Unveiling the truth behind “free solar panels”! This podcast dives into solar panel financing options & hidden costs of free solar that you might miss. Understand solar financing before you buy & make an informed decision about solar power for your home.
John Maher: Hi, I am John Maher. I’m here today with Brian Sadler, Vice President at Solaris Renewables, a solar company in Massachusetts providing premium solar and storage technologies with exceptional customer service; and designing, installing and servicing solar systems in Massachusetts, Southern New Hampshire and Maine. Today we’re talking about understanding solar financing, or how to pay for solar. Welcome, Brian.
Brian Sadler: Hey, John. Good topic today.
The Myth of Free Solar
John: Yeah. One of the things that we hear a lot about now is free solar. You see all these ads, “Hey, you can get solar panels installed for free on your home”, and it makes it sound like it’s some sort of benefit that the government is just handing out solar panels to everybody. Can you explain what those promotions typically actually entail and what are maybe some of the hidden costs or ongoing fees that consumers might not be expecting when they listen to those ads?
Brian: Yeah, we see this a lot, right? We see this a lot on social media and online that the governor is giving away free solar, storage, and a new roof, and it’s such-and-such company, and it’s free solar. And we actually have folks that call us and ask if we do the free solar. And my typical response is, “Sure we do the free solar that you pay for for the next 25 years or so” because that really is what it is.
And so as we all know, nothing is free, and if it’s a big ticket item or a big piece that could be part of your home or an item that you wanted to purchase that probably free is not the way to go because likely you’re going to get what you pay for. So, it’s unfortunate that this tactic has been used in our industry and it makes our jobs a lot harder, I would say.
There’s a lot of confusion around this in particular, but a lot of pieces of solar because, again, solar is relatively new to consumers and not everyone is buying solar all the time. So it’s usually the first time they’ve looked at it and if the first thing that they’re hearing is that it’s free, they’re generally being misled and usually disappointed and frustrated through the process of finding out how this really works. So the free solar really is a free installation. It’s another way of saying no money down, is really what it comes down to. Because again, nothing is free and you are going to pay for solar. Now, there’s different ways to go about that, and I know we’ll probably talk about that here in more layers moving forward, but it really comes down to a type of financing and just about how you’re acquiring the system.
Third Party Ownership (TPO) and Other Solar Options
John: Yeah. So tell me a little bit more about that. With some of these free solar offers, do I actually own those solar panels or does somebody else own the solar panels and they’re just putting them on my roof? How does that ownership structure impact my responsibility also for maybe future maintenance or repairs that have to be done?
Brian: Yeah, really good question. Again, this is more of the nuance behind it and why we spend a lot of time educating customers or potential customers on how this really works. At the end of the day, typically what the free solar advertising — or clickbait is really what it is — it’s usually lead generation folks to have you click on the free solar and fill out your name and address so that folks can contact you and try to get you to sign up. What that really is referring to is what’s called a Third Party Ownership model, or TPO is the acronym that’s often used in our industry. And what that is is really a type of financing. So really when we pull back a little bit and we look at “how can I go solar”, it comes down to three basic options.
You can pay for it outright. So if you have your own cash on hand or access to your own financing, essentially in terms of the installer, it’s cash, right? So it’s a cash payment you’re making to acquire the solar system.
Otherwise, you’re using a loan product. So a lot of times those are no money down as well. And so we’re running no money down. We’ve been doing it for a while now. So we don’t want to have a barrier to entry for the consumer as well, and make it really easy and turnkey. The two ownership models are either paying for it outright with your own funds or using a finance loan to pay for the system by owning it. And in those cases, the owner, being now the homeowner, is going to get all of the local and federal and state incentives that go with investing in solar.
And the other option, the third one, would be the Third Party Ownership. Those typically fall under either what’s called a lease or a power purchase agreement, or PPA as it’s commonly called. Leases are not as common, and especially now we don’t see them as much, but the PPA kind of falls under that connotation of lease. It’s a third party who owns it. Typically, again, it’s financing. So there’s a financing company that owns the system and they’re going to take the federal, state and local incentives and they’re going to use that as part of the financial mechanism to pass back through a lower cost of electricity to the customer. Most of the time you’re paying with a power purchase agreement, you’re paying a reduced cost per kilowatt-hour rate. So we’ll say right now, we’ll say in Massachusetts, most of us paying in the high 30s, 30 cents, 36 cents, 39 cents per kilowatt-hour for electricity.
