Unlocking Solar Financing

As NABCEP Installers, we know that many people want solar, but not everyone can afford to pay upfront. If you’re a small residential contractor like me, you may prefer to work with cash-only customers who can afford to pay upfront. But only targeting this market means that customers in need of financing will seek out higher-priced sales companies whom subcontract out the installation, meaning the installer will still be required to cove labor and balance-of-system costs and have less control over end-of-project payments. So how does solar financing actually work?

Home Equity Line of Credit – Currently 4.5% to 5.5% 

One of the cheapest ways homeowners can finance solar is through a home-equity line of credit (HELOC). This will typically give the customer a ten year loan between 0.5% to 1.5% above prime. It takes about two weeks between the time the customer completes the loan application to the time the money is deposited into the customer bank account. At that point, the customer has the ability to spend the money as they wish. Having a strong customer relationship can ensure the project is adequately funded without straining the installation contractor’s finances, similar to a cash deal. This can result in a beneficial project structure for both the customer and the installer.

For example, my market (Mississippi) has pretty low electricity rates AND lacks net-metering. The only way to make the project economically beneficial is to provide extremely aggressive pricing, below $2/W before sales tax. But that also means I need to reduce my project risk. However, at such a low installation price point, it is easy to explain that the customer needs to cover the material costs upfront, plus some mobilization fees to cover the design and material receiving. The customer is usually happy with these terms, because it can be easily demonstrated to them that they are receiving incredible pricing. Likewise, having the customer do the legwork for a home equity loan does not increase my project cost. So long as the homeowner has equity in their home, the project can be structured similarly to a cash deal (at least from the installer perspective).

It should be pointed out that most solar customers want a 10 year payback (or less) on their solar projects. If you are selling at a 10 year simple payback, a 10 year HELOC will add interest fees to the project. This will cause the solar loan to be “upside down” in the sense that the loan payments will exceed the cost savings of the array over the during the duration of the loan. But most solar customers who qualify for HELOCs understand that while they may be increasing their monthly expenses, the solar array will eventually be paid off and result in long-term payback. And it would not be unfair to characterise the solar array as “paying off the loan” in the sense that the financial structure will substantially reduce the out-of-pocket expense of the homeowner. For example, I recently sold a project where the HELOC loan payments were $2500/year but resulted in $2000/year in electric savings. The customer was happy to spend $500 more per year for ten years, on a low-risk gambit which would result in $2000/year savings even after the loan is paid off, for a 12.5 year payback.

“Short Term” Unconventional Solar Lending – 4.9% – 29.9%

Unconventional lending, also ironically called subprime lending, is a loan which is issued ABOVE prime and does not meet traditional home lending guidelines. This can be an expensive loan, but it can also be a good option for customers with good credit whom do not have enough equity in their home for a HELOC. For example, a customer with good credit may have recently used a HELOC to upgrade their home, with the solar project being an afterthought. They may also be new home-buyer who simply does not have any equity in their home. So there are a number of home owners with good credit who simply do not have home equity, and these customers can be well-served by unconventional financing with loans similar to HELOCs. Because the loans do not involve the bank coordinating with the home title company, some solar installation companies prefer simply to deal with “solar financing companies” rather than use banks for conventional HELOC financing.

A “Short Term” Unconventional solar loan is similar to a commercial capital equipment loan, in that the term typically ranges between 3-7 years. Even if the interest rate is similar to a HELOC, the shorter loan term will result in a higher monthly payment and more “out-of-pocket” expense than a 10 year HELOC. At the same time, the shorter loan term means that less interest is paid. Referencing the previous example, a 7 year unconventionally financed array results in a similar payback to a 10 year HELOC for a customer with good credit (about 12-13 years, under a 10 year “simple payback”).

Short-term unconventional solar loans are also similar to HELOCs in the sense that the customer is given the money upfront. As such, we can structure the project payment terms to provide great pricing, provided that the customer trusts the installation contractor enough to provide a substantial upfront payment (which might be as high as 70% of the total project cost). Customers with bad credit can qualify for shorter-term unconventional solar lending, but the project will not be economic.

“Long Term” Unconventional Solar Lending – 4.9%/yr + 12.5% contract value (20 years)

Finally, we get to long-term solar loans. This kind of loan typically requires the installer to have $2MM in revenue and a couple years in business. On the other hand, the money is paid directly to the installer!

