Who Needs Third-Party Finance? Loan Programs Offer Low-Cost Direct Ownership Opportunities

Mike Mendelsohn, NREL
November 29, 2012 | 12 Comments

Direct ownership of solar systems offers an array of benefits generally not available to third-party finance. And new loan programs are making it easier to achieve that goal.

To date, direct ownership has not been a primary driver of small-scale solar deployment. Instead, residential and commercial customers alike appear to strongly prefer third-party ownership—via leases or power purchase agreements—over direct ownership. According to SunRun, 75% of the California market relies on third-party financing.

That's likely due to the immediate cash requirements necessary to invest (a typical 5-kW residential system can cost on the order of $20,000–$35,000, assuming installation costs of $4–$7/W). And if my own experience is any indication, end-use customers are generally not interested in filling out the paperwork necessary to recover the tax credit offered to homeowners (as distinct from the business investment tax credit or 1603) or utility renewable energy certificates (RECs).

With respect to the cash layout, there may be some new opportunities to borrow the lion's share of the installed system costs, negating most out-of-pocket expenses. And although there is likely more paperwork than in a third-party lease transaction, the benefits of direct ownership may be worth the effort.

One example loan option is the "Step Down" program offered by Admirals Bank. Step Down works directly with installers and developers to essentially promote the program through their client contacts. Step Down is available in every state except for Texas. According to Ryan Wells, Vice President and Director of Renewable Energy Programs for Admirals Bank, the bank is signing up roughly seven to 10 new contractors every day, and the bank is writing several million dollars in residential solar loans each year.

Step Down is a registered program under Title 1, administered by the Federal Housing Authority (FHA) of the U.S. Department of Housing and Urban Development (HUD). According to HUD, the agency insures eligible private lenders against loss on property improvement loans they make. Loan applicants must have good credit histories and the ability to repay the loan in regular monthly payments.

Title 1 loans are capped at $25,000 for single-family homes or $60,000 for multifamily structures and can have maximum terms of 20 years. Different loan aspects apply for manufactured housing — whether on permanent foundations or not.

Wells indicated the bank loans under Step Down carry a fixed simple interest rate of 4.95%–9.95% for most borrowers and are tax deductible. He also argued direct ownership — achievable for many when partnered with a low-cost loan—offers several advantages over a third-party lease, including locked-in payments (some third-party leases escalate annually), a likely appreciation to the home, and ownership rights to alter or move.

I searched for developers that know about Title 1 financing and found several. For example, Black Platinum Solar — serving the Phoenix, Arizona, region — encourages customers to consider a Title 1 home loan. The company — an Admirals Bank client — explains, "[u]nlike a lease, as the property owner you own the PV system, receive any incentive rebates from your utility company, and can take the state and federal tax credits." Which, as mentioned above, can be a lot of work but may also provide significant cost benefits to motivated homeowners. Other loan specifics include:

No equity or appraisal necessary
Both secured and unsecured loans available
Flexible terms (5, 7, 10, 15, or 20 years)
Fast pre-qualification process, typically in 24–48 hours
100% up-front funding
Low, fixed rates based on current market rates in your area
Tax-deductible interest (be sure to consult your tax adviser)
No pre-payment penalties.

In fact, a wide range of other government programs are available, including from Fannie Mae, Freddie Mac, the Veteran's Administration, and the Environmental Protection Agency. These programs offer customers a wide range of financing opportunities and should speed deployment of solar systems.

This article was originally published on NREL Renewable Energy Finance and was republished with permission.

Lead image: Bank building via Shutterstock

12 Comments

Daniel Ferra
December 4, 2012

Petition Background
California law does not allow home owners to size their Solar systems larger than what they use. In order to get the California Solar Initiative (CSI) rebate, the customer is not allowed to install a system that inherently over-produces more than what is needed for his home.
The Feed-in Tariff can not be earned if you receive a rebate from your utility company for solar panels or if you are participating in other utility solar incentives programs such as the CSI. It also can not be earned if you are participating in net metering, which only pays one time a year under the AB 920 California Solar Surplus Act.
Our Feed-In Tariff should mirror Germany, Japan, and Hawaii where residential FIT is 21 cents - 54 cents per kilowatt hour.
The 5 cents per kwh currently administered as a one-time-a-year payment is not adequate and stops our own citizens from participating in our struggle to reduce green house gases.
The California Public Utility commission can change the FIT to 25 cents per kwh, and distribute the solution to all tax-paying citizens, who should not be deliberately handcuffed. Residential home owners should be allowed to participate in the State mandated goal to achieve 33% renewable energy by 2020.
California resident who purchase an electric vehicle can expect a 60% increase in their electric bill, as shown by a study done by Purdue University in summer of 2010.
Due to these laws, we have automatically taken out over 8 million roof tops, that would generate over 11,500MW of power, thats 5 San Onofre nuclear power plants.
We need to let our tax paying, home owning citizens in on a Feed in Tariff that pays 25 cents per kwh.
In the spirit of Bill McKibben and 350.org for our children and eaarth, lets make real global sustaining changes for all of us.
Go to Facebook, Daniel Ferra, Palm Springs Ca. to sign petition, thank you

