Solar Financing Market in the US 0

Solar loans or financing have emerged as a feasible financing solution for residential consumers in the US, and the trend was evident throughout 2018.

The latest US residential solar project finance report by Wood Mackenzie revealed that existing loan providers scaled up through partnerships with major installers. Also, new loan providers grew their business establishing relationships with regional installers.

Loans held nearly 45% share of the residential solar market and have outperformed third-party-owned solar sales for the first time in a long period.

This post is about the solar financing market in the US, including the current trends, updates, and future forecasts.

PV Project Finance in the United States

Installed solar capacity in the United States was more than 10 GW for three years in a row in 2018, and the growth rate is expected to continue. 

According to the Solar Energy Industries Association (SEIA) and Wood Mackenzie Power & Renewables, the first quarter of 2019 is said to be the strongest in the history of the US solar market.  

Fig.1: US Solar Market Insight Q2 2019 (Source: renewableenergyworld.com)

Despite the fast growth rate, due to inefficient and expensive project financing, many solar developers hold themselves back from utilizing the true potential of the solar market. 

Now, with the possibility of the investment tax credit (ITC), it may be possible to address some of the long-term financing challenges in the solar industry. 

The solar finance domain has remained a borrower’s market, but most of the available loans these days have shorter terms that are not suitable for the operational life of projects. 

According to Wood Mackenzie, these days, mini-perm debt structures are the most common financing vehicle. 

In mini-perm debt structures, lenders offer repayment terms of 4-7 years, after which the project sponsor must refinance. 

The same process repeats multiple times during a 20-30 year contract. 

Now, to streamline the financing process, there is a talk in the industry about the benefits of shorter PPAs. However, this transition would still leave small to midsize project developers with the existing structure, which is similar to financing a mortgage with a car loan. 

The solar loan market today resembles the situation of large Third-party ownership (TPO) providers in recent times.  

In fact, TPO dipped to its lowest point in the first half of 2018 since 2011, with a 34% market share.

Most TPO providers are still not profitable, but after restructuring, they could at least able to generate enough cash to keep on growing.

The recent decline in leases and PPAs is due to several reasons, including: 

  1. Slowed growth for loan provider Mosaic 
  2. Resuming TPO sales growth from Vivint Solar, and 
  3. Continued growth from Sunrun.

Mosaic maintained its top position as the leading US solar loan provider, with a 29% share of the customer-owned market. 

Under the new rules, customer-owned residential solar systems will not get a tax credit from 2022, while TPO systems can still claim a 10% credit at that time.

Financing is crucial for deploying solar projects because the costs of solar technologies are paid upfront, while their benefits from these projects generate over many years.  

Solar financing has been structured by the government, offering incentives to accelerate solar deployment. 

The development of the US solar industry is likely to increase financial transparency and investor confidence, which will enable lower-cost financing methods. 

Utility-scale solar might be financed similar to today’s conventional assets, and non-residential solar might be financed like a new roof. On the other hand, residential solar might be financed more like an expensive appliance.

Related article: Top 10 Solar Energy Markets in the World in 2019

Solar Project Financing Structures

Some of the common solar financing structures of renewable energy projects are mentioned below. These structures vary based on the type of participants, source of financing, and allocation of benefits.

Fig.2: Solar Project Financing Structure Flow (Source: energy.gov)

Corporate Financing

In this type of financing, one corporation works on the project and finances all costs. No other investors or lenders are involved. 

The solar project may be set up as a subsidiary of the corporate parent. However, with 100% ownership, the subsidiary will be consolidated into the parent company’s financial accounts.

For obvious reasons, the corporation gets all the benefits of the project.

The corporate parent must have enough capacity for tax credits and benefits to be of use.

In the renewable energy sector, this type of structure is rare and only used by utility companies. 

Selling before Construction

In this structure, the project developer acquires lease and land rights, interconnection agreements, permits, power purchase agreements (PPAs) and feed-in-tariffs.

The developer sells the project to a strategic investor and in return, receives a development fee.

The strategic investor goes ahead and constructs the project on its balance sheet or arranges bridge finance for the construction. 

The ownership and operational responsibility of the plant belong to the strategic investor. The risk of the developer is limited to the development of capital.

Selling after Construction

The developer requests for bridge financing from lenders:

Loan for Construction: The loan amount is repaid to the bank in full after completing the construction. Alternatively, the bridge is converted into a long-term loan.

Cash Equity Bridge: The loan is repaid to the bank after completing the construction with funds from the sponsor. The developer may provide a limited guarantee for cash equity.

Tax Equity Bridge: The loan is repaid to the bank after completing the construction with funds from tax investors, whose role comes into play once the plant produces tax credits.