The conventional financing counterpart to this kind of loan is a long-term home mortgage, but unlike short-term unconventional loans, it carries a substantially higher premium. Long-term unconventional solar loans typically have a provision to allow the customer to pay down the loan without penalty within the first year or two of the loan-term. While shorter options are available, a 20 year loan term is common. The loan usually allows the customer to claim tax benefits of solar and not have it factored into the long-term price of the loan.

These loans add substantial cost to a solar project. Even if the interest rate is the same as a short-term loan, a longer term will substantially increase the total amount of interest paid. On top of that, the loan is riskier for the lender. As such, the lender charges an upfront fee which starts out at 12.5% in order to overcome that risk. So if I am installing solar at $2/W, a long-term loan will increase that starting cost to $2.25/W, before the 4.9% interest kicks in.

Still, customers may seek longer financing terms such that the array can “pay for itself” over the life of the loan term. In other words, the cash flow of the customer would remain positive for every year of the loan. However, customers should remember that this is not a guarantee. In many parts of the country, the 20 year price of electricity does not above the price of inflation, but rather, below it! While this price may not account for the true cost of electricity, being a function of political whim and being disrupted by distributed generation, it is not known how these factors will impact the value of solar to a customer.  For example, the Tennessee Valley Authority only pays 2.5 cents for distributed generation outflow for a “net-metered” solar array. In the executive summary of its 2018 rate change report, it explicitly states the intent to reduce the value of distributed generation further, meaning regional cooperatives will be able to increased fixed meter fees rather than increase the metered electric rate. To get true “retail price” from the array, a residential solar customer in this market may be best served by going “off grid”.

In other words, if a solar customer is presented a long-term cash flow diagram which shows a 7% increase in the price of electricity, but the value of solar only increases at 1.5%, it effectively adds another 6.5% to the interest rate of the loan. In other words, while it is common for a short-term solar loan to be “upside down” over the loan term and still be beneficial to the customer over the long-term, potential solar owners should be advised that long-term solar financing can result in true “upside-down” economics if the solar model is too aggressive. Ultimately, long-term upside-down solar loans are bad for the solar industry.

My recommendation is that unconventional long-term solar financing only be used under ANY of the following conditions:

  1. the price of metered electricity is well above the national average
  2. long-term consumer protections for solar (such as near-retail price net-metering) are firmly established
  3. the project includes a battery bank large enough to take the customer 100% off-grid (even if the customer remains grid-tied)

Regardless of solar policy, a conventionally-financed solar array under a long-term mortgage is usually a good deal!

Finally, if you’ve made it this far down the post, here is a list of solar finance companies to consider:

  1. GreenSky Solar
  2. Dividend Solar
  3. SunGage Financial
  4. LoanPal

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Hopscotch: Stop Worrying and Love MLPE

Here is the summary!
1) Improved installation logistics on the ground and roof
2) Improved cable management when combined with U channel racking
3) Mounting the module BEFORE DC optimizer improves workmanship
The Hopscotch Process:
On the Ground:
a) Select a rail with a top U channel.
b) Pre-assemble the rail, rail splices, and grounding lugs.
c) Mark where the L-feet and module frames will land.
d) Make up your home run and lay-into the U channel.
e) Mount the DC optimizers on the other frame of THE NEXT MODULE OVER, with two optimizers under the last module at the end of the row.
f) Tie wrap the DC optimizer whips into the U channel on each side of the optimizer.
g) Lift the entire rail up in one piece.
On the Roof:
a) Attach the rail to the L-feet, square and level the rack, and complete your wiring.
b) Mount one module onto the rack.
c) Reach under the module to grab the module whips.
d) Plug the “tight whip” into the optimizer. There should be very little slack.
e) Wrap the “loose whip” around the “tight whip” to remove the slack.
f) Repeat.

If you’re a NABCEP solar installer, you are probably already engaged in a love-hate relationship with Module Level Panel Electronics (MLPE). MLPE has clear design and performance advantages to offer solar owners. But MLPE exponentially increases the cabling and electronic failure points on the roof.  At the very least, MLPE means addition installation time. Under the worst case scenario, rodent-destroyed cables or otherwise faulty optimizers can result in numerous trips back to the job site which are not always supported by the manufacturer warranty. 

