Solar Loans - what is the tipping point?

There is a lot of news flow on investor interest on raising funds for solar loans, but not much attention has been paid to - what constitutes an ‘attractive interest rate’ to make homeowners ‘jump’ to make that solar investment.

Supply Side First

Lets focus on the resource side; the benchmark for raising ‘low cost’ institutional funds lies will be SolarCity’s BBB tranche security backed notes which were raised at an interest rate of 4.8% though the actual costs (including investment banking fees & marketing costs) to SolarCity will be far higher.

On the other hand there is a lot of tax equity money being poured into the Solar special purpose investment vehicles and being raised in tranches by institutions like SolarCity, CPF, Sunpower, Sunrun etc. These funds are packaged into individual lease or PPA options to consumers, where interest rate is not segregated from principal and the customer is not aware what is the interest portion of the PPA that he is paying out. Market sources indicate that these funds require a minimum IRR ranging from 9% to 16% to fulfill investor appetite. Again not a cheap option for any consumer? But as PPA’s are an all-in number, the customer does not know better.

We have seen the challenge of raising Tax Equity funds on a regular basis; a recent Greentech Media article highlights that Sungevity one of the leading loan packagers disbanded their individual efforts to raise funds shift and preferred to source funds from CPF a more larger and organized fund raising platform.

And then there is the Crowdfunding platform; Mosaic is the market innovator here and the leader by far. We now have SolarCity setting up a crowdsourcing fundraising platform to raise ‘low cost’ funds. Mosaic has been successful in raising low cost funds in the ballpark of 4% from individual investors; but these funds were channeled to larger community based projects. How successful and what will be the cost of raising funds to invest in individual projects where transaction costs and risks can be high is to be seen.

Where are Interest Rates headed to?

We are at a tipping point where interest rates are beginning to move north; consumer mortgage loans are beginning to climb, according to WSJ Market Data Center- 30 year fixed mortgages are running at 4.5%, HELOC’s at 5.15%, 30 year Treasury Bond 3.70% and expected to climb higher from here.

What Price is the Customer willing to Pay?

First let’s look at the investment thesis. ROI of any solar investment is tail ended i.e. a larger part of the return is back ended with the majority of the returns (aka savings) coming in years 11-25. Interest rates north of 7% will usually push the payback period to year 10 and above, most customers position their payback benchmark as anything between 6-8 years. Anything beyond 8 years and customers baulk at making the investment. So a payback in years 6-8 is a threshold for customers to make a solar investment.

Higher interest rates will then be a constraining factor.

The other issue is behavioral. Luring customers with a ‘low’ or ‘subsidized’ interest rate of 2.99%-4.99% (the upper end is closer to their current refi rate) whets customers appetites to make that decision ‘today’, as most customers do believe that interest rates will begin their northern climb in the near future.  But these low interest rates come wth a caveat - hefty dealer fees!

A recently published article in Clean Technica corroborates the fact that payback on ZERO down Lease/PPAs is faster than ZERO down solar loans - most solar consumer loans are priced north of 7.99% and come with hefty dealer fees to boot. The study shows that cash is king - with cash purchase providing the maximum bang for the buck.

The other challenge - cash also competes with other priorities like home improvement projects, children’s education, buying that next great this time consumer behavior suggests that all these other projects rank higher in priorities.

Bottomline raising low cost funds - as well as packaging these funds to pique consumers interest will be equally if not more critical to encourage customers to make that decision TODAY!

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Tags: installer, power, pv, residential, solar, solar.


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Comment by Bijou Lulla on April 13, 2014 at 7:15pm

Couldn't agree more Barbara; but PPA'a are still the fastest growing loan category!

Comment by Sandra K. Adomatis, SRA on April 13, 2014 at 5:59pm

Be careful with solar leases and PPAs as most contracts reference them as personal property. They do not have continuity of ownership with the property either. These leases can create problems on the sale of a home and could potentially have a negative impact on the sales price paid and/or market value.  The secondary mortgage market has not ruled on how they will react to these 20-year leases but we are hoping for a ruling soon.  Soon is not defined...

Comment by Bijou Lulla on March 16, 2014 at 5:33pm

Well Bob that's exactly the problem with many EE/Solar investments, the benefits are tail ended, investments are upfront. But there are many programs on the anvil, PACE, HERO are some of the program designs that are seeing traction in the marketplace. But these programs have been adopted by only a select Cities/Municipalities, but early results are encouraging. 

Comment by Bob Blanchette on March 16, 2014 at 8:19am

20 years is too long for most customers to sign up considering most people are in their homes only 7 years. Anything over 5 years is going to run off consumers. Use today’s lower cost of solar panels along with utility Smartmeters/TOU rates to get lease times under 5 years and solar will take off.

Otherwise there is simply too much other lower hanging fruit that consumers will chase first. 75% of all electric customers in Oklahoma are reluctant to spend an extra $800 to buy a heat pump vs. using resistance heat, no way they are going to pay for solar..

Getting the government out of the energy business would be a big help. The government (aka taxpayers pay for it) subsidizes energy costs, then subsidizes the green technology that is putting the most money in the congressman’s pockets. Charging consumers the entire cost of energy on their utility bills instead of part of it on their tax bills would encourage more green energy. The green energy that makes sense would survive on it's own.

Comment by Bijou Lulla on March 16, 2014 at 4:38am

Bob, equipment leasing for Solar runs 20 years and with some grey areas like what is the residual value at end of lease period, cost of deposing off the equipment etc. Also customer economic revolve around the system output i.e. kWh of energy and not system cost. Derivative of a Lease called the PPA therefore is more popular as customers pay for he units of electricity that the system generates. 

Comment by Bob Blanchette on March 15, 2014 at 9:42pm

Equipment leasing may be the answer, same business model that security companies use. Customer signs a 36 month contract and agrees to pay $XXX per month. Equipment service/repairs is included in leasing costs, customer pays nothing out of pocket for equipment failure. Energy savings would have to exceed lease amount for the program to make sense for the customer.

With more utilities switching to TOU/VPP rates, solar is promising. Solar production is highest at the same time TOU is at peak rates. Working with TOU rates also eliminate battery storage issues/costs.

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