Thursday, March 7, 2013

Other People’s Money: How Crowdfunding Lowers the Cost of Solar Energy

Other People’s Money: How Crowdfunding Lowers the Cost of Solar Energy

In fact, about 75% of residential solar photovoltaic projects and 40% of commercial ones are financed with different “third-party ownership” models where electricity users install a solar system with little to no money down and start saving money from day one.
But the capital used to deploy these third-party-owned solar projects has an effective interest rate that looks more like that of a credit card than a mortgage. This translates into high monthly payments for electricity from solar systems—just like a homeowner making steep payments on a credit card in the home purchase example. Although it’s not the only factor at play, high interest rates (closely related to “costs of capital”) are one of the big reasons we only see lots of solar in places like Hawaii (where residents pay the highest electricity rates in the nation), but not Kentucky: Solar developers can only produce savings for customers in areas with a combination of high electricity rates, good sunlight, and attractive local incentives—think California and Arizona, two leading states nationwide for total installed solar capacity.
For folks interested in deploying as much solar in the U.S. as quickly as possible, this is a problem. Right now, the capital structure behind most solar projects in the U.S. is prohibitively expensive for the economics of solar to pencil out in most of the country. So, we’ve got to help make capital for solar projects look more like home mortgage loans than credit card debt.
There are a number of ways to do this, but many of the most popular solutions, such as master limited partnerships and solar-specific real estate investment trusts, require regulatory and/or federal legislative changes and aren’t likely to become large-scale solutions in the near term. However, there’s one solution that’s already upon us—crowdfunding.

Crowdfunding lowers costs

As shown in the animation, the “credit card-like” capital that’s currently used for solar projects is composed of expensive equity from two sources: tax equity investors (companies able to absorb the tax benefits associated with solar projects) and solar developers. This equity is expensive and, in simple terms, has an effective interest rate of over 15%. This translates into high a high cost of electricity from solar systems.
But this is where groups such as Mosaic step in. Expensive tax equity is still used to pay for about half of a project, but instead of using equity from the solar developer, crowdfunding providers can step in with funds from the crowd. Capital raised from the crowd has a much lower interest rate (~6.5%) than equity put in from a solar developer (~15%), so the combined interest rate for the solar project goes down, along with the cost of electricity from the solar system.
Finally, at some point in the future we could imagine crowdfunding companies providing all of the capital for a solar project. This would mean a very low interest rate on the entire project and a very low cost of electricity from the solar system.
There are a number of different solutions in development that will help lower interest rates associated with solar PV financing. But crowdfunding excites me for one main reason: it’s here now. And if we’re to get on pace to realize RMI’s vision of a secure, low-carbon, and affordable U.S. electricity system by 2050 as outlined in Reinventing Fire, we need solutions that drive deployment of existing technology as soon as possible.
This blog post originally appeared on Greenbiz.


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