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A local energy company anticipates a 33.4% PG&E rate increases. With Pacific Gas & Electric rates expected to rise 33.4 percent in the next three years — increases recently requested from the California Public Utilities Commission by PG&E — companies are bidding for opportunities to help energy users to sidestep or avoid the financial consequences.
The Property Owner’s Solar Investment
A solar power system is one of the biggest investments a property owner will make, so it’s important to make sure that you fully understand all your funding options. Once you’re sold on the idea of solar power, the biggest hurdle is typically financing.
A $10,000-$15,000 up front purchase price can be a little difficult to swallow, particularly when many Americans are in a situation where they have very little, if any, equity in their homes.
The way to think about financing your solar power system is that it’s an investment that will ultimately save you money. Consider that the average electricity bill for a home is over $100. This means that if you transition to solar power, your system will pay itself off in roughly 8 years.
Couple this with SREC sales, which can be as much as $600/month and that number drops to as little as a year and half. Install a large system that provides more energy than you need, and in some situations, you can sell that additional power to the utility, meaning that your system could be profitable within a year or two.
Now, that’s all well and good, but you still have to take the first step of actually purchasing and installing the system.
Fortunately there are plenty of good financing options available for solar power systems.
Contractors’ List of Solar Funding Options
Way #1: Cash
Paying in cash is a great way to go. It lets you maximize your return on investment by avoiding any interest or administrative fees associated with other financing methods.
Pros: Paying in cash is the cheapest option since you do not have to pay interest on a loan. This allows the system to pay for itself sooner, saving you money. Additionally, you own the solar photovoltaic system outright, adding considerable value to the value of your home.
Cons: By owning the system, you are responsible for system upkeep. If an inverter or panel needs to be replaced it is going to come out of your wallet.
Way #2: Home equity line of credit (HELOC):
A low-interest, variable rate HELOC is likely the best financing choice if you have equity in your home. A HELOC uses your home as collateral for the loan and allows you to borrow a certain percentage of your home equity.
You will be able to borrow up to your credit limit for the full term period and interest rates, which are tied to prime rate, are generally much lower than alternatives. Unfortunately, plummeting home values means only those who put in significant down payments or have lived in their homes for a long time are likely able to qualify. It’s also important to note that obtaining a HELOC can take one to two months and may require you to pay for a home inspection.
Way #3: Solar Home Equity Loans
Solar power is an abundant source of free energy, but to harness that energy, it can be quite expensive. A typical solar power system for an average American home will cost between $10,000-$25,000, which when compared to saving around $100-$150/month on your electricity bill, may not seem worth it. There’s always the option of leasing the equipment, but there’s another alternative if you have equity in your home.
Anyone who got burned during the mortgage crisis may cringe at the sound of a home equity loan, but the traditional usage of this type of loan, before the mortgage crisis, was to improve or repair your home using the equity you had built up, with the goal of keeping your home livable and actually adding equity to your home by making the upgrades. Using this type of loan for a solar power system is exactly this type of upgrade, and depending on your particular situation, you may actually save money by going this route, and add additional equity to your home.
How is this possible?
Let’s take a look at the numbers. Let’s say Bob has a home worth $250,000. Bob has owned his home for 10 years and has built up around $75,000 in equity in the home. Bob’s monthly electricity bill is $125 on average and he has a good credit score. Let’s assume Bob gets a great rate on his HELOC at 3.74% (which is the prime rate as of this writing) and his solar power system costs $12,000. Here’s how the math will work out for Bob over the course of 25 years.
Electricity Bill – $37,500 ($125 x 12months x 25years)
HELOC payoff amt – $14,276 (assuming $125/month)
Savings – $23,224
These figures don’t even include the tax incentives currently available to users of solar power, which can reduce the cost of the systems and increase the savings over the life of the system by thousands.
You can see how with the warranted life of most solar systems (25 years) a solar power system will pay itself off in less than half the guaranteed life of the panels. Everyone’s situation will be a little different, but before you think solar power is too expensive, run the numbers for yourself and see if you could get into a solar power system for the same price, or less than you’re paying now on your energy bill.
