Residential solar financing is a complicated business. It is complicated not only for homeowners who have to decide what product to buy and which company to buy it from, but it is also complicated for those on the business side, who have to sort out permitting procedures, state incentive programs, make financial models based on fluctuating SREC prices, secure tax equity financing, etc. Homeowners arguably have it easier, but without a paycheck that makes it worth their while to dig deep into the nitty-gritty, the onus lies with the solar industry to make solar simple. So let’s take a moment and try to unpack an industry packed full of detail in order to highlight a few key aspects that every potential customer should be aware of.
Buy vs. Lease
The first bridge to cross is whether you want to purchase a system or finance it. Financing usually comes in the form of a lease or a power purchase agreement (PPA), but those options are not available in every state. If those options are available, buying a system still makes sense for many people but there are a few things to bear in mind. First, in order to receive the full 30% federal investment tax credit in year one (it carries over to subsequent years, at least until the end of 2016), a homeowner will need to have a household income of about 75k or greater, with standard deductions, for an average system (about 6kW, installed at $4/watt).
In some places the option to finance to own is available and becoming more prevalent. This usually involves a tax credit recapture, where a financing company will require a medium sized down payment, say $10,000, and float the customer a loan for the amount of the tax credit (a “same as cash” loan, hopefully without any gotcha trickery). When the customer receives their tax credit in a year, they write a check for the same amount to the financing company. The initial payment, the state incentive and the delayed tax credit payment are enough to cover the cost of the system in certain areas.
In my opinion, which should be heeded only with a grain, or maybe bag, of salt, financing to own will continue to gain market share in coming years and is a very good option for homeowners, especially if monitoring and maintenance are included.
Leasing and PPAs
However, for homeowners that do not have the expendable capital lying around, the option to go solar for zero down through a lease or PPA may be available. The difference between a lease and a PPA is that a lease has fixed monthly payments whereas a PPA is pay as you go for the energy your system generates; if the system produces more electricity, you pay more, if the system produces less electricity, you pay less. Sometimes both lease and PPA payments are fixed, however, they can also be sold with an escalator.
An escalator represents the amount a homeowner’s payments will increase on a yearly basis and range from about 1 to 7%, with the average being about 3%. An escalator causes a homeowner’s initial payment terms to look more attractive, but over the term of the contract those payments increase and could even end up surpassing utility rates if electricity prices remain low.
Net Financial Benefit
What a financing company guesses will happen with utility rates is a large part of what they estimate your total net financial benefit will be. A homeowner’s net financial benefit is a function of how much electricity they generate and what they will pay for that electricity compared to what they would have otherwise paid for electricity from the grid. To calculate the net financial benefit over the term of a contract there are a few assumptions that need to be made.
Utility Rate Inflation
First is the assumption about utility rate inflation. Most companies base their inflation rates on historic data but there are ways to manipulate or simply misrepresent that data. Beware if you see inflation rates greater than 5%. There are examples where electricity rates increased grater than 5% during certain time periods, yet the glut in natural gas is suppressing utility rates and to suppose a 5% increase per year, over the course of a 15 to 20 year contract, seems aggressive. An inflation rate around 3% is probably more accurate.
Your Average Rate
Second, pay attention to what they are assuming is your current electricity rate. Utility rate tariffs are notoriously complicated and often vary by amount of consumption, season, time of use and even geography, example: PG&E. Ensuring that a solar quote fairly estimates your average electricity rate will improve the accuracy of your net financial benefit estimation.
Third, a company will have to make an estimate about a systems productivity. This depends on where you live, the azimuth of your system, the tilt of your roof and the shading factor. How much energy the system will produce is also a factor of system size and panel efficiency, but these are known. Productivity, on the other hand, typically measured in kWh/kW (kilowatt-hours per kilowatt), can be accurately estimated but not necessarily accurately quoted. What you are quoted matters, especially if leasing, because your payments are fixed and if your system produces less electricity, then you are getting less for what you are paying. With a PPA, you are paying for the electricity your system generates, so at the end of the day you may be offsetting less of your utility bill with solar power (and thus realizing less net financial benefit because you are buying more electricity from the grid at a higher price) but you will only pay for what you produce.
To assuage customers performance worries some companies will offer a performance guarantee, however homeowners should be wary of these guarantees, as they can be fairly insubstantial. For example, most PPA performance guarantees guarantee what is intrinsically true with a PPA; you pay for what you generate. So if you generate less, you pay less, which is good but still sucks because you are using more grid energy. A good performance guarantee will guarantee a certain amount of energy is produced over the term of the contract, and if not, that the customer be reimbursed for lost production. As such, a financing company is incentivized to fix a system if something goes wrong.
Monitoring and Maintenance
How do they know if something goes wrong? Because homeowners who choose to lease or do a PPA will often receive free monitoring and maintenance throughout the term of their contract. Some purchased systems come with monitoring as well but usually lack a strong performance guarantee to make them substantial and the monitoring service tends to be for only 10 years, as opposed to most leases and PPAs, which last for15 to 20. Monitoring coupled with a strong performance guarantee will ensure that your system is properly functioning for the duration of its life. Sometimes customers will even be able to log onto an online portal to monitor their own performance.
To confuse you even further, sometimes financing companies will have the option to prepay a lease or PPA. This means they will wrap up all the lease or PPA payments a customer would make over the term of a contract, discount that amount, and have the customer pay that amount in full. This is a very appealing option as homeowners can realize savings similar to what they would see if they purchased a system, but also get the added benefit of free monitoring and maintenance for the length of the contract. The downside being that it does require a medium sized prepayment.
What a homeowner chooses at the end of the day will depend on their finances, what products are available to them, how involved they want to be in monitoring their own system, and what they think is the risk of their system breaking, as well as a bunch of other things.
One thing is certain though, residential solar financing, albeit complicated, has served to greatly increase the amount of solar in the USA and the world, and if we hope to have a snowballs chance in hell of stabilizing, let alone decreasing, the amount of greenhouse gases in our atmosphere, we’ll need all the help we can get.