Betting on the Decline of Residential Solar PV Financing

Here is a crazy thought: we will know that solar pv has become mainstream when 3rd party financiers are no longer needed.

I’m very bullish on the ability of 3rd financiers to be able to compete with the general trend of the solar PV industry, huge installed costs reduction, increase electric rates and extremely low risk place to invest capital.

I enjoy thought experiments and this is one that I’ve been chatting with people about since my interview with Barry Cinnamon from Westinghouse Solar when the topic came up. If our goal is to make solar really cheap, why would anyone want to finance it?

I know what you’re saying and that’s the all the industry data points to MORE people financing systems. Yes, this is true, right now. But I’m thinking out another 5 or 7 years, not next year.

For example, At $2.00 watt gross installed costs, why would anyone want to finance solar and save $18.38 (or some other extremely small amount) a month, when they could be saving hundreds. Yes, I agree, they still need to have $8,000 cash, but there are a lot more people who can afford $8k, that can’t afford the $20k, that 4kw costs today.

Even today, I advise all homeowners who ask my advice to NOT finance a system if they can help it, because they will get much better returns if they pay cash. Homeowners are starting to become smart as well, if you need to finance, getting capital from Admirals Bank or GE Capital at 8% (which is what Gary from MassSolarInfo did to purchase his system) is a much better deal then having a 3rd party own it.

Don’t get me wrong, I’m not hating on financiers. They have done a lot of good for the industry. They have brought the industry scale, awareness, spent tons of money on training and policy that is helping everyone, and created an image of solar as something that is cheap and simple. With that being said, it’s possible that they will help to create an industry where they are no longer needed, and that’s a good thing.

Here’s what I was argue is the case for a long term decrease in 3rd party financiers.

1. Installed costs will continue to decline while electric costs continue to increase. This will make it ever and more more lucrative to own the system.
2. Financiers currently cherry pick the best customers, those with the best FICO scores, and those the ones that are the most likely to have the cash to buy a system when costs decline.

While I was at InterSolar, I tossed the idea around and recieved some great responses from really smart people within the industry:

Thomas Dinkel the CEO of SunReports said that people will start buying more solar PV when the realize, like the Germans already have, that it is the safest and most guaranteed invesment that you can make, if you own it. There is not another place you can put your money that has such low risk. If anything, people will start getting capital from regular banks but they’ll still own the system.

Chris Oestreich from SnapNrack said that he feels we will continue to see a gradual decline in prices and cash ownership will likely increase, but he doesn’t think 3rd party financing will never go away. Chris thinks that once people have a simple payback of 4 years or less (Chris W note: that’s more then a 20% risk free return!!!) they’ll go towards cash more often.

James Jenal from Run on Sun (who also has an amazing blog on the solar industry here) feels that community solar will be able to shift the paradigm from financers owning systems to whole communities owning their system. There is some policy work that needs to happen to make community solar an easier reality, but James said that community solar has many benefits. The home is unaffected, there’s no risks of owning a system, and you can buy EXACTLY how much power you need, whether it’s 1.4kW or 11kW depending on your needs and the amount of cash that you have.

Elliot Gansner of Sologico, formerly pvXchange, a marketplace for installers to purchase equipment had some good insights into the cost changes within the industry. When asked if when he thought solar would be so cheap financier aren’t need he said “I hope we get there soon! All the trends are point that way.” He continued to say that the comparison to the German market cost structure  is unfair because they are two very different markets but he said that equipment costs delivered to the job are getting down to $1 a watt soon for the modules, inverters, and racking.

When I pushed Elliot on if he thought $1 per watt was possible for all equipment his response was very insightful, he said yes and it’s simple why he believes this. The manufacturing capacity of the whole industry is still not very large, and we’re not close to hitting the diminishing returns that happens when economies of scale became extremely large.

When I asked Elliot his thoughts on what needs to happen to reduce installed costs, he said that transaction costs are still way to high due to legal and accounting fees because the way we incentives the industry, with tax credits, and it’s ridden with transaction costs, which we may or may not be able to change in the future.

Conclusions about Financing

Back to the point about financiers, I don’t think that they are bad for the industry, but it’s an interesting thought experiment to work through. I don’t think they’ll ever go out of business, but it’s possible that they’ll have to focus on a different customer base, those with no cash and poorer credit. Or they’ll focus on different markets, like the inside of the country where installed costs will be higher, because the industry is not as developed, and the electric rates are lower.

With that being said, I don’t see this change happening for at least 3 years, but I’m going to be on the lookout for the return of the cash sales!