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Financing Your

PV System by Mo Rousso hen I first started in the residential PV industry, it was as the founder, engineer, salesperson, installer, troubleshooter, purchasing manager, bookkeeper, and janitor of a PV integration company in Southern California. Like most small-business owners, I did it all, and this gave me the opportunity to work with hundreds of customers. Surprisingly, despite the range of people I interacted with, they all had a common thread when it came to buying a system: the bottom line—what's this gonna cost me?

My first sale was to an engaging retiree. She had a doctorate in economics, and kept her mind active by writing and publishing a social responsibility newsletter. She was a staunch environmentalist and wanted to leave a legacy of stewardship for the planet. "Aha!" I thought, "here is an easy sale." Boy, was I wrong! She did end up buying a PV system from me, but only after I demonstrated the added value to her home and the financial impact on her heirs.

Another sale in the early days of my business was to a couple with a strong personal history in environmental and social activism. When we first commissioned their system, the wife burst into tears and said, "I thought I would never live to see this day." Even with all of this personal passion tilting the balance toward the sale, it was still dicey until I could demonstrate a return on investment superior to what they were earning on a bank certificate of deposit.

What I learned in those early days was that even if people wanted to stick it to the utility, gain independence from fossil-fueled electricity, or do their part for the planet, they still wanted to know that the PV system on their home made financial sense.

is financing for you?

In many states, investing in an RE system does make economic sense because of incentives and cash rebates, tax credits, property tax exemption, and increased property value. With all these benefits factored in, it's not difficult to create a compelling financial picture that yields an attractive return on investment.

Once you've made the decision to buy, the next question is how. A PV system is a big-ticket item, usually on the order of a new luxury car, swimming pool, or kitchen remodel. Plus, most of us are used to paying monthly for our electricity—paying in advance for years of green electricity is a foreign concept.

The bottom line is that most of us don't have this kind of cash around, or, if we do, are hesitant to part with it. And that's where financing your project can pay off.

Basic financing methods

Cash Out. Withdrawing cash from a certificate of deposit (CD), money market account (MMA), or borrowing against a 401(k) may be a good option for homeowners who have accumulated comfortable reserves—and live in an energy market where PV investment returns exceed those yielded by their conventional investments. For example, especially in today's troubled equity markets, a 1-year CD yields 3.5% and an over-$10,000 MMA yields about 2.5%. Compare this to a PV system in California: With the state's high electricity rates, a PV system may yield a return of more than 12% if you can take advantage of all the tax credits.

Plastic. Using your credit card is a convenient way to pay for your PV system, provided that you have a high enough credit limit. The downside is that interest rates are high, usually higher than any yield enjoyed by a PV investment, and interest is not tax-deductible.

First Mortgage & Refinance. Typical home mortgages are often the very best financing arrangement, since most homeowners are familiar with them and the interest is tax-deductible. A conforming (also known as "conventional") first mortgage takes into account the value of the entire home, including the new solar system, at approved loan-to-value ratios and is paid back over 15 to 40 years. Thirty-year conforming loans are currently available at about 6% and 30-year jumbo loans are just over 7.5%. A jumbo loan or mortgage is a home loan that exceeds the limits set by Fannie Mae and Freddie Mac—the 2007 limit was $417,000 in the continental United States and $625,500 in Alaska, Hawaii, and the U.S. Virgin Islands. Jumbo mortgages generally have a slightly higher interest rate than smaller conventional mortgages.

Home Equity Line of Credit & Home Equity Loans.

These have traditionally been the mainstay of PV financing. However, due to the current financial crisis, many properties have depreciated in value and the home's equity has evaporated. However, for those homeowners who have built enough equity, home equity-based credit may be attractive.

A home equity line of credit (HELOC) allows you to borrow as needed against the equity in your home. Interest is charged on the amount of money that is actually borrowed. There is no fixed loan period, and the interest rate may vary over the time an outstanding loan balance is carried. Current rates for home equity lines are higher than mortgage rates. The interest may be tax deductible. Typically, there is a fee to set up the HELOC and there may be an annual maintenance fee.

A home equity loan is similar to a line of credit, except these loans are typically for a specific amount, to be paid back over a specified period of time and at a designated interest rate. A home equity loan may include fees and points. Interest may be tax-deductible.

It is interesting to note that a $50,000 HELOC currently has an interest rate of about 4.7%, while a $50,000 home equity loan has an interest rate of about 8%.

The following are guidelines to see if your loan is tax-deductible per the Internal Revenue Service. As with any matter that is tax related, it is prudent to consult with your accountant or tax preparer.

Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan.

Financing Pros & Cons

Good for situations where cash is limited

You are familiar and comfortable with a monthly payment schedule

Some financing programs include system maintenance, eliminating your risk if equipment should fail

Some programs offer PV financing rates that are competitive with the rate of historical electric utility tariff increases

Traditional financing vehicles, such as loans, may result in a higher total cash outlay due to interest charges

The fine print in leases and power purchase agreements can be onerous—and these agreements are non-negotiable

You need a FICO score better than 640

Going through a credit check and approval process can delay the purchase

There may be restrictions when selling your home—be sure to read the fine print in any agreement you sign

Products offered through second-tier companies may have lower credit requirements, but along with this, may have high interest rates, offsetting any financial gains afforded by the PV system

You can deduct home mortgage interest only if you meet all the following conditions:

• You must file Form 1040 and itemize deductions on Schedule A (Form 1040).

• You must be legally liable for the loan. You cannot deduct payments you make for someone else if you are not legally liable to make them. Both you and the lender must intend that the loan be repaid. In addition, there must be a true debtor-creditor relationship between you and the lender.