Home Equity Loan: A home equity loan (HEL) is a loan in which a homeowner is able to borrow money by using the equity in their home as collateral. Equity in this case refers to the portion of the home that the person owns, or the difference between the home’s fair market value and the outstanding balance of all loans on the property.
Home equity loans are very common and require a good credit history. They are secured loans as collateral, in this case the equity in your home, ensures that the bank will be able to regain some of their loses in case you end up defaulting.
Pros: Home equity loans are available to people in all geographic locations. In some cases it is possible to deduct the interest from one’s personal income taxes, thereby reducing the interest or making the loan interest free. Additionally, the loan pays cash upfront in one lump sum, allowing you to buy the solar photovoltaic system outright. Owning the system adds considerable value to your home.
Cons: There can be many administrative fees associated with securing a home equity loan. Additionally, you have to use the equity you have secured in your home as collateral. By owning the system, you are responsible for system upkeep. If an inverter or panel needs to be replaced it is going to come out of your wallet.
Way #4: Refinancing Your Mortgage
Refinancing your mortgage is a process in which the outstanding debt on your current mortgage is paid off by a new mortgage loan, typically at more desirable terms. Better terms may become available due to changes in the economy or increases in your credit score. In our case refinancing is done to raise additional money to buy a solar photovoltaic system, but can be done for many other reasons: altering the duration of the mortgage, reducing payment size, or consolidating debt.
Refinancing your mortgage is common and needs be carefully planned out. In certain instances, fees can wipe out any potential savings. Typically it is only used as a means to raise money if other benefits can be gained from altering the terms of your mortgage.
Pros: Refinancing your mortgage is an option that is available to people in all geographic locations. By raising money through a mortgage, the borrower can take advantage of tax breaks that are not available for other types of loans. Additionally, the loan pays cash upfront in one lump sum, allowing you to buy the solar photovoltaic system outright. Owning the system adds considerable value to your home.
Cons: There are many administrative fees associated with refinancing your mortgage. Additionally, you have to use your home as collateral. By owning the solar system, you are responsible for system upkeep. If an inverter or panel needs to be replaced it is going to come out of your wallet.
Way #5: Government solar energy incentive programs:
If you are looking to make your home more eco-friendly, the government may be willing to give you a tax credit to lighten the financial burden. Uncle Sam offers $1,500 in tax credits for upgrading to Energy Star appliances, and additional credits for solar-energy systems like solar panels or solar water heaters. State or local programs may offer additional rebates: In Minnesota for example, homeowners who make qualifying energy-efficient home improvements can save an additional 35% on costs in addition to federal tax credits.
Way #6: Personal Loans:
If you were considering financing your project with a credit card, consider a personal loan instead. Compared to credit cards, personal loans often have lower, fixed (not variable) interest rates that enable you to properly budget your repayment and still leave available credit on your cards for day-to-day conveniences. Not all banks offer personal loans, but there are options online that provide credit-worthy borrowers a fast, easy and automated way to borrow money at rates that can be 20-30% below traditional banks.
Way #7: Title 1 Home Improvement Loans:
The government provides private lenders with insurance to provide loans for up to $25,000 for home improvements for terms as long as 20 years. Borrowers do not need to have equity in their homes to be eligible for these loans, and they can use the funds for any home improvements except for luxury items like hot tubs. Interest rates are generally between 10 and 14%—often half of what private lenders charge. A property owner can apply at any lender (bank, mortgage company, savings and loan association, credit union) that is approved to make Title I loan.
Way #8: Contractor Loans:
Large contracting services often offer their own financing options. This may be a good route to take, but do some research to make sure the contractor’s rates are competitive and that he or she is not getting kickbacks from the lending agency.
Way #9: Solar Leasing
If you’re like most Americans, you like the idea of solar power, but much like early adopters of electric vehicles and fuel cell technology, the upfront cost is often enough to keep the average consumer from seriously considering a solar power system.
The government has generous incentives to get Americans to hop on the solar panel bandwagon, but even after any of the applicable tax incentives and rebates, for an average sized home, you’re still looking at $20,000-$40,000 for a full solar power system.
