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.