By Jonathan Doochin, Soligent
Originally published on Solar Power World
As more financing options compete with PPAs for consumers’ attention, solar PPAs are no longer necessarily the best option. What is the best option, of course, changes with the times. What is clear is that having more options helps increase solar adoption.
What is the best way to finance a solar installation, particularly a residential system?
The answer changes with the times. Before 2008, the best option for most homeowners was to buy a system outright or get a loan. But a loan for solar wasn’t nearly as easy to obtain as a loan for refinancing your house.
Then came the Power Purchase Agreement or PPA. The PPA essentially took the financial and technology risk off of the homeowner and put it on the installer/integrator. This method became highly successful. One dealer said the share of its installations linked to PPAs zoomed to more than 80% in less than two months.
But are PPAs still the best deal for consumers today? We’re seeing market trends that indicate PPA success could be peaking.
Chalk it up to the relentless pace of change and innovation in our industry. The cost of solar projects continues to decrease dramatically, making it easier to finance or buy solar installations directly. The Department of Energy’s SunShot Initiative to lower the total cost of solar to $1.00/W — including installation and soft costs — by the end of the decade remains on track.
The financial community and financial innovators are responding to the groundswell of demand for solar. Until recently, the cost of capital for a residential solar installation averaged 9.9%, according to NREL. Now, solar loans can be obtained for 6% to 7%, only a few points higher than a 30-year mortgage. Interest rates will continue to inch down and become available to a variety of customers.
Financing options are also proliferating. In some areas of the country, there are more than 40 different options for financing residential solar. PACE programs, which enable homeowners to pay for solar through a supplemental charge on their property tax bill, are gaining popularity. Also crowdsourcing, once viewed skeptically, has been a huge success story.
The upshot of this variety and competition is a better deal. A system acquired through a loan today can save a homeowner as much as $15,000 more over a 20-year term than with a PPA. Think of it: A consumer can save $750 more a year for two decades simply by changing his or her financing plan.
Dealers, of course, will benefit too. With a proliferation of options, consumers will need to look to their contractors for expert advice. We saw the same dynamic with home ownership, cars and appliances in the 20th century: Enhancing the ecosystem for customer credit expanded the market, let pent-up demand be met and created new opportunities.
The market, in some ways, is already responding. Last year, GTM Research noted that third-party ownerships appear to be losing their popularity in California, Arizona, Massachusetts and Colorado. Travis Hoium, a writer for multimedia financial-services company The Motley Fool, recently noted that cash sales appear to be an increasing part of the mix in SolarCity’s sales.
Don’t get me wrong. PPAs represent a vibrant, vital part of our industry. In fact, I expect companies promoting PPAs to respond by providing better terms to consumers. Some of the contract provisions will also be changed. PPAs aren’t easy to understand and the ornate structure of some of the contracts hasn’t helped. Competition will help clear the air on those issues.
The PPA isn’t dead, but there are going to be many more financing options under the sun.
Jonathan Doochin is the CEO of Soligent Holdings, which specializes in fulfillment, financing, logistics and other services. Prior to joining Soligent, Jonathan served as CEO of US Green Data, and also CEO of Leverett Energy. Jonathan has also served as a Senior Advisor in the Office of Energy Efficiency and Renewable Energy at the U.S. Department of Energy, and as a consultant at McKinsey & Company.
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