So if you can get solar at 22 cents or 25 cents, you have significant savings. You’re saving 30% on your electric costs by going solar and realizing a lower cost per kilowatt-hour. So that’s really what these models are. So they’ve made it much easier to go solar by saying it’s free solar, or free installation, and you’re getting a reduced cost of electricity. And generally speaking, the maintenance is covered for the most part by the financial company. So the finance company is going to say it’s maintenance free and they’re typically going to, under certain terms and conditions, they’re going to pay another third party to maintain that system if there’s anything that comes up.
With us, I think it’s a little different. So it’s one stop shop. So we look at it as financing. Our customers get the same system, the same service, the same customer service, attention to detail, that we provide all of our customers, regardless of finance type.
We have a lot of customers that pay cash and a lot that do loans. And we are now offering a third party ownership model or PPA, power purchase agreement, that the customer can take advantage of for really aggressive upfront savings. But we’re going to be the ones that the finance company pays to maintain that system as opposed to a lot of the other models… And the free solar model that we see a lot is a third party sales organization selling that project to a third party installer, selling that project to a third party servicing company. And then you have a third party finance company as well.
So you’re talking about the homeowner having to navigate three and four different third parties that they talk to throughout the project and thereafter. And that does create confusion. It also creates miscommunication, the ball being dropped, expectations not being met, and things like that. So this is why that free solar verbiage is really frustrating for especially local installers like us, we spend a lot of time unwinding what that is for real and guiding customers on the different options on how to go solar. And that being one of them, but again, it’s not free.
John: So it’s not free. And there are these issues with the ownership, and like you said, you might be dealing with four different third party people for different various things. But, like you said, with the free solar it sounds like, yeah, you’re still going to be paying for your electricity, you’re just going to be paying it at a reduced rate. But where do you feel like purchasing your solar panels and having ownership over that, why is that better than this free solar model where you’re just paying a reduced rate?
Brian: Generally speaking, the total cost of ownership is going to be significantly less if you own the system. Regardless if you pay for it outright or if you do a loan, you’re going to pay less money for less time. But the “Free solar”, I’m kidding around here, but the third party ownership model or a power purchase agreement or a leasing model, you’re going to see all of those benefits of savings accelerated to the front end. So it looks really compelling so that customers have a month one savings that might look better than a loan, for instance. And they’re not coming out of pocket for a chunk of change out of their own funds to come up with this. So it looks very enticing, but they have escalators. And then over the course of the term of that program, you’re going to pay more than you would have if you bought the system.
And I don’t mean just bought it outright, I mean also on a loan as well. So if you want the most aggressive upfront savings, third party ownership is great. If you say, “Look, I’m going to be in this house for only three more years, I just want to save something in electricity”. That’s a great option. It’s a great option for those who cannot realize the tax credit for a variety of situations. Retired on a fixed income or maybe had a unique financial situation in a given year, and they know they’re not going to be able to realize that tax credit. Someone that gets injured or was out of work for the year, has a good credit score, third party ownership might be a great model for them to go solar. So it does have a fit but in all there’s going to be more benefit to the homeowner and the property by owning the system.
But it is, I’d say, really great that our industry has matured to the point that there’s a lot of options that cover everyone’s needs and it is more accessible to more folks. And this is really what happened when the tax credit came to light, these third party ownership models came to light and opened up solar to more people. And that’s the door knocking model and seeing the solar company at the big box store, and we started to see a lot of that. And now for a company like ours, it’s frustrating to unwind some of that because you don’t need to be really knowledgeable about solar, the programs, the product, to sell or to guide someone on a PPA model, you’re just saying, “Hey, you’re paying 39 cents now. I’m going to get you electricity for 25 cents and get you a free solar installation”.
I mean, what could go wrong? So, it is compelling. It is an easy conversation for any sales rep to have. And I’ve joked around over the years that we can have anyone in our office go sell PPAs. It’s just we are really entrenched in the nuance of the products and services that we offer and the local landscape. And we feel like that educating the customer is really important and differentiates us and gives a better customer experience, which I think in turn shines a more positive light on our industry than does the free solar model.
Types of Loans Available for Solar Installation
John: Okay. So say I’m convinced that purchasing a solar system is the best option for me, but I don’t have the money to just purchase it outright. Talk a little bit about the types of loans that are available now for solar installations. Where do I get a solar loan from?
Brian: Yeah, that’s a great question as well. I would say that for solar loans, it’s generally not something that the consumer needs to go shop. It’s usually through partnerships with the installer. So how the solar only financing generally works is that these solar only financing companies want to partner with reputable, stable, and long-term established solar installers to offer their loan product as an option for them. So, we have a variety of them and we try to keep it as local as possible.
So, we partner with a national solar-only loan provider that happens to be based here in Boston. We’ve been working with them since 2014, ’15. They have a really compelling product that has treatments for some of the incentives, and they’re unique to each individual market across the country. So they have certain mechanisms to help consumers maximize their upfront savings with that. And then there’s other national solar only loans that we work with as well that will have different kind of mechanisms.
