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:
- the price of metered electricity is well above the national average
- long-term consumer protections for solar (such as near-retail price net-metering) are firmly established
- 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:
If you are work in the industry and liked this post, why not support my cause by registering for continuing education? I don’t get paid to write this stuff – your financial support is how I keep this solar content going!