The residential solar business has always been more of a financial business than most people realize. Sure, solar panels and inverters and labor costs matter, but without funding Sunrun (NASDAQ: RUN), SunPower (NASDAQ: SPWR), Sunworks (NASDAQ: SUNW), and other solar energy stocks would not have a business.
What never really made sense in the long run is how residential solar finance has worked. The primary method of financing is the solar lease or power purchase contract (which I’ll call leases for the sake of simplicity), in which a solar company finances and owns the solar installation and customers pay monthly payments for it. decades. Tax credits flow through the solar company to investors, and other cash flows are often sold in securitization transactions.
In the craziest “innovation”, companies convinced investors that there is value in a solar installation after the initial 20-year contract ends, assuming customers will want to continue paying for panels 20-year solar panels. And that’s a big part of the business model, with Sunrun claiming that $ 2.54 billion of its $ 4.17 billion in net assets comes from that 20-plus-year renewal period.
Without renewal, the company’s net assets would only be $ 1.6 billion, which is not much for a company with a market cap of $ 10.6 billion. But the rental model may be breaking down now that loans are getting cheaper and SunPower is struggling to own the market.
Image source: Getty Images.
SunPower’s new loan product
SunPower’s new solar loans will come from the Technology Credit Union and be usable on SunPower Equinox and SunVault solar battery systems. Interest rates are as low as 0.99% for a 15-year loan and 1.99% for a 25-year loan, which, in perspective, is lower than the cost of a mortgage today.
Purchasing solar power and energy storage with a loan will allow homeowners to retain the solar investment tax credit, which currently stands at 26% of the value of the system. And it is worth noting that the loan covers energy storage, as this could help unlock the storage market, as leases are a less straightforward method of financing storage.
Why loans could win over leases
There is a good reason that owning solar panels and battery systems could be advantageous over leases for homeowners. The first is that when a house is sold, a owned solar installation is an asset that goes with the house. A lease is a responsibility that is transferred with the house.
Imagine if you bought a house and it included a car, but in one case the car belonged to the house and was essentially a “free” throw-in with the house. In the other case, you simply took over a lease and had to return the car after a year. Buyers can simply say “no” to the rented car. Historically, leasing has not been a problem for solar companies, but it could be if customers balk at the cost of the lease as solar costs decline.
In the case of loans, homeowners also keep the investment tax credit for themselves. With solar financing, this tax credit has to be sold to a third party, ultimately reducing its value as these investors will need a return.
Direct financing could also be less expensive in the long run. Sunrun recently announced a securitization of its lease payments and earned a 2.46% return on the first 80% of cash flow contracted. It’s a higher rate than the loan I pointed out above and doesn’t even fund the riskiest 20% of cash flow.
Selling solar power through loans will also make the initial cost more competitive. It is easy to compare the price of one solar installation to another if there is a simple installation cost and an interest rate on the loan compared to all the costs hidden in the monthly payment and price increases. of a typical solar lease.
This dynamic is already starting to show itself, with cash and credit sales representing a larger percentage of solar installations. According to Wood Mackenzie, 73% of solar installations in the first three quarters of 2020 were cash or credit sales.
The company is moving again
There are continuing changes in the solar power business model, and right now it seems that as the cost of solar loans goes down, there is a opportunity to disrupt the rental market. SunPower is bringing this loan product to market now and hopes it will spur the growth of solar installations and battery deployments. It could also disrupt Sunrun’s rental business in the competitive solar power and storage market, so it’s a product investors will want to watch closely.
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