Community banks and credit unions are playing a large role in residential solar financing

Energize Weekly, August 8, 2018

Community banks and regional financial institutions are becoming a bigger force in the financing of residential and small commercial solar installations, according to a study by the National Renewable Energy Laboratory (NREL).

These community banks and credit unions represent a new source of capital for small-scale photovoltaic (PV) projects, and they are “experiencing positive early performance of their loans,” NREL said.

About $650 billion will be spent on PV installations between 2019 and 2050, the federal Energy Information Administration estimates. The NREL study said that the local and regional banks, with their $3.6 trillion in assets, “could provide a significant portion of the required PV capital while creating a large investment opportunity for themselves.”

The financing profile for residential and small commercial installations is already changing. From 2012 to 2014, solar leasing and other third-party arrangements dominated the market, accounting for 62 percent to 72 percent of sales. Since 2015, the third-party portion has dropped while purchases made with loans and cash increased.

In 2017, leasing accounted for 41 percent of annual installations, loans were 33 percent of the market and direct purchases were 26 percent of sales.

“The increase in PV loans and cash purchases was due to several factors, including declining PV system costs, more widespread loan availability, and changing business models of national installers among other reasons,” the NREL study said. “The shift towards PV loans has allowed new, smaller financiers … to enter the PV financing market.”

The NREL researchers analyzed 6,770 PV loans worth $186 million, issued by 22 different community or regional financial institutions and found that only 12, less than 0.2 percent, were reported as charged-off or unlikely to be repaid. “However, most PV loan programs are young, with many loans very early in their term, and warrant continued tracking,” the study said.

Banks accounted for 32 percent of the loans and 38 percent of the loan value, and credit unions issued the remaining 68 percent of PV loans with 62 percent of loan value. The loan data reflects performance through February 2018.

NREL researchers also interviewed 20 PV loan experts at 14 banks, credit unions and related institutions to identify trends in the emerging solar-lending market. The bank officials said that many of the PV loan products were initially created in response to requests by customers or members.

In some cases, home improvement contractors who banked with an institution urged it to create a PV loan offering so they could recommend the product to their customers. Several interviewees suggested PV loans complement existing home improvement products.

“In the commercial space, a PV system is like other equipment financings and could be funded by commercial and industrial loans,” the study said.

While developing solar-loan instruments and the expertise to manage them may be a challenge for smaller banks and credit unions, they have some advantages in implementing PV-land products, the study said. The approval process at a smaller bank may be easier and adjusting or modifying a new loan product can be quicker.

These financial institutions are also in a position to provide backing in areas where solar development has been a challenge. The study noted that in 2014, community banks held 72 percent of the deposits in rural counties and 56 percent of the deposits in micro-counties, which had 10,000 to 50,000 residents.

“Many states with a large community banking presence are in the middle of the country, where PV penetration tends to be relatively low,” the study said.

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