Investor Ownership Flip

The investor contributes nearly all the equity and receives a pro-rata percentage of the cash and tax benefits before a flip in allocation.

At a certain level of internal rate of return (IRR), the ownership flips back to the developer. Subsequently, the majority of the cash and tax benefits go to the developer.

The tax investor will continue to get the production tax credits even after the flip.

Leveraged Ownership Flip and Pay-As-You-Go (PAYGO)

This is the most common project finance structure for renewable energy.

The tax investor contributes before production, though a part of the investment may be deferred until the project receives production tax credits. 

The tax credits are initially allocated to the tax investor. However, a high percentage is paid to the developer as an equity contribution. 

This works as a claw-back if the project does not perform. This structure also has a return-based flip in the allocations.

Back Leveraged Structure

This is similar to the “Investor Ownership Flip” structure. However, the developer leverages its equity stake in the project by using debt financing.

Leveraged Lease

In this type of financing structure, the sponsor equity and construction loan fund the construction. 

After the construction, the sponsor sells the project to the investors that have developed a trust and immediately leases it back.

The developer pays back the construction loan through sales. 

Lease payments are usually assigned to a lender. A minimum of 20% equity is usually required for tax purposes.

If set up as an operating lease, the lease may be only for 5 years with the option to re-lease.

Homeowner Model

When homeowners invest in renewable energy generators, they own 100%. However, quite often, they can get bank finance, and in some cases, up to 100% of the capital costs.

Depending on the region and applicable laws, homeowners may need to set up a company for energy generation. In that case, they will also be able to earn profit from tax benefits.

In case of a lack of tax benefits, it gets compensated by higher feed-in tariffs for small installations.

Solar Construction Finance

Long-term financing like the solar mortgage real estate investment trust (REIT) can help break financing challenges and align debt repayment terms to the operational life cycle of the project. 

REITs are widely implemented in the real estate industry, and with similar attributes for the solar market, solar mortgage REITs can reduce the cost of capital for projects, increase the net operating income, and ensure cash flows over the lifetime of the PPA.

Nearly 90% of solar projects in the US are financed, and it has an impact on the successful completion of the projects. 

In 2018, solar PV was the largest renewable energy employer worldwide. It means there are plenty of opportunities for the industry to support job growth. 

If financing terms can be aligned with the operational life of solar projects, smaller developers can grow their businesses more sustainably. 

If more developers can take this approach, more projects will be produced and feed the ever-increasing need for solar by utilities.

Solar mortgage REITs offer fixed-rate and long-term mortgage loans to solar developers for new installations or long-term refinancing for existing projects. 

Solar mortgage REITs can provide developers with an option to maintain ownership of a project. 

In the current scenario, even with the success of solar as a reliable investment, developers continue to face challenges due to suboptimal financing solutions. 

The solar industry needs proven investment vehicles for long-term financing, which will ensure that solar’s growth is sustainable through changing incentives, and for many years.

The US Residential Solar Finance Update 

As mentioned earlier, solar loans became the dominant consumer finance product in 2018.

The emergence of smaller solar installers helped loan providers in 2018 as those local installers turned to loan providers for consumer financing. Other sources of consumer finance are generally not available to installers.

Solid residential solar growth in Florida and Texas also played a part in the relative upswing of solar loans, as third-party ownership is currently limited in those states.

Despite the growth in the solar loan industry, it has very thin margins. Considering this, some solar loan providers are also venturing into verticals such as storage and home improvement for higher margins. 

Fig.3: Residential Solar Loan Near-Term Forecast, 2015-2020E (Source: greentechmedia.com)

Third-party owner (TPO) systems are likely to increase during 2022-2023 when the investment tax credit (ITC) will be eliminated for customer-owned systems. 

Solar loans will become simpler and will enable traditional commercial banks to offer direct-to-consumer loans.

Dedicated solar loan providers may have had an advantage once commercial banks enter the lending space as they have large installer networks and the technology to integrate into the installers’ sales tools easily.

The Way Forward

Purchasing a residential solar system can cost anywhere between $15,000 and $29,000. Though due to solar financing options available, it is getting more affordable for homeowners.

Solar Lease/PPA is the most common way for residential consumers in the US to finance solar energy

With solar leasing or a power purchase agreement (PPA), a third-party solar financing company buys and takes care of the solar panels. Consumers pay a fixed rate for the solar electricity the system produces. 

This way, consumers can skip the upfront cost and low lock-in rates for solar electricity for up to 25 years.

Another way of financing is loans and mortgage, where consumers can take out a solar loan or an energy-efficiency mortgage from the federal government to finance their solar system.

Besides residential solar financing, an increasing number of commercial projects are seeking financing, and with solar market expansion, it will be easier for project developers to get finance in the coming years. 

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