residential solar market (Part 1)