Falling prices and growing acceptance of home solar power is sparking a challenge to major financiers who have anchored the U.S. industry using leases, as smaller banks and other lenders rush to offer homeowners loans to buy systems.
Loans offer homeowners a path to solar system ownership and the opportunity to capture for themselves federal tax credits worth 30 percent of the value.
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Well over 60 percent of residential systems in top solar states like California and Arizona today are owned by investors or companies which lease systems to homeowners for a monthly fee.
Investors like Goldman Sachs Group Inc, U.S. Bancorp , Google Inc, lured in large part by the tax credits, have helped propel the rapid growth of leasing companies like SolarCity Corp, Sunrun Inc, Sungevity Inc and Clean Power Finance Inc.
But prices of systems have fallen to $20,000-$30,000 for a typical home, equivalent to the price of a car. This has made ownership more feasible and reduced the number of years it can take for a system to pay for itself through lower power bills.
"It became glaringly obvious that someone needed to provide a path to ownership for these systems. It's not a $40,000 or $50,000 expense anymore," said Jim Petersen, founder of Fremont, California-based PetersenDean, one of the biggest U.S. installers. "And why would you give up your tax credit? Anybody that has a job has a tax appetite."
The leasing pioneers are mixed when it comes to their response to the loan trend.
SolarCity, for example, does not offer a loan, but customers can secure their own loans to finance the purchase of a SolarCity system.
Sunrun said it is focused on solar leases and a similar product called power purchase agreements. It does not offer a loan product.
Sungevity has partnered with Boston-based Admirals Bank on a loan, and Clean Power Finance, a startup that makes solar financing products available to installers through a software platform, is preparing to roll out its first loan.
"The fact that people might talk about 'I might borrow for it, I might lease for it' - that makes it mainstream," said Danny Kennedy, Sungevity's co-founder.
The solar business already was facing a drop in the federal solar tax credit to 10 percent in 2017, an event analysts say could make investing in solar leasing funds less attractive for the likes of Google and U.S. Bancorp.
Tax equity investors enjoy returns of 8 to 12 percent, on average, by investing in solar leases, according to executives at several leasing companies. The rate of return on loans tends to be tied to overall interest rates.
Google, which has committed $355 million to rooftop solar funds with SolarCity and Clean Power Finance, declined to comment on solar loans or whether it will continue to invest in solar leases once the federal tax credit declines.
U.S. Bancorp did not respond to a request for comment. Goldman would not comment.
For homeowners, a lot depends on state incentives and the length of the loan.
Solar panel maker and project developer SunPower Corp said Colorado has a better incentive for customers who buy, meaning loan payments can be lower than lease payments and made over a shorter period of time.
In California, the nation's top solar market, leases still cost less overall, SunPower Chief Executive Tom Werner said, adding that it is still 'early days' for loans in the Golden State.
SunPower, majority owned by Total SA, said it is seeing equivalent interest in loans and leases, and is expanding its loan capacity. Just this week, the company inked a deal with Digital Federal Credit Union, the Marlborough, Massachusetts-based lead originator for a consortium of credit unions that may provide up to $100 million in financing for the SunPower loan program. Other SunPower loan financing partners include Salt Lake City-based Enerbank USA, a unit of CMS Energy , and Mountain View, California-based First Tech Federal Credit Union.
Still, Werner said it is too early to say whether loans will emerge as the winners. "Will eventually loans be the dominant choice? We don't know, so we are going to offer both," he said.
Boston-based Admirals Bank, arguably the most aggressive marketer of the solar loan, 18 months ago began offering a solar loan product, which essentially is a second mortgage. It now works with about 700 installers, including PetersenDean.
"We're going through this grassroots effort to educate folks on the benefits (of loans)," said Robert Banaski, head of retail banking and operations at Admirals.
There are small signs that such efforts are working. Data from GTM Research shows third-party-owned systems have lost market share in key solar states Arizona, Massachusetts and Colorado since late last year.
In Arizona, a recovering housing market has led to an increase in the number of systems being financed through home mortgages and equity loans. Leases and power purchase agreements - which allow consumers to lock in electricity rates for 20 years rather than paying to lease solar equipment - have dropped to 85 percent of the market from 90 percent in three quarters.
In Massachusetts, solar loans have driven leasing's market share down to 60 percent from 63.9 percent late last year, and Admiral is facing competitors, like Sungage, which this year began offering solar loans through a program with the Connecticut Clean Energy Finance and Investment Authority.
Admirals' solar loan volumes have increased 250 percent in the last year, according to Banaski, who declined to give exact figures. "We dipped our toe in the water and it just took off for us."