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For SolarCity, a move away from leases to loans

SolarCity became the nation’s biggest installer of residential rooftop solar energy by offering to lease solar panels with no upfront costs.

Now, times are changing, and so is SolarCity.

Homeowners are showing a greater desire to own the solar panels they put on their roof, so SolarCity is moving away from its leasing model in favor of allowing consumers to take out loans and own their solar arrays outright.

Both ways permit customers to install solar panels with no upfront costs.

The shift is partly out of necessity for SolarCity and its new owner, Tesla Inc., and partly because of big changes within the solar energy marketplace.

It eases the financial burden that leases impose on companies like SolarCity. And it falls in line with changing consumer preferences that favor direct ownership over leasing as the price of rooftop solar drops.

Moving to loans will ease the financial burden that SolarCity faces from its leasing program, which forced the company to constantly raise hundreds of millions of dollars from investors so it could cover the upfront cost of installing all of those leased solar arrays. Shifting more of its customers to loans will reduce the amount of money that SolarCity needs to raise from investors to cover the upfront costs of its no-money-down leasing deals.

But it also puts SolarCity more squarely in line with broader market trends, as more homeowners who are turning to solar energy prefer to own their systems. More than half of all residential solar that was installed during the fourth quarter of last year was financed with loans. It was the first time in six years that loans outpaced leases and power purchase agreements as the primary financing tool used by homeowners, according to GTM Research.

Those shifts within the solar market also will have an impact on the massive solar panel factory that SolarCity plans to open later this year in South Buffalo. The plant, built with $750 million in state aid, will be the biggest in the Western Hemisphere, and how successful SolarCity is at keeping up with changes in the solar marketplace will play a big role in determining whether the local factory can deliver the economic impact – including up to 2,900 jobs at SolarCity and its suppliers – promised by the company.

That demand also will be heavily impacted by the success of the solar roofing product that SolarCity unveiled last October and expects to begin selling this year. The solar roof is expected to be a big source of demand for the Buffalo plant’s solar modules. The roof, which has built in solar modules so it looks much like a conventional roof, could be a product that helps set SolarCity apart from its competitors, much like its leasing program did years ago, provided that the solar roof can be cost competitive with regular roofing products. Elon Musk, Tesla’s CEO, has said he expects the solar roof to cost less than a conventional roof, once the savings from the electricity it produces are factored in.

New solar roof a high-stakes gamble for Tesla-SolarCity venture

The reason behind the shift toward loans is twofold: Consumers now can borrow more cheaply to install rooftop solar than it costs companies like SolarCity, which faced rising borrowing costs as its debt grew, to raise the money needed to finance its no-money-down lease deals.

And the falling price of solar energy means that rooftop solar now is more affordable than ever before, making the monthly payments from taking out a loan to install rooftop solar less of a burden on a homeowner’s budget.

“All signs point to the continued rise of customer ownership,” said Nicole Litvak, a GTM Research analyst. “Leasing was a necessary temporary solution that sparked the original growth of residential solar, but the future is cash and loans.”

The heyday for solar leases came in 2014, when 72 percent of all residential solar was through a lease or a power purchase agreement. Those were the days when SolarCity was growing at a breakneck pace and it coincided with the company’s purchase of fledgling solar panel producer Silevo, which had high-efficiency panel technology that SolarCity executives believed would be at the center of its efforts to drive down costs. It’s also when SolarCity disclosed that it would make the solar panel factory that Silevo planned to open in Buffalo five times bigger than originally planned.

But since then, leasing has steadily been losing favor among consumers. It dipped to 62 percent of all residential solar installed in 2015 and to 53 percent for all of last year. GTM Research expects leases to account for 45 percent of the residential solar market this year – its lowest share since 2011.

Plunging solar energy costs are a big reason behind the declining popularity of leasing. A 6,000-kilowatt residential solar array cost an average of $17,340 last year, according to GTM Research. That was 17 percent less than the year before, as a global glut in the supply of solar modules, combined with fierce price wars for the other hardware that goes into a solar array, made the main components of a rooftop solar array significantly cheaper.

Loans have other advantages, too. They allow consumers to avoid the long-term contracts that come with leases. And homeowners who own their solar panels get to claim for themselves all of the tax benefits and incentives that come with solar power.

For SolarCity, the shift toward loans is a big change. It revamped its loan product last year, allowing consumers to take out loans over 10- or 20-year terms to finance their rooftop solar, with no money down. The new loan program replaced a more complicated offering that had been in place since 2014.

SolarCity’s loan program has been growing steadily. It accounted for 28 percent of all of the solar generating capacity that the company deployed during the fourth quarter of last year, and Elon Musk, Tesla’s CEO, has said he expects loans to keep gaining popularity. Tesla will report its first-quarter earnings on May 3, and that update could include new details about the popularity of loans during the first quarter.

The shift to loans also helps SolarCity, which amassed $3.5 billion in debt as it fronted the cost of the rooftop solar that it leased to homeowners. With loans, SolarCity doesn’t have to front the cost, so its financial burden is eased – a key consideration for a company that has lost more than $1.5 billion over the past two years.

While the leasing model helped SolarCity capture more than a third of the residential market as recently as 2015, its market share had dipped to 22 percent during the fourth quarter of last year, according to GTM Research.

At the same time, the shift toward loans has been good for the nation’s smallest installers, primarily local companies that serve only a limited market. Those small installers, as a group, have been capturing a bigger share of the residential market, with most of the gains coming at the expense of big national players, like SolarCity and Vivint Solar, whose market share fell to 7 percent during the fourth quarter from 9 percent a year ago.

Small installers now command about 43 percent of the residential solar market, up from 30 percent a year ago. Those small installers have some inherent advantages over the big players, mainly because their overhead costs tend to be lower. While big players, like SolarCity, have struggled to reduce their cost of signing up new customers, small installers don’t have big sales forces and they often rely on word-of-mouth referrals to get new customers.

In contrast, national players like SolarCity need big sales forces and more elaborate marketing programs, which can account for about 20 percent of their overall costs. In comparison, sales and marketing costs only account for about 3 percent of the purchase price of a car, according to data compiled by Global Equities Research Analyst Trip Chowdhry.

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