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Financing Your PV System
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Financing Your PV System
Financing Your PV System

When I first started in the residential PV industry, it was as the founder, engineer, salesperson, installer, troubleshooter, purchasing manager, bookkeeper, and janitor of a PV integration company in Southern California. Like most small-business owners, I did it all, and this gave me the opportunity to work with hundreds of customers. Surprisingly, despite the range of people I interacted with, they all had a common thread when it came to buying a system: the bottom line—what’s this gonna cost me?

My first sale was to an engaging retiree. She had a doctorate in economics, and kept her mind active by writing and publishing a social responsibility newsletter. She was a staunch environmentalist and wanted to leave a legacy of stewardship for the planet. “Aha!” I thought, “here is an easy sale.” Boy, was I wrong! She did end up buying a PV system from me, but only after I demonstrated the added value to her home and the financial impact on her heirs.

Another sale in the early days of my business was to a couple with a strong personal history in environmental and social activism. When we first commissioned their system, the wife burst into tears and said, “I thought I would never live to see this day.” Even with all of this personal passion tilting the balance toward the sale, it was still dicey until I could demonstrate a return on investment superior to what they were earning on a bank certificate of deposit.

What I learned in those early days was that even if people wanted to stick it to the utility, gain independence from fossil-fueled electricity, or do their part for the planet, they still wanted to know that the PV system on their home made financial sense.

Is Financing for You?

In many states, investing in an RE system does make economic sense because of incentives and cash rebates, tax credits, property tax exemption, and increased property value. With all these benefits factored in, it’s not difficult to create a compelling financial picture that yields an attractive return on investment.

Once you’ve made the decision to buy, the next question is how. A PV system is a big-ticket item, usually on the order of a new luxury car, swimming pool, or kitchen remodel. Plus, most of us are used to paying monthly for our electricity—paying in advance for years of green electricity is a foreign concept.

The bottom line is that most of us don’t have this kind of cash around, or, if we do, are hesitant to part with it. And that’s where financing your project can pay off.

Basic Financing Methods

Cash Out. Withdrawing cash from a certificate of deposit (CD), money market account (MMA), or borrowing against a 401(k) may be a good option for homeowners who have accumulated comfortable reserves—and live in an energy market where PV investment returns exceed those yielded by their conventional investments. For example, especially in today’s troubled equity markets, a 1-year CD yields 3.5% and an over-$10,000 MMA yields about 2.5%. Compare this to a PV system in California: With the state’s high electricity rates, a PV system may yield a return of more than 12% if you can take advantage of all the tax credits.

Plastic. Using your credit card is a convenient way to pay for your PV system, provided that you have a high enough credit limit. The downside is that interest rates are high, usually higher than any yield enjoyed by a PV investment, and interest is not tax-deductible.

First Mortgage & Refinance. Typical home mortgages are often the very best financing arrangement, since most homeowners are familiar with them and the interest is tax-deductible. A conforming (also known as “conventional”) first mortgage takes into account the value of the entire home, including the new solar system, at approved loan-to-value ratios and is paid back over 15 to 40 years. Thirty-year conforming loans are currently available at about 6% and 30-year jumbo loans are just over 7.5%. A jumbo loan or mortgage is a home loan that exceeds the limits set by Fannie Mae and Freddie Mac—the 2007 limit was $417,000 in the continental United States and $625,500 in Alaska, Hawaii, and the U.S. Virgin Islands. Jumbo mortgages generally have a slightly higher interest rate than smaller conventional mortgages.

Home Equity Line of Credit & Home Equity Loans. These have traditionally been the mainstay of PV financing. However, due to the current financial crisis, many properties have depreciated in value and the home’s equity has evaporated. However, for those homeowners who have built enough equity, home equity-based credit may be attractive.

A home equity line of credit (HELOC) allows you to borrow as needed against the equity in your home. Interest is charged on the amount of money that is actually borrowed. There is no fixed loan period, and the interest rate may vary over the time an outstanding loan balance is carried. Current rates for home equity lines are higher than mortgage rates. The interest may be tax deductible. Typically, there is a fee to set up the HELOC and there may be an annual maintenance fee.

