If it seems obvious that solar projects run on money, how solar business can put potential customers in touch with money is not always so clear. This is particularly true for the residential solar marketplace, where budgets are often tight and ready sources of capital are few.
Although some banks, credit unions and other lenders are beginning to loan money to homeowners who want to install solar systems, many financial institutions still see obstacles to offering these loans. Therefore, the U.S. Department of Energy's National Renewable Energy Laboratory (NREL) has launched its Banking on Solar working group to address the barriers to lending for rooftop solar projects.
‘We saw that there was a need for direct lending activity that would help open up additional opportunities for consumers to own their residential systems outright,’ says Michael Mendelsohn, senior financial analyst with NREL. ‘We thought that if we could convene the correct different stakeholders, we could create the necessary infrastructure.’
The stakeholders include representatives from banks of all sizes, law firms, municipal and state finance authorities, energy companies, and others. One goal is to educate the financial companies about residential solar projects.
‘There is not a lot of understanding of the asset itself,’ Mendelsohn says. ‘Does it really operate 20 years like it's supposed to? Do people pay off these bills, or do they walk away from them in times of stress and default? Those are critical issues because solar is such a long-lived asset.’
The solar project might be so long-lived that it outlasts the borrower who had it installed on the rooftop. Bankers and appraisers want to know what happens to the asset when the home is sold or the property goes into default. The mortgage holder has priority over the secondary liens, so other lenders run the risk of not being repaid. Also, if the solar project is not paid off, the lender will not want to remove the panels, even though the project is the collateral, because the installation does have value.
‘The new owner of the property understands they will get energy and cost savings on their utility bill. We are explaining that value to the mortgage industry,’ Mendelsohn says.
Among the first tasks for the Banking on Solar working group, which has more than 100 members, is developing standardized loan documents and underwriting criteria in the residential and commercial solar markets. Banking on Solar is also working with another NREL-led working group, Solar Access to Public Capital. While the former is working on encouraging banks to originate these loans, the latter is trying to help banks securitize the loans.
‘Banks don't want to keep these loans on their books,’ Mendelsohn says. ‘They often securitize and sell them off into capital markets. If we can get one, we help drive the other.’
He adds that it helps that the securitization concept is not completely new to solar. Last year, installer SolarCity began selling notes that were backed by long-term residential leases.
Banking on Solar members say making it easier for banks to finance distributed generation (DG) is a worthy, and reachable, goal.
Loans for DG can eventually become as common as auto loans, says Mark F. Thielking, chairman of New York State's Energy Improvement Corp., which operates programs such as Energize NY.
‘Back in 1900, when the first cars were on the scene, there was no way to finance a car,’ Thielking says. ‘Over time, as that market matured, the industry figured out people don't have the money to pay for a car. They developed a standardized process to qualify the borrower using the car as collateral.’
Today, he says, 80% of all car purchases are financed. ‘The investors that provide the capital for the auto market understand the credit and understand the risks,’ he says. ‘We are doing the same thing for renewable energy and for energy efficiency.’
Sylvain Mansier, co-founder and chief operating and financial officer of Boston-based Sungage Financial, says the company's first residential solar loan, which launched last year, uses the solar electric system as the collateral. It was the first such loan in the U.S. to do so, he says.
‘Sungage Financial joined the Banking on Solar working group to share its experience, to learn from entities addressing similar challenges and to help educate capital providers about the solar lending opportunity,’ Mansier says.
One goal, he says, is to make it easier for new capital providers to participate in solar lending.
‘We hope that through the Banking on Solar working group, the industry will develop a common understanding of key considerations and establish a set of best practices for market participants to follow,’ he says. ‘This will ultimately result in better solar financing options for borrowers.’
Mendelsohn says webinars keep the group linked together. Banking on Solar has met in person once, with about 35 members in attendance. The group plans to assemble again at Solar Power International in Las Vegas this October.
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Nora Caley is a freelance writer based in Denver.