With an unstable housing market and a recovering economy, spending this kind of money on anything on your house may seem unreasonable, and that’s where the concept of solar leasing comes into play; and this innovative idea can get you into a solar solution without breaking the bank.
How Does Solar Leasing Work?: Most people understand the concept of leasing a car or leasing an apartment, but when you’re installing solar panels onto your house, the concept of leasing may raise a few questions. Most utilities (and more coming online all the time) support a type of energy metering called “net metering” which essentially means that if you normally use let’s say 10kwH of electricity per day and your solar panels provide 12kwH, you just “gave” 2kwH back to the grid, then on a day where you use 14kwH, you would “take” 2kWh from the grid and be at a net of 0. Remember that at this point there are no solar leasing firms that support areas that do not have net metering, so check with your utility before you head too much further down the road of leasing.
How Much Does Solar Leasing Cost? The main question on everyone’s mind is going to be, “how much?” and that’s the good news. Solar leases are setup to end up costing you less than you currently pay on your energy bill. The way this works is the solar leasing company will look at how many panels you would need to meet your current energy needs and then charge you a fixed rate that on average is about 5% lower than your current bill. 5% may not seem like a lot, but consider that this is a fixed rate, so while electricity is projected to rise by neural 400% in the next 30 years, your solar lease price will stay the same for as long as you lease the equipment.
Whether you’re looking to go green, or simply insulate yourself from the rising energy costs around the corner, solar leasing is a solid choice for anyone who believe in the concept and the technology, but either can’t afford or isn’t comfortable putting a significant amount of money up front to purchase the panels.
Way #10: Solar Power Purchase Agreements (SPPAs)
For owners of SMB’s and large businesses, an option you may not have considered, but that can reduce your energy bills and possibly provide additional revenue is a Solar Power Purchase Agreement (or SPPA). SPPA’s can be customized for various different types of property, including long-term leased property, and depending on your situation, may even be applicable for certain types of residential property.
What Is An SPPA? An SPPA is an agreement between several parties that essentially covers the interactions and responsibilities required to install, maintain and utilize a solar power system. A typical SPPA will include the host customer (the owner or lessee of the property), the solar services provider (the party coordinating the project and contracts) and the power utility. A typical arrangement will be setup so that the host will typically not pay for any of the equipment and will purchase the energy from the panels at a lower rate than their current utility’s pricing. Note that for small properties or homes, a solar lease is more appropriate.
What Are The Benefits? For any business considering a solar power system, an SPPA will save thousands if not hundreds of thousands of dollars in equipment costs. The host will know what their energy bill will be for the duration of the SPPA (usually between 6-25 years) making it much more predictable than the local utility’s fluctuating pricing. All of the maintenance and setup is typically covered by the solar services provider, so thousands more will be saved in maintenance costs when compared to purchasing a solar power system.
What Are The Drawbacks? If the location is leased, it may be difficult to get approval for the system installation. When the host needs more electricity than the system can provide, the local utility will be used, which may add additional administrative costs to the host. Property taxes may be increased in certain states and counties after installation.
How Do I Get Started? If you think an SPPA may be right for your business, or if you just want to get additional information or a quote, start your research for SPPA providers in your area. Make sure you speak with your lessor if you lease your building to make sure that you are allowed to install a solar system, and to ensure that the lessor will not have the claim to any Renewable Energy Certificates (RECs) or potential revenue from energy surplus.
Way #11: SRECs: Solar Renewable Energy Credits:
You may have heard about companies purchasing so-called carbon credits over the years in order to offset their greenhouse gas emissions. This is a popular way to improve the image of a company or to be able to print a “carbon neutral” badge on a particular product, but green energy is more than just a trend, it can mean big profits and, in some cases, it’s the law.
A Solar Renewable Energy Credit (or SREC) is similar in concept to the idea of a carbon credit, but varies in a few distinct and important areas. An SREC is created by a business or individual producing solar energy and the typical equivalent value is 1 SREC for every one megawatt-hour (MWh) produced. To put this into perspective, a typical home solar power system with an average of 5 hours of sunlight each day will generate between 400-1600 kWh of energy per month, depending on the size of the system, so best case scenario that’s .053 SRECs generated per day. Keep in mind that you’re not handing over your precious solar energy in exchange for an SREC, it’s simply generated by the fact that you’re producing green energy.