Daniel Ferra
December 4, 2012

Hello, we need a National Feed in Tariff, for Solar and Wind, with laws that level the playing field, this petition starts with homeowners in California. Japan, Germany, and our state of Hawaii, will pay residents between 21- 54 cents per kilowatt hour, here in California they will pay us 5 cents per kilowatt hour, and they wont let us oversize our Solar systems, want to change our Feed in Tariff? Campaign to allow Californian residents to sell electricity obtained by renewable energy for a fair pro-business market price. Will you read, sign, and share this petition?

http://signon.org/sign/let-california-home-owners

Tom Weiss
December 4, 2012

There are always advantages to both, aren't there? Just like there are advantages to owning or leasing a car. And, sometimes when you own it you pay cash, and other times you finance it. As installed $/watt continue to drop I wouldn't be surprised to see the auto financing model take hold. Currently, the credit score requirements are high and financing companies still have all the jobs they can handle. Eventually, the bar will be lowered. Eventually, we'll see / hear ads like, 'If you have a job then you can have solar on your house.' As Steve Nelson points out on the advantages of TPO, with an inverter that has a 10 year warranty, it's nice to know that it will be replaced if it goes wrong. And, even if it's Enphase, if an inverter goes bad, it's not the homeowner's problem, it's the System Owners. There's also monitoring included in the price. Not many residential customer-owned systems that have monitoring included, except SunPower, that I'm aware of. I'm also curious how many residential customers who own the system are able to take full advantage of the 30% ITC in the first year. As they often already have a mortgage deduction and all the other deductions, they may have to carry it forward and finance that carry forward until they can take advantage of it.

Bruce Karney
December 4, 2012

What's "new" here? High interest rate unsecured loans have been available for a long time for home improvement projects, including solar.

Years of actual evidence from California and other states demonstrates that a substantial majority of solar customers who have a choice between loans and leases or PPAs prefer the latter.

The claim that "owned solar" systems will increase a home's value at resale is probably true, but I've seen many examples of solar installers claiming absurdly high resale values in order to jack up the claimed ROI of purchasing a system. This, along with the claim of 6-7% annual increases in electricity prices, is one of the most common misrepresentations found in residential solar bids.

Lastly, I'm puzzled as to why someone from NREL has written an article that sounds like an advertisement for a particular loan program. That doesn't seem like something our tax dollars should be paying for.

Walter J Smith
December 4, 2012

Okay, I posted my comment, and it was deleted even though I obeyed the comment limit posted. Then I was notified that it wasn't, but the comment was not returned so I could edit it better than the little pile of figures and words at the bottom of the box does.

ANONYMOUS
December 4, 2012

Dear Sir, I am in India , I am interested to implement Solar power plants ( house / small commercial purpose). Is there any simple financing scheme to encourage in India . As you know there is a huge scope here. Kindly advice me so that we can go ahead . We will procure the materials required from USA and install. Expecting your positive reply. Thanking you , With Regards: Shiva - Bangalore India +91 9845541384

ANONYMOUS
November 30, 2012

last post continued... So I don't know how anyone can argue that a $200 monthly lease payment that escalates is better than a fixed loan payment of $175 and has the ability to write off the interest being paid. Also they can pay off the loan at any time and have no monthly payments at all. The only competitive lease option that I see nowadays is the Prepaid lease that allows homeowners to still collect SREC's or other local incentives. The obstacle with a prepaid lease is you still have to come up with money out of pocket because most banks will not finance a homeowner for something that they do not own. Lastly, these systems have no moving parts carry a 25 year warranty, and if they use micro inverters those will also carry a 25 year warranty, so the whole cost of maintaining these systems is highly overrated by companies that like to push the TPO model. Not to mention if the third party goes belly up or gets out of the business the whole maintenance coverage doesn't have any value.

ANONYMOUS
November 30, 2012

We can all agree that a cash purchase will yield the highest return for a residential solar system, then financing the system with a reasonable loan should provide only a slightly less ROI, but still making it a great investment.

I know that there will be those who invest or even work for the companies that offer TPO and will do their best to defend their investment. Given the fact that most installers can install a 5-10kw system for under $4.00 per watt in most areas of the country it is making it so a home owner can take out a loan between 5-8% and still have an overall better ROI than a no money down monthly lease payment.

