Solar Loans 101

Mosaic’s new home solar loan offering is the last piece to the puzzle for a complete solar finance ecosystem for homeowners. As the price of installed solar power has dropped precipitously over the past 5 years from $10/watt down to around $3/watt, solar enthusiasts and more recent converts have decided to “go solar.” Residential solar installations in the past required a large upfront investment by the homeowner since financing in the past was largely unavailable. The price of a solar system ends up being for the average American similar to the price of a car; the price range can vary dramatically but for most people will fall in between $5,000 – $20,000. The difference between the purchase of a car and a solar system is that the purchase of a solar system is a long-term financial investment that makes you money.

Residential Solar Finance 101

Large solar power installations have always been driven by rigorous financial analysis, but over the past few years the same could be said for residential solar systems. The two numbers that homeowners want to know about a potential solar system are:

1.      Price per kW (kilowatt) installed

2.      ROI (Return on Investment)

Price per kW Installed

Price per kW (kilowatt: 1 kilowatt = 1000 watts) installed is the final price a homeowner will pay to an installer for a completed installation on their home. If a homeowner buys a 2 kW (2 kW = 2000 watts) solar installation at $3/watt their upfront cost will be 2000 x $3 = $6,000.

Payback Period

Simple payback period is a metric used to determine how fast a financial investment pays for itself. Payback period is the number of years it takes an investment to recoup all the upfront cost.

To continue with our example, let’s say our homeowner who purchased the 2 kW solar system saves $1,000 per year in electricity costs. In a simplified calculation the homeowner saves $1,000 per year for 6 years and at that point will have saved $6,000. Since it takes this homeowner 6 years to make back the $6,000 initially invested, the payback period of this solar system is 6 years.

30% Federal Tax Credit

A great incentive for homeowners that has been increasing the number of solar installations is the 30% Federal Tax Credit (sometimes shortened to “FTC”). If a homeowner buys and owns the solar system on their home they receive a 30% tax credit from the federal government. A good thing to know is that the 30% Federal Tax Credit is in effect until the end of 2016.

To apply the 30% Federal Tax Credit to our example homeowner. Although the homeowner still buys their solar system for $6,000 they will receive an $1,800 tax credit in their first year effectively making their first year savings $2,800 ($1,000 energy cost savings + $1,800 from the 30% Federal Tax Credit). Since the homeowner will still save $1,000 per year in energy cost savings the ROI of their solar investment with the Federal Tax Credit is now down to 4.2 years!

Residential Solar Leases

There are many homeowners who have great homes for solar power but might not have $6,000 available to buy their own system right away. Thanks to solar leasing companies such as SolarCity, SunRun, and Sungevity there has been a huge increase in residential solar installations in the states where those companies operate.

The benefit of a solar lease is that it removes the large upfront cost of a solar system while allowing you to save money on your utility bill immediately. The problem with a solar lease is that the leasing company receives the 30% Federal Tax Credit as well as any other available incentives rather than the homeowner.

A solar lease is an exciting financing option that has moved the residential solar market forward but unfortunately it prevents the homeowner from owning their solar system. With the great promise of a solar revolution it would be a shame if homeowners simply switch from paying their old utility bills to paying new slightly lower utility bills to their solar leasing company.

Home Solar Loans

The alternative to a solar lease is a solar loan. Although the terms may sound similar they are different in a number of important ways. A solar loan is a loan given to a homeowner to cover the initial upfront costs while allowing them to pay the loan back with the energy cost savings from their solar system.

A home solar loan allows the homeowner to receive the 30% Federal Tax Credit as well as any other available incentives rather than having those passed to a leasing company. The other exciting aspect is a home solar loan allows you to partially become your own utility rather than just supplementing your old utility with a new utility. You still have to make your monthly payments for your solar loan, but it is YOUR solar system on your roof.

Traditional banks may be wary to offer home solar loans since it is a relatively new market and they may not understand what a great investment a solar system can be. The difference between a home solar loan and a solar lease is analogous to the difference between paying rent every month and paying your mortgage. Either way you are writing a check but owning a home is a long term financial investment while paying rent is not an investment at all. It’s the same way with a solar power system.

A home solar loan can be a great long term investment that allows you to get a larger ROI, receive the 30% Federal Tax Credit, and increase the value of your home for resale. Home solar loans are not just investments in our homes they are investments in our future.

Bill Ehrlich is a Mosaic blog contributor who works in the electrical industry. After graduating from Notre Dame with a degree in Finance he worked on a cattle ranch in Wyoming and then taught English in China. Returning home to the States he worked at Inovateus Solar, a solar integrator in South Bend, Indiana. Originally from Minnesota, he is currently getting his hands dirty doing electrical construction in the city of Chicago. Outside of work Bill enjoys investing, solar power, and most of all, investing in solar power!

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