So how much financing will the residential industry consume to support its growth? Here are some quick back-of-the-envelope calculations: assuming that an average system costs $35,000 in financing (this includes not just the installation cost but also the financing costs over the life of the contract discounted back), then $100 million only pays for roughly 3,000 residential installations. To put this into perspective, currently there are an estimated 150,000 residential installations in the US of which maybe 1/3 are financed. The share of financed installations amongst new stock, however, is much higher (50-70%?). When looking at these numbers it’s easy to see that the financing needs of the residential solar industry at the current growth rates will require not million but billion dollar funds very soon.
That might seem scary since it’s a lot of capital in an asset class that’s not well established. It’s a young asset class that does not have a lot of history under its belt. No one really knows what the long-term risk characteristics will look like. How high will the operating and maintenance costs really be? How high will default rates be? Do we really understand the risk of trees growing and potentially reducing the performance of the asset? (Just look at an aerial image of older neighborhoods and compare it to newer neighborhoods.) Sure, the terms and conditions of the financing contracts stipulate that the trees have to be trimmed but have you tried convincing your neighbor of that? And legal battles to get your neighbor’s trees cut are costly and take time. Another risk is a systematic drop in electricity rates that could lead to a lot of people deciding that they are better off not paying anymore. Their credit scores would take a hit but some might decide that they are better off that way.
Admittedly, these risks are not worse than those impacting other similar asset classes like mortgages or consumer loans. What is different, however, is that banks and companies like Google cannot possible fully understand (and therefore correctly price) the risks associated with solar energy assets. Not yet. Only time will allow them to learn and collect the necessary data. The result will be a very efficient market of different financing solutions that provides the most competitive terms to customers. It’s surely an exciting story to see unfold over the coming years.