The residential solar business has always been more of a finance business than most people think. Sure, solar panels and inverters and labor costs matter, but without financing Sunrun (RUN 9.82%), SunPower (SPWR 5.52%), Sunworks (SUNW 5.77%), and other solar energy stocks wouldn't have a business.
What's never really made sense long-term is the way residential solar financing has worked. The main financing method is the solar lease or power purchase agreement (which I'll call leases for simplicity), in which a solar company finances and owns the solar installation and customers pay monthly payments for decades. Tax credits flow through the solar company to investors, and other cash flows are often sold off in securitization deals.
In the wildest "innovation," companies have convinced investors that there's value in a solar installation after the upfront 20-year contract ends, assuming that customers will want to continue paying for 20-year-old solar panels. And this is a big part of the business model, with Sunrun claiming that $2.54 billion of its $4.17 billion of net earning assets is from this renewal period 20+ years in the future.
Without renewals, the company's net earning assets would be just $1.6 billion, which isn't a lot for a company with a $10.6 billion market cap. But the lease model may be falling apart now that loans are getting cheaper and SunPower is taking a big swing at owning the market.
SunPower's new loan product
The new solar loans from SunPower will come through the Technology Credit Union and be usable on SunPower Equinox solar and SunVault battery systems. Interest rates are as low as 0.99% for a 15-year loan and 1.99% for a 25-year loan, which for perspective is lower than the cost of a mortgage today.
Buying solar and energy storage with a loan will allow homeowners to keep the solar investment tax credit, which is currently for 26% of the value of the system. And it's notable that the loan covers energy storage, because this could help unlock the storage market, given that leases are a less straightforward method for financing storage.
Why loans could win over leases
There's a good reason owning solar panels and battery systems could be advantageous over leases for homeowners. One is that when a home is sold, an owned solar installation is an asset that goes with the home. A lease is a liability that's being transferred with the home.
Imagine if you bought a house and it included a car, but in one case the car was owned and was essentially a "free" throw-in with the house. In the other case, you were simply taking over a lease and had to give the car back after a year. Buyers may simply say "no" to the leased car. Historically, transferring leases hasn't been an issue for solar companies, but it could be if customers balk at the cost of the lease as solar costs come down.
In the case of loans, homeowners also get to keep the investment tax credit for themselves. With solar financing, that tax credit needs to be sold to a third party, which ultimately reduces its value because those investors will require a return.
Direct financing could also be less expensive long-term. Sunrun recently announced a securitization of its lease payments, and it got a 2.46% yield on the first 80% of contracted cash flows. That's a higher rate than the loan I highlighted above and doesn't even finance the riskiest 20% of cash flows.
Selling solar through loans will also make the upfront cost more competitive. It's easy to compare the price of one solar installation to another if there's a simple cost to install and an interest rate on the loan versus all of the costs hidden in the monthly payment and price escalations of a typical solar lease.
These dynamics are already starting to play out, with cash and loan sales accounting for a larger percentage of solar installations. According to Wood Mackenzie, 73% of solar installations in the first three quarters of 2020 were cash or loan sales.
The business is shifting again
There are continual shifts in the solar business model, and right now it looks like as the cost of solar loans comes down, there's an opportunity to disrupt the lease market. SunPower is bringing that loan product to market now and hoping it'll drive growth for both solar installations and battery deployments. It could also disrupt Sunrun's leasing business in the competitive solar and storage market, so this is a product investors will want to watch closely.