Let’s back up a bit and talk about the reason SRECs are so important. Many utilities are now required to have a certain percentage of their energy be created by solar power, so in many cases, a utility will simply purchase the required amount in the form of buying SRECs, rather than purchasing and installing a large amount of solar panels and tying it into their grid. This works out well for owners of solar power equipment because, in addition to saving money on an electric bill and potentially earning money by giving energy back into the grid, sales of SRECs to a utility can provide an alternative source of income that can be quite high and ultimately cover the cost of the solar equipment itself.
There’s no set value of an SREC, and it fluctuates depending on market demand and time of year, but typical prices of an SREC range from $200-$600 each. Think about the implications here for a homeowner with a solar energy system. Taking an average solar power output of 1000 kWh/day and an average price per SREC of $400, you’re looking at an extra $400 per month in your pocket.
This financial benefit alone should be enough to sway you if you’re on the fence about a solar power system, especially considering if you have an average electric bill currently of $150/month and you purchase a 1kWh/month system that lasts for 25 years (which is the typical warrantee period) you’ll earn approximately $144,000 over the life of your solar power system, and it will be much more as the price of SRECs and the cost of electricity continue to rise.
If you’re interested in selling SRECs or finding out more information about how the trade process works, srectrade.com is a great resource for information and they also offer a brokerage service to help you get certified to start generating SRECs and then to help you sell those SRECs in bulk to utilities and other SREC buyers.
Where you can redeem SRECs: SRECs are currently only available in states where a Renewable Portfolio Standard (RPS) exists with a specification for solar power. In other words, it only exists in states which have made solar energy an option to meet renewable energy requirements. 30 US states have a Renewable Portfolio Standard, but not all of those have a provision for solar power
Way #12: PACE Municipal Financing
PACE (which stands for Property Assessed Clean Energy) is a government program that takes the cost of a solar energy system and installation and rolls that cost into your property taxes for the next 20 years. Learn how PACE can help finance your solar system.
The Pros and Cons Of PACE: If you haven’t figured it out by now, there are a lot of unique ways to finance the purchase and installation of a solar energy system, but PACE Municipal Financing may just be the most unique and ingenious idea we’ve come across. In a nutshell, PACE (which stands for Property Assessed Clean Energy) is a government program that takes the cost of a solar energy system and installation and rolls that cost into your property taxes for the next 20 years.
This is a truly smart way to get into a solar energy system because you will typically be saving more money each month on your electricity bill that will be reflected in the rise in your property taxes. Let’s take a look at some of the pros and cons of PACE programs.
- There is little or no up-front cost
- The homeowner will usually not feel any negative financial impact
- Jobs are created by the city for installation and logistics
- Funding comes from the homeowner, so no other government programs are adversely affected
- The improvements will generally up the resale value of the home
- SRECs will be available to provide additional income from the solar power system
- Not available in many states
- Tax liability rolls over if home is sold; could make selling more difficult
- Approval by the city is needed prior to installation
PACE offers a fresh idea that will hopefully allow many more people to be able to get into solar energy. These programs have already done very well in California and a handful of other states, so hopefully programs like this will come to your state soon, if they aren’t yet available. A few additional things to keep in mind if you’re considering PACE financing is that you may not be able to customize your system or choose your individual components, since the packages, vendors and installation companies will generally be hired by the state to do all the jobs covered by the program. This will typically not be a big problem, however if you had your heart set on solar shingles, you may get disappointed.
Way #13: Peer to Peer Lending (P2P)
P2P lending is essentially a loan where instead of a bank, there are a group of tens, if not hundreds of lenders all contributing small amounts to add up to the requested amount. A middleman broker (usually a web site) will allow users to request money or loan money through the site and will generally post the anticipated rate of return for the lender.
Perhaps the only thing more creative about solar power than the technology itself is the vast number of ways that people are financing the purchase and installation. This is likely due to the fact that it’s a fairly large chuck of change up front ($10,000-$25,000) and the initial return on investment is usually no more than $100/month in electricity savings.