A home equity loan is similar to a line of credit, except these loans are typically for a specific amount, to be paid back over a specified period of time and at a designated interest rate. A home equity loan may include fees and points. Interest may be tax-deductible.

It is interesting to note that a $50,000 HELOC currently has an interest rate of about 4.7%, while a $50,000 home equity loan has an interest rate of about 8%.

The following are guidelines to see if your loan is tax-deductible per the Internal Revenue Service. As with any matter that is tax related, it is prudent to consult with your accountant or tax preparer.

Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan.

You can deduct home mortgage interest only if you meet all the following conditions:

  • You must file Form 1040 and itemize deductions on Schedule A (Form 1040).
  • You must be legally liable for the loan. You cannot deduct payments you make for someone else if you are not legally liable to make them. Both you and the lender must intend that the loan be repaid. In addition, there must be a true debtor–creditor relationship between you and the lender.
  • The mortgage must be a secured debt on a qualified home in which you have an ownership interest—your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. 

Power Purchase Agreement (PPA). PPAs are a financial instrument that is moving into the residential market from the commercial PV market. In a PPA, the provider finances, installs, owns, and operates a renewable energy system on your property with no capital investment from you. (See HP128, “Financing the Solar Dream.”)

During the PPA’s term, the installed system generates clean power and you are only billed for the actual electrical output—usually at a discounted price per kWh. In this way, you “buy” electricity from the PPA provider—not from your utility—and are billed for it monthly. At certain milestones during most PPA agreements, you can purchase the PV system at a discount or elect to continue the agreement.

PPA providers assume the operating risks—if the system is not generating electricity, you do not pay them. Most PPA contracts cover a period ranging from 12 to 20 years, so it’s in a provider’s best interest to use reliable components and contractors to ensure a system’s long-term reliability and optimal energy production. Currently, PPAs are not available in most states.

Bank Secured & Unsecured Loans. A number of innovative banks have begun offering both secured and unsecured loans for residential PV systems. Most of the secured loans are home equity-based and, as a result, may be tax-deductible if they meet the IRS rules noted previously. Interest incurred from unsecured loans is not tax-deductible. The pioneer in promoting PV loans is New Resource Bank of San Francisco. However, other banks, like ShoreBank, are also very solar-friendly. Mainstream banks, such as Union Bank of California, Bank of America, and Wells Fargo, are also beginning to offer PV system loans.

Vendor Financing. Some PV module manufacturers offer financing to their customers, provided through specialty banks and retail outlets. These loans may have attractively lower monthly payments because the payback is spread over 15, 20, or even 30 years. Loans may be fixed, adjustable, or a combination. You may also get deals like no payments for one year, or six months same as cash.

Your interest rate will depend on your credit score. Vendor financing is available through companies like BP Solar, SunPower, and Sharp Solar. In fact, there are a number of PV distributors, like Conergy, Solar Depot, groSolar, SunWize, AEE Solar, and DC Power, that may offer financing. However, financing is not offered on a retail basis. It is offered through their installer network as a value-added service to dealers. As a result, it always pays to ask the dealers from whom you are soliciting proposals if they offer financing—and the terms of that offering.

Utility & State Loan Programs. A number of states and utilities have established loan programs to help homeowners purchase PV systems. For example, Sacramento Municipal Utility District’s Residential Loan program provides 100% financing to customers who install solar hot water or PV systems. Their 10‑year loan currently carries an interest rate of 7.5%.

In Oregon, the Small-Scale Energy Loan Program is administered by the Oregon Department of Energy to finance small-scale, local energy projects. Terms vary with the size and nature of the project.

Association Financing. The leader in providing financing products to its contractor members is the Electric & Gas Industries Association (EGIA). EGIA provides financing for energy-efficiency and renewable energy projects through its partnership with GE Money and its GEOSmart Sustainable Financing Solutions program.

