Growing money with sunlight
Craig Huntley, partner and chief development officer for Solect Energy in Hopkinton
Ask Andrew Zelman, senior vice president at MutualOne Bank in Framingham, why his bank does loans for commercial solar projects, and he says it's pretty simple.
“As a bank, you want to do them because the cash flows that come from the projects are relatively known,” he said.
As long as the sun shines, a solar array is pretty much guaranteed to produce electricity. Meanwhile, the federal government and the state of Massachusetts promise that they'll also generate valuable tax benefits and solar renewable energy credits.
So, unlike most business projects—and certainly unlike almost any residential improvements—there's a virtually certain, highly stable source of income to help the borrower pay off the loan.
This is a dynamic that has drawn a range of lenders into the Massachusetts solar market—including both commercial and residential installations—in recent years.
Zelman said MutualOne has financed about five commercial solar installations over the past five years, most of them multi-million-dollar projects. Early on, the projects seeking financing were mainly large investor-owned solar farms that produced power to sell to users. But Zelman noted the state has tweaked its incentives to encourage more installations at businesses that will use much of the power they produce. That's a more efficient way of using solar power, and it requires less use of the electrical grid.
Zelman said it made sense to encourage investor-driven solar farms to begin with, but these days a wide range of businesses are recognizing the value of solar power, which allows state subsidies to be redirected.
“Do you really want to subsidize an investor?” Zelman asked. “You want to subsidize the end user.”
Craig Huntley, partner and chief development officer for Solect Energy in Hopkinton, said that, as companies have become more comfortable getting involved in solar power, lenders have too.
“Six years ago, when we started our company, I spent a lot of time at banks explaining that these are secure investments,” he said. “Now the comfort level with the safety of the investment is significantly greater than it was six years ago.”
Huntly said the majority of the 180 products in Solect's portfolio have involved traditional lenders, including community banks like MutualOne as well as larger institutions. But in some cases, other models make more sense. Federal tax credits are a big part of what makes many solar installations financially viable, so nonprofits and companies that don't anticipate a big tax bill may find that it's not worthwhile to buy their own solar systems. In these cases, Huntley said, an organization may want to enter some kind of lease or power purchase deal where another company essentially owns the array—and gets the tax benefits from it—while reciprocating with cheap electricity and cash.
Huntley said the percentage of Solect customers that are nonprofits has jumped from 15 or 20 percent in previous years up to more than 50 percent this year. When it does these deals, Solect sometimes invests its own capital in the projects, but sometimes it seeks outside investors. Huntley said there's no shortage of potential investors, from private individuals to corporate energy-related firms to specialty funds created to make these investments.
“I probably get a call a week from an investment company looking for a project to invest in,” he said. “Massachusetts is an attractive market.”
The market is strong enough that Huntley said there are now some “really creative financing structures” being created on Wall Street for solar investment. But he said that type of investor is typically more interested in large solar farms than individual rooftop installations.
Meanwhile, on the residential side of the solar market, homeowners getting solar panels installed on their roofs are increasingly inclined to own their own arrays, according to Susan Boucher, marketing director for the Hudson solar installer New England Clean Energy.
Back in 2012, Boucher said, “everybody wanted to talk about leasing.” But she said the public quickly grew a bit skeptical about letting an outside company own the arrays on their roofs. That's partly because the financing market for individually owned solar systems has grown tremendously, giving homeowners more options.
“Loans have been great,” Boucher said. “They've been a game-changer.”
Boucher said there are a number of national players that design loans specifically for residential solar. These deals typically include a short-term, no-interest loan for 30 percent of the system, which the homeowner pays back after receiving a federal tax credit. Then, the rest of the system can be paid off over 10 to 20 years, with the help of the electricity savings and SRECs they provide. Unlike home equity loans, which are another avenue for financing installations, they don't require any collateral beyond the systems themselves.
State support of solar financing a boon?
This fall, another sort of financing for residential solar is also on the horizon thanks to a new state program. The state Department of Energy Resources (DOER) will use $30 million to help local banks and credit unions make attractive loans for residential installations. The funding will allow lenders to offer lower interest rates than they otherwise could, take slightly larger risks on people who might not otherwise qualify for a loan, and provide assistance on loans to moderate-income borrowers, DOER said.
The state hopes the program will push the residential solar market away from leasing and toward individual ownership. But Boucher said with the market already headed in that direction the role of the new subsidized loans isn't completely clear.
“We're all curious to see what happens,” she said. “The solar loan market is fairly evolved at this point, so they may be behind the eight-ball.”
At least one locally based lender has already dived into the residential solar lending market. Last year, Marlborough-based Digital Federal Credit Union (DCU) made a deal with Sungage Financial, a Boston firm that develops solar loans and partners with financial institutions to fund them.
Sara Ross, cofounder and CEO of Sungage, said the loans often give homeowners a way to finance solar systems where they can put no money down and then use the savings and subsidies from the system to pay the loan off.
“They're actually doing no work to go solar, so solar is paying for itself,” Ross said.
Sungage is now active in 10 states and works with 20 installers in Massachusetts alone, providing an alternative for people who might otherwise go with solar lease or take out a home equity loan.
Ross said DCU is a large, forward-thinking credit union, which makes it a good partner for Sungage.
“They're experts in being good, compliant consumer lenders,” she said. “They know how to do that really well. We know how to design products for solar, we know how to talk about how lending fits into solar.”
Ross is skeptical about the need for the new state solar loan program—which, of course, would compete with Sungage—arguing that the market is already being served well by the private sector. She said she'd like to see the state put its energy into helping low-income Massachusetts residents afford solar systems instead.
“I would love to see the state focus their efforts on that part of the population, that really important effort,” she said. “I see no reason to pour additional ratepayer dollars into supporting the segment of the market that's working.”
For now, the solar finance market does seem to be getting more solar installations done all the time, at both the commercial and residential levels. That provides benefits for the systems' owners and the companies financing them. But Zelman, the MutualOne senior vice president, said it's good to remember that there's also a larger context to consider.
“I believe it's probably a good thing in total because it gets us thinking about a renewable world versus a throwaway world,” he said. n
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