When it comes to solar, I tend to read and write most often about technology providers and utility scale developers. I’ve rarely spent much time considering the business of residential solar installation beyond developing an understanding of the basics—I mean, honestly, aren’t installers basically just construction firms? How interesting could that be.

I dug into that assumption a little bit this week with the help of Jeff Cavros, the CFO of a startup solar installation company called Solar Universe. As it turns out, residential solar installation may be a rare bright spot in what is otherwise a terrible market for PV deployment. Let’s start out with the basics.

Residential Solar Financing Options

Financing is the primary choice that homeowners have to make when installing a system. Choice of panel supplier, mount type, and other technical details really don’t matter once the panels are on the roof; all that matters is cash in and cash out. There are three primary options that consumers have.

• Direct ownership financed by cash and/or debt
  In this model, the consumer pays up front for the entire cost of the system and installation, minus any state or federal incentives. This option forces homeowners to pay significant up-front costs but also gives them the largest long-run return on investment. Installers typically have partnerships with financial institutions and offer co-branded borrowing options (such as Solar Universe’s SunLoan).


• Lease
  This model works exactly like a car lease. The installer will have a partnership a financial institution who puts up the necessary capital up front in return for fixed monthly payments for the lifetime of the lease. At the end of the lease term the homeowner can either decide to purchase the system outright (at some pre-set percentage of its original cost) or the installer will come and remove it. This option makes solar extremely accessible by lowering up-front costs, but it leaves leaseholders vulnerable to the risk of power generation fluctuations. In cloudy months it is very possible that lease payments will be higher than cost savings due to the reduced solar generation. This is, of course, less of a problem in California’s virtual perma-sun. For an example of a solar lease program, take a look at Solar City.


• Power Purchase Agreement (PPA)
  The PPA was created by the founder of SunEdison, Jigar Shah, as a contractual arrangement ideally suited to the needs of the solar industry. In a PPA, the solar installer installs the system on a home and then continues to own the system. The homeowner pays per kilowatt-hour of electricity consumption, just as he/she would to the utility. This reduces the risk to the homeowner as much as possible—he/she doesn’t have put any personal capital at risk and only has to pay for power actually generated. In a PPA there is typically a rate that is locked in for the duration of the contract. This rate is typically close to market rates at the start of the contract but then is frozen in time for 15+ years, meaning that total savings over the life of the PPA can be significant. For an example of a residential solar installer currently using this model take a look at SunRun.

Financing in the Current Market

Having gone over the basics of how these projects are financed, let’s delve a little deeper. Each of these three financing options is currently affected pretty dramatically by some things that are going on in the market right now.

• Unemployment is up and wages are down. Both of these factors reduce discretionary income. Investments—equities or otherwise—are down. Put all this together and you have an environment where considerably fewer people can put their hands on cash to finance a solar installation.


• Equity in homes is down across the board. Home equity had previously been the primary way to collateralize loans used for to purchase of solar installations.


• Bankruptcies and defaults are up across wide segments of the market. This makes banks very conservative in committing money to lease programs and home equity loans.

In addition to these macro-trends affecting solar, there are several specific policy and economic trends that are having just as significant of an impact.

Tax Equity

One major source of capital for solar lease or PPA programs in the past has been tax equity. Tax equity comes from the federal solar investment tax credit (ITC), which (as of the stimulus package passed this year) allows a 30% write-off of the investment in any new solar power facility (except pool water heaters).

This write-off can be traded from one entity to another and claimed with by the entity that gets the most value from it. In the past several years most tax equity investors were major financial institutions, but in 2008/2009, with most financial institutions posting losses, tax write-offs have no value. Therefore, tax equity investors are very difficult to find and it is harder to find capital for residential projects.

Which is why it was a big win for Jeff and Solar Universe when they recently found a tax equity investor for a new pool of lease money they are raising.  Tax equity represents $4m out of a total $10m of the proposed total fund, an amount that Jeff estimates will finance 300 residential installations/leases.

ITC Modifications

Prior to $700B TARP act passed in November of 2008, the solar investment tax credit had a $2,000 ceiling placed on it for residential installations.  One of the major reasons why it made sense for homeowners to finance their purchases through leases or PPAs prior to this point was that the financier could take advantage of the entire ITC and was not limited to the $2,000 ceiling.  The ability to take advantage of the entire ITC changes the economics of the installation dramatically, and therefore there was a strong incentive towards financing.

However, with the changes introduced in November, residential installations can now take advantage of the entire ITC—the ceiling has been removed.  This means that leasing is no longer as advantageous as it was previously, and in fact direct ownership now has the largest positive net present value to homeowners. 

I like this change, and Jeff agreed with me.  Customers now have two distinct options between leasing and buying.  The choice between the two is straightforward and not clouded by strange effects of federal policy.  Customers who prefer to pay up front have a larger benefit over the long run.  Customers who cannot or do not want to put forth the capital up front can lease their system and still take advantage of lower electricity rates immediately.

Survival as an Installer

I asked Jeff about the overall installer industry and the dynamics therein. From my perspective, the deck seemed to be stacked against installers for a number of reasons:

• Technology providers are large and have significant bargaining power


• It is difficult to create service differentiation as an installer


• Market dynamics (regulation, supply/demand) are constantly changing

Jeff made me realize something that I didn’t have a good feel for previously: demand for rooftop solar is real and isn’t going away, even in the current economy.  Particularly in certain hot areas such as California and New Jersey, there simply aren’t enough qualified installers to satisfy demand.  So, whether or not a five-forces analysis of the industry looks positive, the industry is here to stay.  The question then shifts from “Is being a solar installer profitable?” to “How can I structure my solar installation business to compete most effectively?”

Solar Universe’s answer to that is scale through franchising.  By franchising, Solar Universe can handle marketing, sales, and IT; it can have enough buying power to negotiate better terms with technology providers; it can have enough administrative capacity to re-tool as regulations change. 

Jeff is hoping to see Solar Universe grow to 150 franchises within by 2013.  I look forward to following him as he proves out his business model.