Let me give a great example, California has their 5 tier pricing and in most areas and a typical homeowner might be paying $300 per month for electricity at an average of 25 cents per watt. A lease companies comes in and says we are going to give you 9kw system to cover your usage and only charge you $200 per month, and instead of paying the electric company that increases their rates @ 5-6% a year we will only increase your payments by 2.9%.

If a homeowner were to do some research and find that they could have financed that system either through an equity line or an FHA loan they would have found out that they could have got that $35-$37 thousand dollar system with no money out of pocket and have a lower payment than the lease payment of $200 per month. And the loan payment never rises and the homeowner can typically write off 100% of any interest paid. With the Admirals Step Down Program that homeowner also get the ability to pay down their loan using their incentive monies and reduce the payments even further.

K Smith
November 29, 2012

I agree that this loan, among others, are good opportunities for homeowners looking to purchase a solar electric system. However, in the states that offer third party ownership (TPO) options like a lease or power purchase agreement, I think that the TPO option is a better investment. This article assumes that the homeowner will be paying monthly in a TPO option, but there are also other TPO options which allow the customer to pre-pay for all of the power in the 15 or 20-year lease or PPA term upfront, which offers a better return on investment than purchasing the system. One reason for this is because the solar company providing the TPO will maintain, monitor, and insure the system for the life of the term. This has a great economic value since the solar company is putting out for inverter replacements, repairs, etc over the life of term, so you don't have to. Some solar companies even offer a power production guarantee on the system, or your money back, which does not typically come when you purchase the system, so you have peace of mind.

Another reason that TPO's are more beneficial is because the value of the incentives/subsidies is included in the upfront cost right away or monetized upfront, so you don't have to wait for these monies to come back to you. Solar PPA/leasing companies can also depreciate the system when they buy it for you since they are a business, reducing their total cost, and then they pass on some of these savings to you, the homeowner. Homeowners of course cannot take advantage of this.

Lastly, some TPOs allow the homeowner to still hold on to the SRECs or renewable energy certificates/credits. So at the end of the day, by doing a lease or power purchase agreement you are not necessarily forfeiting any of the incentives, but in fact gaining an incentive since solar companies will depreciate the system and pass some of these cost savings on to you. And, once again, everything is taken care of for you. As they say, to own is to maintain!

Steve Nelson
November 29, 2012

I wish NREL provided a more nuanced analysis of the purchase vs. third-party ownership (TPO) scenarios for home PV.

If you have the cash available (e.g., in a low-return money-market fund) and you have sufficient tax liability to fully use the 30% federal investment tax credit, then buying is a better deal than TPO. You'll save more in the long run by eliminating the middle man.

But what if you have to borrow the money? In the Step Down program cited, the cost of that money would be between about 5% and 10%. Maybe with a 5% loan you'll still come out ahead in the long run, but I doubt you will paying 10%. I'd like to see NREL develop an online process that would enable a potential PV customer to compare the payoffs of purchase vs. TPO by plugging in variables such as borrowing costs, ITC availability, lease or PPA cost, escalators (if any), etc. Then a customer could make an informed decision about what's best for him.

As for the benefits of ownership Mendelsohn cites, locked-in payments (and buyout provisions) may be available with TPO deals. Appreciation of home values may be "likely" for purchased systems, although there is no hard data on this, but a similar effect may also be "likely" with TPO systems. A purchased PV system obviously goes with the home when it's sold, but TPO contracts provide a process to transfer the contract to a new owner.

On the other hand, system ownership has its downside. It involves a lot of work before you buy: evaluating the financials, the equipment and competing installer proposals, plus more paperwork. And here's a hidden cost. Having taken out a big loan, you may find it harder to get another loan later, e.g., for college tuition or a medical emergency.

There are good reasons why TPO is gaining wide acceptance. Most consumers like simplicity, convenience and paying over time. Buying a system may be a good deal in the long run, but it's a more complicated process appealing to a much smaller segment of the market.

Bob Wallace
November 29, 2012

Installation companies need to provide someone to walk owners through the tax paperwork. A company employee, a contracted CPA, whomever could help new owners through the paperwork quickly.

Or generate some software that would print out that part of the tax return with the numbers in place.

Chris Williams, HeatSpring
November 29, 2012

Mike,

Great analysis. You hit the nail on the head. The idea that 3rd party financing is the best alternative for everyone is frankly bullsh%^. Cash sales will also be more and more attractive as installed costs drop, rates increase, and risk declines. http://www.greentechmedia.com/articles/read/guest-post-betting-on-the-decline-of-residential-solar-pv-financing

Chris

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Michael Mendelsohn

Michael Mendelsohn is a Senior Analyst with the National Renewable Energy Laboratory’s project finance team and expert in PV and CSP financing. His expertise spans 20 years and encompasses various aspects of renewable energy technologies,...