Solar Energy as a Loan Product

Thursday, February 22, 2022  |  Jody De Valk

What do you get when you have raising global awareness of dire environmental issues, a crumbling national power grid predicated on expensive and dwindling fossil fuels, and unpredictable weather patterns that put tremendous pressure on existing systems?

In the financial services space, that adds up to opportunity.

An opportunity as corporate citizens to make an impact on the environment. An opportunity to help others in our communities do the same. An opportunity to promote green business development, and an opportunity to position ourselves as clean energy champions in our markets by offering a loan product that has far more reach than just the bottom line. 

Here Comes the Sun

Public awareness plus rising costs of fossil fuels plus regulatory reform plus reduction in expenses associated with solar installation, use and storage has created this perfect little storm (forgive the pun) of growing solar demand. This growing demand, along with other aspects of the business, have made solar loans a loan product line that can help banks and credit unions increase loan share of wallet.   

According to research from Center for Climate and Energy Solutions, renewable energy sources grew 42% from 2010 to 2020, and as of 2020 make up nearly 20% of utility-scale U.S. electricity generation. While the bulk of this comes from hydro and wind, solar is the cleanest and most abundant renewable energy source available, producing no greenhouse gases and/or ambient air pollution. It is the fastest-growing electricity source and can be installed and used at every level of the economy.

Since 2014, solar energy, as a percentage of renewable energy produced in the United States, has grown in share by 68%, jumping from just under 5% of the renewable energy production in 2014 to over 14% in 2019. In that same span, solar production has increased to account for just under 3% of ALL electricity produced.

According to the Solar Energy Industries Association (SEIA), approximately 4% of homes in the United States are currently powered by solar energy.

While supply chain issues had a serious impact on the growth of solar in 2021, the Annual Energy Outlook for 2021, published by the U.S Energy Information Administration, projects that solar electricity generation will almost triple by 2050.

One of the reasons for this tremendous growth is falling prices.

The U.S. Department of Energy’s National Renewable Energy Laboratory (NREL) says that solar photovoltaic (PV) prices have fallen more than 60% since 2010. The drop in cost along with governmental incentives such as the solar Investment Tax Credit (ITC) has made systems far more accessible for both residential and business scale installation. The Center for Sustainable Energy estimates that the average solar panel system, including installation, can cost between $12,000 and $25,000, compared to around $45,000 just over 10 years ago.

Changing regulation and shifting policy have also contributed to the rise of solar. The past 10 years have seen expansive regulation, nationally in the form of tax incentives, and locally in the form of solar easements, which provide more protection to solar customers by prohibiting or limiting private restrictions on solar energy installations. Additionally, implementation of and revisions to existing state net metering laws have encouraged the growth of solar installation.

And looking forward, there is ongoing dialogue in the industry and among policymakers shaping the way rooftop solar generation is used and valued.

To that point, said Severin Borenstein at a solar competition and consumer protection workshop, a typical distributed system (rooftop) sends much of what it generates into the grid. In the past, that contribution was largely undervalued, but with new regulation, the rooftop provision to the local and national electricity supply is getting a fair shake.

And that fair shake comes in the way of net metering, an essential piece of the solar conversation.

Net metering is essentially what the utility pays for the excess electricity generated by the rooftop system. It will largely determine the time it takes the homeowner or business to recoup the cost of the solar installation. Again, these laws, the rates paid and the cost of electricity vary from state to state, but net metering laws help to promote distributed solar. Currently, 41 states use net metering as a mechanism to compensate customer-sited distributed generation. Delaware has some of the strongest, most liberal net metering regulation in the country, and, according to grading by SolarReviews, it receives perfect marks across the evaluation criteria for its renewable energy policies.  

Conversely, an article by the Brookings Institute illustrates how more restrictive policies in Nevada resulted in not only a 92% drop in permits to install, but three of the state’s largest providers of solar panels to exit the market.  

While there is ongoing debate over how to best serve all stakeholders equitably, the vast majority agree that some form of compensation must be available to promote wide-scale solar installation.

An Opportunity to Lend

For financial institutions, a diversified offering of loan products is vital as they attempt to not only survive but to thrive in these uncertain times. As trusted advisors, they should be helping customers and members understand the benefits associated with renewable energy sources like solar, both from a financial perspective and as a citizen of the planet.   

There are numerous reasons consumers choose to be part of the solar movement: lucrative tax incentives, an assumption of lower overall energy bills, environmental concerns, and the desire to self-generate and become self-reliant. Regardless of the reasons, solar offers a long-term sustainable loan product that has benefits far beyond the income statement.

The data outlined above paints a bright, sunny picture for those willing to jump into the solar lending space. But, like any new product, institutions will have to evaluate how best to position solar as a loan offering in their portfolio. As with any loan product, there are risks that need to be assessed, and the pricing and structure of solar-specific loan packages will need to be set up in a way that meets the risk posture of the organization and fits with the long-term lending philosophy.

As previously mentioned, a residential rooftop solar installation now costs between $15,000 and $25,000, roughly the same as buying a new car. And while there are a variety of structures and loan types that can be used to offer solar financing – like in auto financing – an indirect financing channel has proven valuable.  

Institutions like Mosiac, Dividend Financial, Digital Federal Credit Union and other lenders are choosing to partner with local solar installers in much the same way banks and credit unions receive auto loan applicants.

Denver-based Clean Energy Credit Union, a 100% online credit union, has partnered with local installer Amicus as well as one of the country’s largest solar distributors, Soligent, to provide residential installation and financing to its members.

Clean Energy Credit Union’s solar product is fairly straightforward. Solar customers can choose either a 12- or 18-month loan that covers the solar tax credit, a 12-, 15- or 20-year fixed rate loan on the remaining portion of the solar electric system cost, or a combination of the two. The loan is secured by the solar equipment that’s installed, has a fixed rate, has no prepayment, and loan amounts can range from $3,000 up to $90,000.

Obviously, using the indirect channel may not suit all institutions based on their business model. Many credit unions and banks are using existing products like personal loans, home equity loans or lines, or cash-out refinance. Each of these options has certain pros and cons. They can be secured or unsecured and have differing terms (rate, length, down payment) based on the prevailing economic conditions. Each should be explored to find the best option that fits the institution’s business model.   

Regardless of financing methodology, state and federal tax incentives, along with state programs such as rebates and Renewal Energy Certificates, not only make rooftop solar installation loans an attractive addition to the product line but help to mitigate loan loss.  

With Solar, Everybody Wins

Years of environmental neglect has put the United States and other countries around the world in a position where alternative fuel sources are essential for long-term sustainability. The push for clean energy is being driven by public awareness and demands for immediate action that not only mandates but promotes the use of solar power. The volatility in price, the damaging effects and the dwindling supply of fossil fuels coupled with falling solar prices for installation and upkeep has spurred demand of alternative fuel sources with solar leading the charge.

A solar loan product is a win, win, win. It creates much-needed, sustainable interest income for banks and credit unions. It reduces the consumer’s reliance on fossil fuel, lowers the household cost of energy and, according to Zillow, increases the value of the home by over 4%. And solar is the cleanest, most abundant fuel source.

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