Finding new ways to finance rooftop solar

As the market for solar in Europe has been hammered by rollbacks in subsidies, from Germany to Italy, many on the domestic front have noted that at the end of 2016, the 30 percent tax credit on residential solar installations will expire. Sure, that’s over four years away, but regardless of how much longer homeowners can count on an incentive to install solar, solar installers themselves are keenly aware that they’re going to have to figure out more attractive financing schemes as subsidies sunset.

And just in the last six months we’ve seen an array of new thinking about how to finance both residential and commercial rooftop solar. I wrote about it last week, but the major problem for solar installation is the up front capital costs, which run about $20,000 and up for a 4 kilowatt residential system. Regardless of the long term return on investment from reduced utility bills, that’s just too steep an up front cost for most Americans.

There are a number of ideas about new financing mechanisms to eliminate up front capital costs. But let me outline three new models that either aim to nullify up front costs or create new mechanisms to increase the flow of capital into financing for solar installations.

1) Securitizing solar payments. Solar installer SolarCity doesn’t charge anything to install a system and will maintain it for its customers, provided they sign 20 year contracts under its power purchase agreement program. The company is locking in long term contracts with payments either by leasing the solar equipment or getting fixed rates on monthly electricity payments.

Bloomberg New Energy Finance estimates that in 2013 $4.6 billion in financing will be needed to finance rooftop solar projects. As companies like SolarCity accumulate millions of dollars of contracts, the banks have come calling, interested in creating asset-backed securities built around payments on solar systems. Merrill Lynch’s managing director of asset-backed securities recently told Bloomberg that solar backed securities would “open up substantial amounts of liquidity and credit capacity to an industry that doesn’t have it today.”

Yes, everyone remembers the global disaster that was mortgage backed securities, but some are arguing that while you can walk away from your home, it’s very difficult to live in a home and not pay your solar power bill, which theoretically should mean you don’t have power. Right now SolarCity requires a credit score of 700 to qualify for financing, a pretty strong filter. Though ratings agency are understandably nervous about rating the new security because the technology is new and no one knows what the underlying asset (the solar system) will be worth in 20 years nor is there historical data on the performance of the contracts themselves for more than a few years. With all that said, I do think these types of securities are inevitable, and will actually carry pretty reasonable risks for investors.

2) Peer-to-peer financing. While likely to be a much smaller part of the equation, there are efforts to connect individual investors with solar projects. My colleague Katie Fehrenbacher initially reported on Solar Mosaic, which she’s described as “The Kickstarter for solar,” and the startup’s mission is to crowd fund solar projects, having just completed an initial phase which provided $350,000 of investment from 400 individuals who would get their initial money back after a specified period. “Kickstarter” is an apt description but it’s clear that Solar Mosaic has larger aims than just doing the right thing, and is in a quiet period as it goes through the difficult process of getting accredited by the Securities and Exchange Commission (SEC) to give investors a return of around 6 percent on their solar investment.

3) Building markets to support solar financing. Clean Power Finance is further innovating the renewable energy credit markets by offering to purchase credits from installers, allowing installers to quickly use that money to finance the next project. Utilities with renewable energy generation mandates are often the customers for the credits and despite extreme volatility in pricing for the credits, like what we saw in New Jersey over the past year, energy credit markets are one way to push more money into solar installation. It’s a similar premise in California where SB 843 is being considered, a bill that would allow those who don’t own a home or who can’t install solar in their home, to buy clean power which would offset their utility bill. It would essentially force more capital into the market and drive more renewable energy installation.

The cost of installation remains a barrier to solar deployment and if we could reduce the actual installation costs, as I discussed last week, and combine that with cheaper capital to maker solar even more price competitive, then distributed solar will get even more attractive. Which will be necessary as generous tax credits eventually go away.

Question of the week

Will financing innovations matter to the future of distributed solar?
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Adam Lesser

Analyst Gigaom Research

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