And then there’s local, there’s credit unions that have realized some benefit from seeing that solar is like no default. It’s a really strong product. Banks and institutions are very traditional, and historically they want to invest in and support products that have been around hundreds of years for houses and automobiles and things like that that have long-term stability. And solar’s relatively new and they’re starting to understand, hey, this is really a payment that is replacing a utility cost at a consumer’s home, and they’re paying that bill already, and now this is less so they’re probably going to pay this, right?
John: They’ve got the money, they’ve been paying their electric bill all this time, so we know that they have the money for it.
Brian: Yeah, it’s a good bet. So the banks have started to realize, hey, this is a good bet and we’re going to always get this money back and make our interest rate. So they’re happy, this is profitable for them. And the customer’s spending less with a solar loan than they are to the utility, and they’re able to fix that payment. It’s not like that loan payment’s variable, it’s a fixed payment. So it’s become more and more compelling to financial institutions, more and more compelling to customers. And if they own the system, we help guide them on… Given their situation, we learn a little bit about the customer, what’s important to them. Is it upfront savings? Is it long-term cost of ownership? What’s important, the monthly payment? Is it total cost? All those pieces, we talk through and learn, and we say, well, given what you’re saying, I think this is the best loan product for you or this might be. And we’re able to show them all of them and they can look at them side by side and determine what’s best for them. But we want to make sure that we do a great job explaining how each of the loan mechanisms work inside of those loan products.
Federal and State Solar Tax Incentives
John: Okay. And then in terms of tax credits and incentives, how do federal and state tax incentives work and how does that factor into the overall cost of a solar system?
Brian: Well, I got to put on a big disclaimer that I’m not a CPA or a tax professional. So we have to make sure we always say that when we’re talking to customers about the tax credits, but essentially the federal tax credit is 30%, so it’s 30% of the gross cost of the project that comes back to you. Now, how does it come back to you is really dependent upon your individual situation in that given tax year. But ultimately it’s a credit, it’s not a write-off, it’s not a deduction, it’s a true credit back to you. So you either reduce the payment you need to make to the federal government based on that year’s tax filing, or you can get a check back to you if you’re getting a refund, for instance. So it’s really significant. I mean that’s 30% of the system right there covered by the federal tax credit.
In Massachusetts there is also a $1,000 tax credit. It’s technically 15% of the cost of the system, but it’s been capped at $1,000 for some time now because we have some other really strong incentive programs. And then in New Hampshire there’s a rebate. And then in all of New Hampshire, Maine, Massachusetts, there is an income program that you can realize cash payments based on the performance of your system for the next 20 plus years. So the tax credits are a big piece.
And then we have some other income programs, and then in some cases it’s a rebate as well. Some of the municipal light plants here in Massachusetts have upfront rebates to the customer. And that’s why we’re here to help customers navigate that based on where they’re at, their situation, and what their goals and needs are. But at the end of the day, the tax credit, the 30% from the federal government, is the biggest piece. And then these loans have treatments for that. And even really the third party ownership, the PPAs and the leases, they’re based on the financial institution taking that tax credit. So your monthly payment is based on that part of that equation as well, that the institution is taking 30% plus any other local incentives. And the idea is they’re passing that back through to the consumer with cheaper electricity.
John: So again, assuming that I’m purchasing my solar panels and I’m getting financing or a loan for that, how long does it typically take to see a return on investment when you’re investing in a solar system?
Brian: Well, the good news is if you choose to do a financial mechanism like a loan or a third party, it’s month one. So your return is instant, right? So if you’re paying less with solar than you were paying before, your return is instant, right? So typically if you are financing a system, it’s month one. Now if you’re coming out of pocket as an investment, you’re going to separate yourself from a chunk of change to buy the solar system…
John: Sure, yeah.
Brian: …and then how quickly do you recoup that money is really the payback or payback years. And so I would say, typically speaking, for a decent site, is what we see right now is about seven years. If you are really good, you can knock a year or a little bit more off it even. And then if you are a little bit challenged, say with roof space or shading, you might add a year to that. I would say worst case scenario, people are seeing probably eight years. Best case scenario, five and a half, six years. But I would say the mean is typically seven years that we see folks being able to recoup that investment or “payback years”. But again, that’s why these financial mechanisms are in place because if you’re going to finance it, as long as you’re paying less than you were before, it’s instant payback.
John: All right, well that’s really great information, Brian. Thanks again for speaking with me today.
Brian: Thanks John, I appreciate it.
John: And for more information, you can visit the website at solarisrenewables.com or call (781) 270-6555.