Solar loans, leases plug into the sun
New York — A new financing offering could make home solar cheaper and more attractive to homeowners, and keep the adoption of home solar growing.
The offer, recently announced by SolarCity, is a loan that allows homeowners to install their own solar system on their roof for little or no money down, and pay less for electricity. Previous plans, while popular, turned off some because the solar company owned the system.
"The value proposition is becoming clearer and less complicated for consumers," says Patrick Jobin, an analyst at Credit Suisse. "Solar is going mainstream."
SolarCity's new loan deal and current similar deals that involve leases or power purchase agreements can pay off — if you have the right roof in the right state.
For the deals to work, your roof can't be shrouded in shade and you have to be paying a relatively high price for power.
Your state also has to allow you to trade the solar power you generate but don't use for the power you need at night or when the sun isn't shining.
For that reason, the national solar companies that offer these deals, such as SolarCity, Sunrun, Sungevity and Vivint Solar, operate only in certain states, concentrated mostly in the Northeast, Southwest and West. For now, solar can't compete with the power prices and regulations in Southeast and parts of the Midwest.
To help determine if a solar system is right for you, the solar company takes a look at your bill, and your roof, and then figures out if it can offer you a break on your bill.
The plans work by addressing solar's big drawback: high upfront cost. A typical system costs $30,000. Before the lease deals and power purchase deals were rolled out starting in 2007 and 2008, that steep initial hit turned off many consumers.
A lease or loan deal spreads that upfront cost — reduced by a federal tax credit of 30 percent of the system — over 20 or 30 years, making the payments look more like monthly electric bills.
As the panels produce power, you need to buy less from your utility. You come out ahead if the savings on your power bill is bigger than the monthly loan or lease payment.
Lease and power purchase agreements now account for two-thirds of home solar installations, according to Shayle Kann of GTM Research.
The difference between a loan and a lease or purchase agreement is that the homeowner owns the system, and the federal tax credit comes to the homeowner, instead of to the solar company or its financier.
When the value of the federal tax credit — $9,000 for a typical system — is factored in, homeowners can pay substantially less for power over the life of the panels.
Most customers would probably prefer a loan, Kann said, assuming the savings are the same.
SolarCity CEO Lyndon Rive said the company can offer the loans now because it has better access to financing, it can predict the performance of panels well, and it has decreased installation costs dramatically.
SolarCity's loan terms do not require a lien on the house, which should ease the process of selling a home during the loan period. But, like competing lease plans, the loan generally requires a high credit score. SolarCity will only lend to those with a credit score of at least 680.
The loans will be offered initially at 4.5 percent over 30 years. Customers pay only for the power the panels produce each month, instead of a fixed amount. If the panels produce more in a given month, customers will pay their loan off faster. Solar power is cheaper than power from the electric utility, so a customer's monthly electricity cost would fall further.
If the panels produce less, the customer pays less to SolarCity and, in theory, will not have to pay the loan off in full. But SolarCity is confident that it can predict the output of the panels over 30 years well enough to ensure the loan will be repaid.
"It takes the production risk of the system off the customer's plate and puts it on Solar City's," Kann says.