• The mortgage must be a secured debt on a qualified home in which you have an ownership interest—your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities.

Power Purchase Agreement (PPA). PPAs are a financial instrument that is moving into the residential market from the commercial PV market. In a PPA, the provider finances, installs, owns, and operates a renewable energy system on your property with no capital investment from you. (See HP128, "Financing the Solar Dream.")

During the PPA's term, the installed system generates clean power and you are only billed for the actual electrical output—usually at a discounted price per kWh. In this way, you "buy" electricity from the PPA provider—not from your utility—and are billed for it monthly. At certain milestones during most PPA agreements, you can purchase the PV system at a discount or elect to continue the agreement.

PPA providers assume the operating risks—if the system is not generating electricity, you do not pay them. Most PPA contracts cover a period ranging from 12 to 20 years, so it's in a provider's best interest to use reliable components and contractors to ensure a system's long-term reliability and optimal energy production. Currently, PPAs are not available in most states.

Bank Secured & Unsecured Loans. A number of innovative banks have begun offering both secured and unsecured loans for residential PV systems. Most of the secured loans are home equity-based and, as a result, may be tax-deductible if they meet the IRS rules noted previously. Interest incurred from unsecured loans is not tax-deductible. The pioneer in promoting PV loans is New Resource Bank of San Francisco. However, other banks, like ShoreBank, are also very solar-friendly. Mainstream banks, such as Union Bank of California, Bank of America, and Wells Fargo, are also beginning to offer PV system loans.

Vendor Financing. Some PV module manufacturers offer financing to their customers, provided through specialty banks and retail outlets. These loans may have attractively lower monthly payments because the payback is spread over 15, 20, or even 30 years. Loans may be fixed, adjustable, or a combination. You may also get deals like no payments for one year, or six months same as cash.

Your interest rate will depend on your credit score. Vendor financing is available through companies like BP Solar, SunPower, and Sharp Solar. In fact, there are a number of PV distributors, like Conergy, Solar Depot, groSolar, SunWize, AEE Solar, and DC Power, that may offer financing. However, financing is not offered on a retail basis. It is offered through their installer network as a value-added service to dealers. As a result, it always pays to ask the dealers from whom you are soliciting proposals if they offer financing—and the terms of that offering.

Utility & State Loan Programs. A number of states and utilities have established loan programs to help homeowners purchase PV systems. For example, Sacramento Municipal Utility District's Residential Loan program provides 100% financing to customers who install solar hot water or PV systems. Their 10-year loan currently carries an interest rate of 7.5%.

In Oregon, the Small-Scale Energy Loan Program is administered by the Oregon Department of Energy to finance small-scale, local energy projects. Terms vary with the size and nature of the project.

Association Financing. The leader in providing financing products to its contractor members is the Electric & Gas

Off-Grid Financing

So, you found that perfect piece of rural property on which to build your dream home and you don't have a lot of cash left for a big RE system. Now what? You still need to have electricity for a number of crucial things, like your well pump, refrigerator, and lights.

If you like the lifestyle, but are not necessarily committed to falling off the grid, you can investigate how much it would cost to run utility electricity to your property. Depending on your distance from existing lines, it may cost between $50,000 and $100,000 (and up)—just for the privilege of buying electricity from the utility for the rest of your years. But $50,000 can buy a lot of renewable energy capacity with no recurring energy bills!

If you are building a new off-grid home, many institutions would be happy to fold the cost of your RE system into the construction loan. If you need to transition to a mortgage at the conclusion of the construction, all home lenders require that the home has sufficient power to properly protect its asset value—a home with no electricity would be difficult to sell.

Make sure that you keep copies of your invoices for the RE system, as well as copies of the approved electrical inspection, to prove to the mortgage company that you have electricity at the property, and to ensure that the appraiser adds an appropriate amount to the value of the home.

If there is existing infrastructure, like an engine generator, that provides electricity, you may still be able to refinance into a new mortgage and access cash for your PV system. Additionally, bank loans may be available. However, they vary on a regional basis, so be sure to talk to your bank—especially if you have a strong credit rating.

Some of the state loan programs will also help finance off-grid PV systems. To see what's available, visit the Database of Incentives for Renewables and Efficiency site at www.dsireusa.org.

Industries Association (EGIA). EGIA provides financing for energy-efficiency and renewable energy projects through its partnership with GE Money and its GEOSmart Sustainable Financing Solutions program.

Local Government Loans. These programs represent one of the most exciting developments in residential PV financing to date. California has passed a unique way to fund the propagation of renewable energy by allowing municipalities to create special tax assessment districts. If you own a home within the district, you can borrow money from the local jurisdiction and pay it back over time through an increase in your property taxes. Berkeley, California, is pioneering this approach with its Financing Initiative for Renewable and Solar Technology (FIRST). The FIRST program will provide financing up to $37,500 per installation for either residential or

PV System Financing Options

Provider Selects Assumes

Down Minimum Materials & Operating Risk &

Type Payment Interest Rate1 Term (Yrs.) Credit Score2 Contractor Maintenance

Provider Selects Assumes

Down Minimum Materials & Operating Risk &

Type Payment Interest Rate1 Term (Yrs.) Credit Score2 Contractor Maintenance

Mortgage or refinance



Getting Started With Solar

Getting Started With Solar

Do we really want the one thing that gives us its resources unconditionally to suffer even more than it is suffering now? Nature, is a part of our being from the earliest human days. We respect Nature and it gives us its bounty, but in the recent past greedy money hungry corporations have made us all so destructive, so wasteful.

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