This equates to a scenario that won’t be appealing for most consumers, unless they’re already gung-ho for the green movement. Most people who purchase and use solar power like the ancillary benefit of reducing their carbon footprint, but it’s often not the highest on the priority list; rather, it’s a modern form of alchemy, and if tomorrow a technology came out that turned water to gasoline with no emissions, we’d all likely pay whatever price necessary to get a hold of it. This is generally the reason that solar power purchasers are savvy enough to find some unique and sometimes peculiar funding sources, which brings us to peer-to-peer funding.
P2P funding is not exclusive to the solar power community by any means, but solar is a perfect use case for this new form of lending. If you haven’t heard of it, P2P lending is essentially a loan where instead of a bank, there are a group of tens, if not hundreds of lenders all contributing small amounts to add up to the requested amount. A middleman broker (usually a web site) will allow users to request money or loan money through the site and will generally post the anticipated rate of return for the lender. If this sounds a little familiar, it’s a very similar concept to the micro loans that have become so popular in the third world, but with P2P lending, you generally get involved as an investor to make money and as an applicant in order to purchase something or to absolve some outstanding debts.
Solar power systems can be quite costly; a good system for an average sized home will routinely cost around $15,000, so a loan will be a great way to offload some of this cost on the front end. Keep in mind that you don’t have to request the full amount; you may wish to pay for half with cash and do a P2P loan for the remainder. Check out all of the sites, read the reviews and decide which one seems safe, fair and easy for you to use.
Make sure that the interest rate is reasonable and calculate your total cost of the loan of the life of the loan compared to the savings you’ll receive from the reduced electricity bills. Ultimately, its one choice out of many to fund your solar power system, but it may fit the bill for a good portion of folks looking to get into solar power.
Way #14: Feed-In Tariffs (FIT)
FIT is essentially a program whereby the government or utility running the program (the California Public Utilities Commission in California for example) guarantees the purchase of excess energy generated by the, in this case, solar panels tied into the grid. The result is people with solar energy systems, generating more power than they use, can sell back this excess power to offset their investment, or in some cases, to earn money from the solar power system.
Looking for another way to fund your solar energy system, take a look at a program being adopted all over the world, including some states in the US, called FIT (Feed-In Tariffs). FIT is essentially a program whereby the government or utility running the program (the California Public Utilities Commission in California for example) guarantees the purchase of excess energy generated by the, in this case, solar panels tied into the grid. The result is people with solar energy systems, generating more power than they use, can sell back this excess power to offset their investment, or in some cases, to earn money from the solar power system. For the purpose of this article, I’ll focus on the details pertaining to these types of programs in the United States, for more specific information on your country; refer to the Wikipedia entry for FITs.
First off, one caveat is that the program is only open to those not currently participating in net metering. Net metering, as you may know, is the program where you are tied into your local utility’s grid and you are compensated for any energy you contribute back to the grid in the form of a reduction on your bill, however, once your bill is reduced to $0, you are not compensated any further.
What FITs offer, by contrast, is that for those who are consistently producing more energy than they use, they will actually be paid each month for the energy generated. This rate varies greatly depending on the time of day and time of year the energy is produced and a slew of other factors. In California, for example, the rate ranges from 5 cents per kilowatt hour to as much as 30 on a hot summer day when electricity is particularly expensive. The purchase of your excess solar power is guaranteed, so you don’t have to continually negotiate the sale as you would need to with SRECs.
For a real world example for the amount of money you could generate, let’s suppose you calculate your energy consumption at around 45kWh/day and you purchase a 2000kWh/month system. This will leave you with an excess of around 1350 kWh/month, so at an average selling rate of 12 cents/kWh, that’s $162/month.
That’s not too shabby considering that you’ll be covering your own energy consumption and still be eligible for many other government subsidies and could still qualify for the generation and sale of SRECs.
For more info on FITs in your area, check out http://en.wikipedia.org/wiki/Feed-in_tariff
We hope you enjoyed reading this article on the “14 Unique Ways Contractors’ Fund Solar Projects.”. Information was provided by SolarMash.com is a comprehensive source of information about solar energy, solar power and solar technologies including solar panels.
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