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We like to think that when we deposit a dollar at the bank, it goes into a big vault and we can pull out that same dollar at any time. But that¿s not how the U.S. banking system works. Banks take that money and invest it to make money themselves, so cash gets spread around. This, naturally, leads to a big risk: What happens if those investments go sour? Well, you¿d be out of luck. You can¿t get your dollar back.
The Federal Reserve doesn¿t like that scenario, so it prohibits banks from putting all the cash it has on deposit on the line. In fact, the Fed forces banks to keep a portion of their assets at the Federal Reserve itself, to make sure that some of your assets won¿t get squandered if the bank¿s bets go south. These are called ¿reserves,¿ (hence, Federal Reserve. Got it? Good), and usually amount to 10% of the total cash kept in checking accounts.
These reserves are never exactly 10%, and banks like to keep a little extra in reserve ¿ not, as you might think, to make you more comfortable that they¿re in good financial shape, but rather so they can take that excess and lend it to other banks and make money off it. (They¿re banks, they can¿t help themselves.) The rate at which they make these loans is called the Federal Funds rate, which is set by the Federal Reserve¿s Federal Open Market Committee.
When you hear people chattering about how the Fed cut or hiked interest rates, this is what they¿re talking about: the interest rate banks can charge for lending money from their reserves. This begs the question: If these are essentially loans between banks, why is the Fed Funds rate so important for the rest of the economy?
Well, simply put, because loans make the financial world go round. Bank A lends Bank B $10,000 at a Fed Funds rate of 5%. Bank B then lends out $10,000 to a small business at 7%. The small business then takes that money and expands the business and hires new workers. Now someone is employed, Bank B has made interest off the loan, and Bank A is the richer for making it all happen. It¿s perhaps overly simplistic, but you get the idea. When you want the economy to thrive, you make lending cheaper.
Of course, sometimes you don¿t want the economy to thrive. In fact, you might want it to cool down, mostly to avoid money flooding the system and causing inflation. In that case, the Fed raises interest rates, making it difficult to lend or borrow.
Home / Markets / Innovation
Wednesday, November 21, 2007
Innovation: SunPower Offers Financing for Solar Panels
Donna Fuscaldo
FOXBusiness
New York --You can't buy the sun. But one company is trying to get you to finance its rays.
SunPower (SPWR), a San Jose, Calif.,
maker of solar panels, is offering financing on the equipment, similar to how you would pay your mortgage or car monthly.
While only available in California, the company expects to offer more residential financing opportunities in other states
in the coming months.
“It’s not unlike financing ownership of a car," said Julie Blunden, vice president of corporate
communications, public policy, at SunPower. “We work with a bank to offer financing comparable to the length of the warranty
on the solar panels, which is 25 years.”
That means homeowners wouldn’t have to come up with the money
up front to install the systems, which can cost as much as $30,000. SunPower officials said the financing is based on the
prime rate, which is currently around 8%.
SunPower has been offering commercial financing for some time, and
last year started to offer it to its California residential customers. Blunden said the company is eyeing New York, New Jersey
and Colorado as states it wants to roll-out financing options with its banking partners. SunPower currently does business
in 26 states and expects financing to be available in all its markets down the road.
Given that solar energy is an
emerging market for home heating, Blunden said it’s taking time for services around it to become available.
“As markets
grow, all of the services will follow,’’ said Blunden. “We’re definitely seeing interest from some folks on the financial
side.”
SunPower is betting the ability to finance the installation of solar panels will drive more adoption
in the residential market. While the cost savings and government rebates surrounding solar panels help, they haven't been
enough to make this a big consumer market. Cost for the systems have and will continue to be a big deterrent.
Nevertheless,
Blunden said the financing option has driven corporate adoption of solar panels and should do the same with consumers. “There’s
no doubt it will expand the customer base,’’ she said. “There are residential customers out there that have solar panels that
wouldn’t be able to have them if they had the capital cost upfront. If people had to pay upfront for a car, they wouldn’t
be driving around in a BMW.”
Paul Clegg, an analyst at Jefferies & Co., said being able to finance the installation
of solar panels could aid in growth of the burgeoning market.
“When you’re looking at spending an extra $30,000 to
put a solar module on you roof, it's kind of a shock," said Clegg. “Having the offer part of a package by the same people
that are installing the modules on the roof does facilitate the process.’’
According to Clegg, without the current
government subsidies, solar panels would be too costly for most of the U.S. So, anything that spreads out the cost would be
welcome, he said. He said that other solar panel companies are also offering financing.
As to if solar
panel companies like SunPower will eventually open their own financing businesses, similar to how the car makers do it, Clegg
said it’s not likely to happen in the near term. After all, any capital companies like SunPower have would be better spent
on the technology -- not to mention banks are better equipped to act as lenders to consumers.
“We’re not a bank,’’
noted Blunden at SunPower when asked if the company would consider opening a finance unit. “We’re a Silicon Valley technology
company.”
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