Residential Solar Financing
Inside this Article
Even with a strong 5-year outlook for solar, many growing businesses in our industry face critical risks. Each day brings us closer to the expiration of the investment tax credit (ITC), and each win makes us a greater perceived threat to the utilities. Some utilities are pushing back against the rapid growth of customer-owned distributed solar, as evidenced by utility-owned rooftop solar programs, attempts to develop rate structures and fees that are not solar-friendly, and the alteration of state net-metering policies. Financing may be central to a group of factors, such as reducing soft costs, that can mitigate the risks and help residential solar installation companies maintain stable growth. If you are not doing so already, you should consider offering financing products to your potential customers in addition to design and installation services.
Five short years ago, the US economy was still scraping by on fumes, and environmentally conscious early adopters were typically the only ones turning to grid-tied solar. Meanwhile, the banking industry was still in tight-clasped, risk-averse recovery mode. With average residential PV system prices hovering near $50,000 in 2010, third-party ownership (TPO) system leases and power purchase agreements (PPAs) were a boon to the residential solar market in the US and helped it grow into the $3 billion market it represents today. However, with shifts in the industry environment, affordable solar ownership may be able to provide your customers with greater long-term value.
In 2010, the cost of a typical residential PV system was within a few thousand dollars of Americans’ median income. Even for those with the means, solar was generally too new and the payback period too long to make it attractive to a high volume of customers. At the time, a home equity line of credit (HELOC) may have been the optimal PV system financing vehicle. However, so many households had upside-down mortgages that HELOCs were not an option for many homeowners. In this market environment, TPO, often referred to as “solar as a service” because of its subscription-like pricing approach, opened the door to millions of otherwise unreachable customers. Under the TPO model, a third-party investor—who can take advantage of all available solar tax incentives and rebates—owns the system. This arrangement effectively lowers the net system cost and associated monthly payments for the consumer, and it adds convenience as it removes the burden of monetizing available incentives from the homeowner.
With its promise of free installations and immediate monthly savings, TPO has been the go-to financing model for sales teams from coast to coast. And why not? The TPO model fits many of the purchasing preferences of Americans—no money down, immediate savings and risk-free guarantees. In all columns, this looks like a win. Many Americans, specifically the middle class, heard this message loud and clear. The same key markets where TPO has catapulted solar into popularity have seen a tight correlation between adoption rates and those customers with gross annual household incomes between $40,000 and $89,999 (see Figure 1). While TPO attracted the interest of homeowners, it also caught the attention of Wall Street, which has contributed to the TPO model’s credibility with heavy investments in residential solar.
Loans Enter the Arena
Fast-forward to 2015. The up-front cost of solar, access to capital and the health of the consumer economy have all improved. According to SEIA, the cost of residential solar has plummeted 45% since 2010. The average cost of a residential system is now in the neighborhood of $25,000. The number of lenders infusing capital into the residential solar market is growing at a robust pace, and consumers with little or no equity in their homes can borrow money for a PV system with ease. Before we accuse the current solar loan market of mirroring the practices that resulted in the housing collapse, sending our economy into a tailspin during the recession, bear in mind two things: first, easy access to solar loans requires good credit (typically a credit score of 680 or better), and second, these are not loans to go buy a new ski boat. An investment in solar offsets an expensive and volatile payment with one that is reduced and controlled.
One of the most impactful recent developments in residential solar financing has been the transition from secured loans, such as a lien on the home, to unsecured loans where a lien is filed on the solar equipment only. This shift not only removes the equity requirement, it also drastically simplifies the lending process for consumers. Interestingly, two distinct camps—home improvement lenders and pure-play solar financiers—are active in this arena.