There is no way to fully eliminate this risk, as individual panels are plugged into their adjacent neighbors during installation. Cable management techniques such as tie-wraps and cable clips have their shortcomings too. Even the best cable management system does not address the exposed length of cable between the module junction box and module frame, which will inevitably droop over time.

Every solar installer has their favorite cable management technique, and I’ve finally honed in on a MLPE-mounting technique I’d like to share.

Do the Hopscotch!

1). Select any racking system with an “open U” top channel. I like the Everest Cross-Rail system, but even Unistrut will do. 

A U-shaped top channel assists easy cable management.

2) Everything except the L-foot attachments and module mounting is done on the ground. For example, you will fully assemble the solar rail and then lay the home-run cable into the U channel, before lifting up to the roof.

Pre-assemble the entire rail length on the ground (including rooftop home-run cable).

Liberal use of tie-wraps mitigates failure and vanishes exposed cable.

3) Measuring and marking the rail is critical for ground pre-assembly. With practice, much of this work can even be performed at the office before getting to the job site. The goal is identify where every single component, down to the zip tie, will land on the rail in order to avoid any conflicts up on the roof when mounting the modules. You want to mark the following:

•  Module End Clip •  L-foot attachments

•  Module Edges •  DC Optimizer Locations

•  Module Mid Clip

4) The Hopscotch!

Traditional Method:

DC Optimizers are commonly located on the rail underneath the solar module, located to not interfere with the module edges or L-foot attachments. Before mounting the module, the optimizer is plugged in. Then the module is lowered in such a manner that the loose cable whips remain atop the optimizer and below the module. Combined with pre-assembly, this can result in a very “clean” looking installation. However, this process requires multiple hands to install, and cables remain loose underneath the array, which could be problematic down the road. 

Traditionally, the optimizer is located under the module with awkward cable management to prevent drooping.

Hopscotch Method:

Locate the DC Optimizer underneath the next module over. This may sound like heresy. But consider the advantages of the next few installation steps.

5) Back on the ground, mount the optimizers on the rail and plug them into their next-door neighbors. Make liberal use tie-wraps, at least one on each side of the optimizer, with additional tie-wraps to keep any slack in the U-channel. Doubling up the cable-whips provides cheap insurance that the cable will remain in the rail over the life of the project.

6) Lift the entire rail assembly in one piece up to the roof. Attach the rail to the previously mounted L-feet and square, completing the rack installation. At this time, you will also want to finish wiring your transition box and home-run cable run down to the inverter.

7) BEFORE plugging the module to the optimizer, mount the module onto the rack. If you used the Hopscotch layout, you no longer need to juggle the module and optimizer connections, substantially improving the installation time of this process.

Hopscotching allows mounting the module BEFORE cable management.

8) Reach underneath the module and grab the loose module whips. Plug into the exposed optimizer whips. There should be almost no slack in the “tight” module whip. Wrap the “loose” module whip around the tight cable to eliminate any slack. Compared to the traditional method, you will be able to see the cable whips running underneath the module frames. But because there is no slack, the cable is secure and will not shift over time.

Wrap the 'Loose Whip' around the 'Tight Whip'

9) The final module will have two optimizers underneath. After “hopscotching” the second-to-last module, the final module is mounted in the traditional manner.

And that’s it! Through careful planning of every system component, ground-mount pre-assembly is utilized for a quick and clean installation on the roof. The additional planning time is more than made up for through reduced time spent on the roof, eliminating all sorts of project risks such as installer fatigue or unexpected rain (which can damage “unplugged and exposed” optimizer). Any misplaced optimizers can be easily adjusted AFTER mounting the module. Because you no longer have to fight MLPE mounting and cable management obstacles, you can finally learn to stop worrying and love your module-level panel electronics!

'Vanished' cable with hopscotched MLPE

Blog Author John Cromer is a NABCEP-certified solar installer, mechanical engineer, master electrician, and residential builder. He’s on a mission to convert Mississippi to 100% solar power. Because if a “bad solar policy, low electricity pricing” market like Mississippi can flip to solar, there will be no more excuses for carbon-heavy electricity and the rest of the USA will follow.

If you liked this post, why not support his mission by registering for The Glass-Slapper Guide to Solar Power for continuing education? The program meets 100% of NABCEP continuing education requirements and includes unlimited course access and updates.