301 Moved Permanently

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On Oct. 7, SolarCity announced, in CEO Lyndon Rive’s words, the biggest product launch in the company’s history. SolarCity’s MyPower program represents the solar finance giant’s first foray into the solar loan space.

Particularly striking was the company’s estimates that the new solar loan product might be responsible for as much as half of the company’s sales in 2015. Given the company’s 2015 guidance, this projection effectively silences any questions about consumer demand for solar loans.

The shake-up is exciting because it brings the conversation about the future of residential solar finance out from the shadows. For too long, the seemingly unquestionable wisdom was that leases and power purchase agreements would continue to dominate the residential solar finance space. But now, with the SolarCity announcement, the re-emergence of property-assessed clean energy (PACE) financing and efforts such as the National Renewable Energy Laboratory’s Banking on Solar initiative, it is clear that we have an opportunity to reconsider the best foundation for a vibrant and resilient residential sector.

If we were building residential solar finance from scratch, what would be our principles of design? I’ll argue for three. First, residential solar finance must meet consumer preferences. By definition, this will mean that one size won’t fit all and choice will be key. Second, residential solar finance must be quick and easy. Given that the alternative for consumers is to stay with their utility, our collective challenge is to make this transaction as painless as possible. Third, the capital we use to fuel residential solar must be scalable. As residential solar goes from niche to mainstream, so must our capital sources.

 

Meeting consumer preferences

One striking feature of residential solar is that we’ve historically bundled a choice around financing with choices around equipment and the handling of repairs. In other words, when consumers select a residential solar lease, they are also forced to accept standard offer equipment and prepay for 20 years of repairs. One can assume a priori that the forced bundling of finance, equipment and prepaid repairs did not best meet the varied preferences of consumers. Therefore, if one of our design principles is to meet consumer preferences, then it stands to reason that we should seek to decouple financing, equipment selection and repair contracts to let the full variety of consumer preferences along these dimensions shine through.

In addition to decoupling, meeting consumer preferences will require choice around ownership options. Historically, the providers of solar leases have compared solar to satellite dishes or cell phones to argue that ownership was inappropriate. Those analogies quickly break down when you consider that there is no equity upside to ownership for satellite dishes or cell phones.

Cars may serve as a better analogy. In the U.S. auto market, between 1990 and 2010, the rate of leasing for new sales of passenger cars averaged 24%. In other words, most consumers own and finance with a loan despite the lower monthly payments associated with auto leases.

Residential solar has, of course, one structural reason for continuing to offer leases - to facilitate participation by those individuals who cannot monetize the available tax incentives. As a result, the solar finance solution set for the residential solar industry must continue to include leases and loans, but if the automobile market is any indication, it will likely be dominated by financing options that support ownership.

 

Making it easy

While it should be painfully obvious, it never hurts to remind ourselves that we’re competing against the status quo of the utility. Utilities make it very easy for you to become their customer. If you live in their territory and you call to request an account, they tend to accommodate you on the spot. You don’t have to have any equity in your home. They don’t take a lien on your house. They don’t force you to complete an application or sign a 15-page contract. This reality bears keeping in mind as we contemplate both the products and the processes that constitute the residential solar finance of the future.

Solar financing products, which involve the real property, have been a crutch for solar lending in the absence of solar-smart product design and educated lenders. The use of the real property adds cost and slowness and unnecessarily limits the addressable market to those with equity, or at least those without an existing second lien. It is worth mentioning one notable variant on this theme: the PACE program. Such programs use municipal bond markets as capital sources and on tax liens - which are also real property-based - as the ultimate repayment mechanisms. Unfortunately, PACE contracts tend to be complicated and include features that are strikingly consumer-unfriendly, such as annual administrative charges and restrictions on prepayments.

Ideal solar financing solutions will be simple for consumers to understand and easy to deploy rapidly at the kitchen table. Moreover, the associated underwriting criteria will allow us to address a broad base of customers without requiring any touch points with the real property.

 

Ensuring scalability

Industry analysts project that in 2016, 2.9 GW of residential solar will be installed in the U.S. For simplicity’s sake, at $4/W, this implies a capital requirement of $11.6 billion. Although still small by the standards of the U.S. auto or mortgage markets, this capital need will continue to outstrip the supply of tax equity and create a premium for this particular form of capital.

Moreover, in 2017, when the federal investment tax credit falls to 10% and the residential energy credit falls to 0%, a portion of the capital stack currently borne by taxpayers will need to be sourced elsewhere. The recent expansion of the PACE program may cause optimism among some, but given that enabling legislation is still required, this path does not, at present, constitute a reliable path to scale. When taken together, these factors point to the need for a transition from niche sources of capital, such as tax equity and even “the crowd,” to stable, deep and experienced pools of capital.

And of course, stable, deep and experienced pools of capital for consumer debt do exist. Insurance companies, pension funds, endowments and banks are among the many players active in the market for consumer paper. In the first quarter of 2014, for example, credit unions alone held $182 billion in auto loans.

Consumer lenders, such as credit unions, can not only provide low-cost capital, but can also contribute their expertise in being a compliant and responsible lender and a reliable and experienced servicer. In the interests of rapidly scaling, it makes good sense for the solar industry to leverage rather than try to rebuild this expertise.

 

Boring is better

In April 2014, the Rocky Mountain Institute wrote a blog post entitled “Keep Solar Finance Weird? ... Hopefully Not.” The authors argue that complexity in solar finance “impedes faster growth both due to insufficient capital and higher cost to the customer.”

Complexity is especially problematic in the residential market where the counterparty is a homeowner and not a chief financial officer. In other words, dull might be the brightest future for residential solar finance. S

 

Sara Ross is CEO and co-founder of Sungage Financial, a Boston-based marketplace that provides homeowners with access to low-cost solar financing. Ross started Sungage following her own experience purchasing solar. She can be reached by email at sara.ross@sungagefinancial.com.