Solar Financials

Here is something that peeves me greatly. Let’s say I want to buy an SUV, a three ton chunk of rolling steel, which:

• Loses thousands of dollars of value the instant I stick the key in it
• Will cost me thousands of dollars a year to own and operate, thus increasing my financial risk
• Will depreciate dramatically over ten years to a fraction of its purchase price

I can walk into a bank, fill out a simple form, deliver up a W-2 form, and if my credit is good, walk out with something in the range of $30,000.

If I want to buy a solar energy system, be it a photovoltaic system producing electricity or a solar hot water system, I will face problems. The solar system will:

• Depreciate slowly
• Produce a tax free return on investment, decreasing my financial risk
• Last 25 years or more
• Increase the value of my home by more than the cost of the system

The bank, however, will stiff me. Either I will have to go through the hassle of getting a home equity loan or else I will have to pay the high interest rate of an unsecured loan. No EZ loan terms for solar. Why is this? It is due to a lack of failure.

Untold thousands of people have failed to pay off their car loans and have had their cars repossessed. The banks understand the process, the residual value of the car, and the probability of default, so they can plan and manage their risk accordingly. The same goes for houses. Due to long experience, banks understand the foreclosure process and deal with it. There is no such body of experience with renewable energy systems. Therefore, such systems have no value as collateral to the banks. So it was explained to me by a patient but implacable loan manager.

At one time there were no cars, so there was a time before car loans. It follows that there must have been some bank somewhere that was the first to loan someone money to buy a car, using the car itself as collateral. I’m still looking for the first bank to make that momentous step for a solar energy system. A few large solar installation companies have each raised some money and put together their own in-house programs, but commercial banks are stuck in the past.

If solar loans could be as easy and cheap as car loans the market would expand by a factor of ten.

One thing that might end the impasse is a program of loan guarantees. The state or the Feds could devise standards and back loans that acknowledged solar panels as collateral. This would give banks some data points for calculating risk and, with the occasional failure, an understanding of repossession and resale value. I have proposed the idea to a couple of Vermont state legislators and I encourage you to do the same.

 Another peeve of mine in the realm of solar is the inevitable question, “What’s the payback?” People want to know how many years it will take for a solar system to earn back its purchase price. There are a number of answers to this.

The direct answer for photovoltaics for homeowners in Vermont runs around 11 to 19 years, depending on installation cost, initial electrical price, and how fast the price of electricity goes up. Business owners have access to more grants and tax breaks, so they would get a faster payback. Solar hot water can easily pay back its costs inside of ten years, and often within eight. People generally express dissatisfaction with these numbers.

The facetious but pointed answer is, “What’s the payback on your granite countertop? Formica will hold up a mixing bowl at a fraction of the price.” Insert the name of another expensive home or life accessory in place of “granite countertop” if you wish. We often buy things for reasons other than financial return. We buy many things that are money-sucking black holes. Your electric water heater offers no payback – you just keep pouring money into it.

The more productive response is, “What’s the payback on other options for that chunk of money?” If someone has cash on hand or ready credit, how do other options compare with energy enhancements, and at what level of risk and taxation? The range of simple return on an investment in renewable energy, using the numbers above, varies between 5.26% and 12.5%, assuming that the price of energy stays flat for a decade or two. (Dream on.) Price hikes only make it better. The returns from renewable energy are essentially risk free (covered by homeowners insurance) and tax free. Where can you find a near-zero risk investment that returns even 5% these days, or any investment this side of crime that returns over 10%? I should note that investments in energy efficiency can beat these numbers and should be your first consideration. Again, these are tax-free and risk free returns.

So what’s the payback on that CD or money market account right now? Not much better than that granite countertop, I’d imagine. Neither of these options does anything for the environment, either. Put your money where your mouth is and you’ll be putting it where your financial interests are.

Comments

[Major Lemming]

Did your banker pal offer a home equity loan or line of credit? Rates are low and it is a good time to refinance the whole enchilada and take cash out for a new solar system. Or you could get a sweet 2011 Galaxy GL with leather trim and a moon roof with the same money; or eat KFC till the money runs out. That money is yours.

It is all about the lender being able to repo or foreclose something if the borrower defaults. They can take your house, not your granite countertop. It would hard to get an unsecured loan for anything, no matter how wise an investment, unless you pay high rates on a personal loan or credit card. This is not a conspiracy against alternative energy.

[Minor Heretic]

My Dear Major Lemming,

I never said it was a conspiracy. It's just the present state of play. PV modules that have been bolted down can be unbolted, carted away, and sold. It's just that they haven't.

Well, there is one embarrassing case where a ground mounted array near the Middlesex State Police station was stolen, apparently in broad daylight.

The response I hear from potential customers is that they don't want to go through the hassle of a home equity loan. Perhaps the process makes them uneasy. They don't want to pay the high rate of a personal loan. So no sale. If the process could be like a car loan, with the modules as collateral, the solar market would expand dramatically.

[Concojones]

The question, "how many years to earn my investment back" illustrates nobody is wants to deal with solar panels unless there's a hefty payback that justifies the hassle.

Loans may be a barrier, but they're not the main one. The key question is: where's the incentive? You're talking about a 5% return on investment, but the average American is not an investor, he's a consumer, one paycheck away from the streets. Those who are investors, are often successful i.e. busy professionals who aren't looking forward to dealing with the installation of some futuristic apparatus on their roof (one that none of their neighbors seem to want, either, when you look around). Compare that to stocks and bonds which offer a similar return with a simple nod to your banker.

Multiply energy prices by 5, and all of this will turn around in a heartbeat. The difference? An incentive that is obvious to Joe Average, not just the math whizzes.