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Solar City plans to go ahead with the first Solar Home Loan

A new form of loan is being tested by Solar City aimed at creating monthly fixed lease into a variable entity according to the units consumed per month. With the risk of Solar Energy subsidy being revoked soon, how will the loan be able to impact the life of an ordinary person?

California based green energy company, Solar City, wants to stay one step ahead of the solar market and the tricky financials that are involved in such a technical, fragile and newly developed business area. A few months back, the company took a bold step towards financial liberation by being the first company to get asset based securitization for raising its own capital. The move was largely successful creating further opportunities for the company to share the benefits gained by asset base financing with its loyal customer base. Bank loans are hard to get and often have terms that are highly favorable towards the bank. The constant pressure of raising money also creates havoc for a company that requires high capital investment to keep the operations running. Solar energy sector has seen costs plummet, yet there is financial pressure on the companies to get hold of solar panels and other equipment before installing the equipment in customer premises. The customers often have to pay monthly lease, an installment system that ensures that break-even point is reached after a certain period of time.

This is a widely used model that works well and is the first and in some cases the only choice for various companies, but this is a model that requires constant cash flow into the system making the profitability highly dependent on investor equity and investment.

Solar City’s loan program offers a different option to the customers to explore. It is based like a lease or rent agreement with a 4.8% interest rate per annum, although now the user has to pay only for the electricity that they are generating. The no fixed monthly charges make it a more exciting proposition like a pay as you go model where you pay for only the services that you have consume. The loan is going to be structured like a power lease agreement with a validity of 30 years and the loan will be accessible to all people having a FICO score higher than 680. The meaning of all this to the ordinary customer will be that they have to pay higher for the first year only. The 30% federal tax credit and adding the saving from the solar energy, the house owner will have highly beneficial, low cost electricity for the remaining years of the loan.

The fact that energy bills will be directly tied up with the consumption and production of energy used, will help track the savings that will be possible every month. Solar City have named the loan as MyPower loan and believe that it will be able to offer customers greater saving than the conventional loan and lease deal which are widely practiced by most green energy companies. The securitization of the assets has made the company value their customer relations even more, and they want to build lasting relationships with their customers. The company wants to expand, not just to new customers and new markets but also through solar equipment sales which can be easily and directly made to the customers if they are already onboard with the company. The company believes that they have carried out the necessary estimations and are pretty sure that their revenues will almost stay the same with the new framework, if not having an increase.

The only little hitch in the whole model is about the federal tax credit subsidy which is required as it makes the loan feasible for the people. In the current scenario, the federal tax credit is supposed to end by the year 2016. This creates a slight problem as the loan is marketed as a twenty years loan, if there is no tax credit; it removes away a 30% subsidy straight away from the loan. The company is really hopeful that this scenario will be averted and law makers will renew the solar and other green energy incentives. “If that does not happen, we are unable to say that things will stay the same, but we are pretty sure that there will be an extension and things will go as planned” says the excited spokesperson of the company.

The benefits of the solar loan though are almost unlimited. With more companies trying to step in and follow the example set by Solar City. The kind of loans enables the solar companies to enter more states than before making it not only a viable business opportunity but also a way to extend the business beyond the traditional state boundaries. There is a opportunity for Solar City who intend to go for second way of securitization very soon and are expecting to raise another $100 million at least but there is caution as well as the lease last for almost 20 years. This is the total unknown as there is no historic data to see how the systems will be working in another 20 years’ time.

As users, let us hope that maximum benefit gets transferred to the end consumers, not only green energy has the ability to be cheaper, it also has the ability to revive and sustain our planet.

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