Solar loan originator Sungage Financial and solar crowdsourcing pioneer Mosaic have a new financing plan that offers homeowners direct ownership of rooftop solar projects.

Third-party funding for residential solar through leases and power purchase agreements continues to drive solar growth by offering homeowners reduced electricity bills with zero-down terms.

That financial structure now faces competition from a new plan to loan homeowners the system’s full purchase price with an affordable down payment and interest rates. Direct ownership, according to Sungage CEO and co-founder Sara Ross, could double the utility bill reductions homeowners are getting from third-party-owned (TPO) solar leases. 

Sungage will use $5 million in a special purpose entity (SPE) created by Connecticut’s green bank, the Clean Energy Finance and Investment Authority (CEFIA). Through its Connecticut network of twenty-two installers, Sungage will qualify and extend loans to homeowners in the state for rooftop solar.

The Hampshire Foundation will provide $1 million to fund the SPE, and Mosaic has committed to provide a total of $4 million through either its institutional backers or its crowdfunders’ investments.

For offerings to the crowd, Mosaic will bundle the loans qualified by Sungage into portfolios of marketable amounts, according to Mosaic CIO Greg Rosen. Those offerings will begin in Q2 2014.

Utility bill savings from their solar installations should allow homeowners to make the fifteen-year-term loan repayments, at an interest rate of around 6.49 percent, to the SPE. That revenue stream should cover the debt to the Hampshire Foundation, as well as Mosaic funds and the SPE’s expenses, according to CEFIA CIO Bert Hunter. Mosaic’s return should allow it to provide its investors with a 4.4 percent to 7 percent return.

As Mosaic’s investors continue to buy in, the CEFIA-provided $5 million will be replenished in the SPE, and Sungage can continue to make new solar loans, according to Sungage co-founder and CFO Sylvain Mansier.

Sungage has already made solar loans totaling over $2.2 million to more than 100 Connecticut homeowners.

Mosaic has never handled a rooftop residential product for individual homeowners, but Rosen expects “the fundamentals of solar finance risk mitigation and due diligence” to be largely similar to its financings of multi-unit residential properties or commercial systems. There will be more monthly payments to manage, “but since the overwhelming majority of homeowners are paying by monthly automatic electronic transfer, it is still relatively simple,” he said.

Last fall, GTM Research said the number-one emerging trend in residential rooftop solar is the shift from third-party-funded leases and PPAs to solar loans that allow direct ownership.

Leaders in the TPO space, including OneRoof and Sungevity, now offer loans, as do panel manufacturers SunPower and Canadian Solar. Sungage is emerging as “the Sunrun of loans,” according to GTM Research.

But many banks still don’t understand solar as a cash-generating asset, Ross said. EnerBank and Admirals Bank have loan products, but EnerBank’s entry is an unsecured personal loan that is effectively “blind to the solar piece.” Admirals Bank's product is “old solar” in Ross' view because it requires using the house as collateral.

For solar loans, Ross said, the rooftop system and the energy it produces are the collateral. “There are other loans that can be used for solar, but we originate solar loans,” she said.

There are three chief benefits of solar ownership versus leasing, according to Ross.

First, it sharply cuts the cost of capital. A recent NREL study found the cost of capital for a typical solar lease to be 14 percent, a rate that is not expected to fall. Bringing that cost down will come primarily “through an increase in debt provision to homeowners,” the NREL study concluded.

Second, because ownership can yield as much as twice the utility bill savings over the system’s life compared to TPO, it will drive more solar deployment, help grow the industry’s scale, and further bring down costs.

Finally, ownership gives consumers a viable alternative to TPO programs, especially if upfront costs and ownership responsibilities are comparable.

A key part of the Sungage plan is a smaller down payment calculated to compete with low- and zero-down TPO programs. For an average, well-sited system, the down payment can be less than $1,000.

“TPO plans may also require an upfront payment,” according to Sungage. And as shown by last year’s study conducted by the consultancy Cadmus, Meister for the Massachusetts Department of Energy Resources, “the total payments associated with a solar installation (including any down payments) are often substantially less than the total payments in a TPO scenario.”

A key Sungage innovation would, like TPO programs, minimize ownership responsibilities, Sungage's Mansier said. Installer partners are required to provide both labor and production warranties that run for the entire term of the loan. They ensure that the system’s revenue-stream-generating production is maintained throughout the life of the loan, which in turn secures the loan’s repayment and the plan’s success.

TPO programs have demonstrated that institutions will invest in bundled rooftop solar portfolios. The question now is whether Mosaic’s crowd of investors will be as enthusiastic about this more complicated structure as it has been about large individual installations. Ross and Mansier say they are confident in the Massachusetts and New York solar markets, where Sungage's installer partners tell them opportunities are opening up.