Local Government Loans. These programs represent one of the most exciting developments in residential PV financing to date. California has passed a unique way to fund the propagation of renewable energy by allowing municipalities to create special tax assessment districts. If you own a home within the district, you can borrow money from the local jurisdiction and pay it back over time through an increase in your property taxes. Berkeley, California, is pioneering this approach with its Financing Initiative for Renewable and Solar Technology (FIRST). The FIRST program will provide financing up to $37,500 per installation for either residential or commercial properties—without a down payment. Payments will be made through a special tax on the participant’s property tax bill. If the owner moves out of the house during the 20-year repayment period, the property tax assessment and the PV system remain with the property.

Energy-Efficiency Mortgages. Homeowners can take advantage of energy-efficiency mortgages (EEMs) to finance a variety of energy-efficiency measures, including solar electricity, in a new or existing home. The U.S. federal government supports these loans by insuring them through Federal Housing Authority or Veterans Affairs programs. This allows borrowers who might otherwise be denied loans to pursue energy-efficiency improvements, and it secures lenders against loan default. Rates and terms are similar to conforming first mortgages.

The federal Energy Star program has a partnership program for lenders whereby lenders who provide EEMs to borrowers may become Energy Star lender partners. Becoming a partner allows lenders to utilize the Energy Star brand to promote themselves.

Operating Lease. This method of financing, like PPAs, uses the tax incentives associated with the project to pay for the use of funds. Tax incentives include credits and depreciation expenses. Terms are typically seven to 20 years, and lease payments are matched at or below utility costs. Typically, this type of lease is not performance-based—the homeowner makes the lease payment regardless of system performance. At the end of the lease, the customer can renew the lease or purchase the equipment at fair market value.

The leader in residential PV leasing is SolarCity, which offers lease programs in locations in Oregon, California, and Arizona. They have modified the terms of their lease to guarantee that if your system isn’t producing the amount of electricity it is supposed to, they will pay you the difference. They also require very little down payment and structure their lease so that your payments, combined with your net-metered balance of payment to the utility, are less than your average monthly utility bill. However, you’ll need a FICO score of at least 720 to qualify. As with any form of financial contract, read the fine print before signing to ensure that you are comfortable with the lease terms, which may stipulate what happens if you sell your home, when your system needs maintenance, and what happens in the case of default.

Finding Financing That Fits

There are a number of choices available through which to finance your PV system and to realize your green dream. However, it goes without saying that, in today’s volatile economy, you need to be comfortable with the payments and the terms. Read the fine print, and make sure you understand what the terms mean and how they impact your specific financial situation.

Generally, and within the context of your financial situation, evaluate financing your PV system in the following order:

  1. Liquidate an underperforming asset. In many cases, beating the annual historical electricity tariff rate increase is justification enough for the investment. In California, the historical rate increase is about 7% per year. Not many secure investments can beat that rate in today’s market.
  2. Use a mortgage or home equity instrument. They offer low interest rates that are tax deductible.
  3. If you live where there is property-tax-based financing, this is a very low-risk way to go.
  4. If you are looking to minimize your monthly payments and are not interested in assuming the operational risk, then entertain a PPA or a lease.
  5. If you are interested in PV ownership and do not have home equity, check out New Resource Bank, ShoreBank, or any other bank that offers financing specifically for PV systems. Also check to see if your state offers low-interest loans.
  6. Unsecured loans from any source should be the last resort, since interest rates are higher and the interest usually is not tax-deductible.

Access

Mo Rousso engineered and installed his first solar energy project in 1975. In 2001, he founded HelioPower, a leading solar power integration firm based in California. Mo is currently CEO of Helio mU, a PV finance company, that will be rolling out its residential program in spring of 2009. He holds a master of business administration with an emphasis in finance, and a bachelor of science degree in mechanical engineering.

Power Purchase Agreements:

SunRun • www.sunrunhome.com

Helio mU • www.heliomu.com

Bank Loans:

New Resource Bank • www.newresourcebank.com

ShoreBank • www.shorebankcorp.com

Vendor Financing:

SunPower • www.sunpowercorp.com/For-Homes/How-To-Buy/Smart-Financing.aspx

Sharp Solar • 866-667-4916 • www.solar.sharpusa.com

Conergy • www.conergy.us/desktopdefault.aspx/tabid-2013//732_read-5120/

Association Financing:

EGIA/GEOsmart • www.egia.com

Leases:

SolarCity • www.solarcity.com

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