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Let's face it, we're in an industry that is constantly changing. It's Sunday night again, and I have a tendency to get a little philosophical on Sunday nights. Maybe it's the expectations of what's possible in the coming week, and how those things fit into the big picture. So my philosophical thought of the night comes from 5th century BC Greek philosopher, Heraclitus. "Nothing endures but change."  In solar industry parlance, that constant change is called the "solarcoaster," a term I've heard from several people and whose origin eludes me despite lots of asking around. If you have good attribution, please leave it in the comments!

I bring this up because I think it's important to start writing in more definite terms about what could be the next sea change in our industry: the solar loan.

In MODsolar's position in the industry, we're in the middle of a lot of folks. Specifically, our software can be the glue that holds together folks who can acquire solar deals—the installers/sales companies—and the funders who need deals in which to invest. Over the last few months, I've heard from both sides that the loan is on the rise and that it's something to watch if you're not already providing/using one, along with your other third-party-owned (TPO) options.

Before we look forward, let's look into the recent past.

We wouldn't be here without TPO

Look, whether or not you like how your TPO company treats you, the fact is that without those companies the industry wouldn't be anywhere near where it is today. TPOs were extremely effective in combatting high solar system costs from 2007 - 2012 by monetizing tax incentives provided primarily by the federal government. This enabled them to offer affordable financing to consumers to offset high solar system costs, and thus get a lot more solar in the market.

These incentives in turn brought investors into solar—specifically tax equity investors—who with debt or equity investors (think people with money to lend, or people who want to own projects) were the keystone in the arch that supported residential solar funding.

Tax equity investors are in limited supply. To be a tax equity investor, a company must have both money to invest and large tax liabilities. By putting money into a solar project, the company can take advantage of the tax-reduction incentives available for solar to reduce their taxes. But there simply aren’t too many companies that have the necessary investment funds and tax liabilities, and that are also attracted to solar as an investment.

Of course, this effect caused what was called the "tax equity bottleneck." The bottleneck meant simply that there weren't that many tax equity investors comfortable with solar, so everyone was chasing the same folks. What happens when you have that much demand and not that much supply? Where's Adam Smith when we need him? Of course, prices rise for tax equity. Since tax equity is an investment, this rise in price simply means that the "yield"—the percentage return required by the tax equity investor—rises. Note that this was less true in 2011 & 2012 when the 1603 Treasury Grant was in effect.

Today however, it is back in full force...or at least it should be, if it weren't for the solar loan.  So why is the time right for the rise of the solar loan? I think there's four reasons:

Signal #1: Price of solar

By now we've all read the screaming headlines about the drop in solar cost. Inside of MODsolar's Platform, we've seen a $2/Watt overall drop in costs since the Platform came online in June 2011. (NOTE: for those of you curious about what we have—check out any page on our website—we post some high-level numbers, and have plans to post more in the near future).

With solar at this level, the large up-front costs that required financial engineering to overcome may no longer be necessary. Therefore the loan, a (usually) simpler, financial product is starting to come into the market in a big way. One of the most potent things about the loan is this: Since solar only works if you're a homeowner, in the super majority of cases, the homeowner is very familiar with a loan, and probably has at least one already.

Doubt this? Well, remember, if you're a homeowner, you probably have a mortgage. And of course, a mortgage is a loan. So a sales person selling to a homeowner can rely upon that knowledge to ease their path in getting the homeowner comfortable with the financial product. And education can be the biggest barrier to the solar sale.

So, as prices drop, that has impact to everyone, especially investors, because simply, there isn't as much money to go around.

Signal #2: Tax equity yields are dropping

To understand that loans are starting to have an impact, we simply need to look at yields given to tax equity investors inside these deals. Since I came from outside the solar industry into the industry in 2011, like many of you I suspect, I had a lot to learn. So the way I choose to continually invest in my solar education was to attend various conferences. I've been attending various finance conferences and talking to folks there, along with reading, for some time.

At conferences, I would hear hedge fund guys talk about how their solar investments were yielding "high-teens." Go to a conference today, and you'll hear investors who have been there, done that, lamenting how their yields are "9%, 11% if you're lucky."  That's a big change. And keep in mind, each point drop in yield can give off significant savings in overall cost of the system (I read some research that supports this, but I can't find it at the moment, I'll repost it when I find it). AND shaved profits for the investor. By the way, these numbers I quote are anecdotally collected, these deals are all private so we'll never exactly know.

But why is this happening? Because there's more competition.

Signal #3: Mo' money for mo' solar

Simply look at the pace of deals in 2013, the amount of capital that's being invested in solar (or chasing solar, almost), and it's clear that competition is on the rise.  Now, if you're an investor who likes making loans, and you have a secure asset like a solar system that is needed for power production (something people are NOT willing to go without long term), you're starting to wonder if a solar system is a loanable asset.

So basically, the herd mentality has started to take over, and solar is seen by more and more investors as a safe bet, and an interesting niche to get into. You can expect this trend to continue, and the problem being instead, that there aren't enough willing homeowners to go around (more on this in a later post).

But the signals we're getting of how more money is coming into solar are very clear.

Signal #4: Major TPO firms are getting into the action

You're seeing companies of all different types get into the solar loan thing.  From vertically integrated installers like SolarCity and SunPower, to newer companies like OneRoof.  You also have to give credit to the guys over at Admiral's Bank, who despite some bumps and being early have made it a priority and are just now really getting the traction they probably deserve for their product.

It is significant that such big companies, the ones that began and grew on being TPO firms, now want a loan in their portfolio to offer to customers. They're not stupid, they're looking ahead and have been around longer than anyone, which means they've been riding the solarcoaster for some time and have survived. The fact that these firms are getting into the loan action is probably the clearest signal that the loan is on the rise.

So, what does this mean for you?

So, how does this impact you? Well, if you're an installer without a sales organization who installs for others, don't choose a sales organization that doesn't have a loan in their portfolio (or more than one loan, sometimes). If you're a sales organization who is an expert at customer acquisitions, get a loan along with a lease/PPA—you'll just close more business.

If you're a developer who's trying to bring funds into the industry—look to the loan folks. I bet you have something to offer them through your network, and they probably need help with some of the paperwork. And finally, if you're a residential consumer, depending on your state and what you pay for electricity, the loan may be the correct choice for you.

But for all of us in solar, the signals are clear.  While nothing endures like change, a rising tide lifts all boats, and it's our job to navigate from this wave to the next.

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