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 car………at 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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