Credit Unions Role in Equitable Solar Adoption

The Challenge

According to SEIA’s Q3 2021 report, solar and energy storage experienced historic residential growth despite headwinds of supply constraints and rising costs. However, despite this impressive result during a pandemic, the Department of Energy’s goal is 4X 2020 solar deployment (15GW in 2020 to 60GW between 2025–2030). Solar deployment acceleration is required to meet solar electricity supply goals of 40% by 2035 and 45% by 2050 ( Solar Futures Study).

According to this same study,

Challenges must be addressed so that solar costs and benefits are distributed equitably. Solar deployment can bring jobs, savings on electricity bills, and enhanced energy resilience. Various interventions-financial, community engagement, siting, policy, regulatory, and resilience measures-can improve equity in rooftop solar adoption.

A supporting research study from NREL titled, Affordable and Accessible Solar for All: Barriers, Solutions, and On-Site Adoption Potential, cites compelling data illustrating gross inequities and barriers to solar adoption when comparing race and income. Low-and moderate-income (LMI) households (including multifamily and renter-occupied buildings) represent 43% of U.S. households (Sigrin and Mooney 2018), but only 15% of solar adopters (Barbose et al. 2020). In addition, 90% of solar adopters have reported prime/super-prime credit scores > 680. And after controlling for homeownership rates, Black-majority census tracks had installed 61% less rooftop solar than no-majority tracks. Similarly, Hispanic-majority census tracks installed 45% less. While White-majority census tracks installed 37% more (Sunter, Castellanos, and Kammen 2019).

Why Credit Unions?

Credit unions provide an excellent lending foundation for renewable deployment. First, many credit unions are local/regional, which correlates well with solar developer footprints. Second, credit unions have closer relationships with their members and have broader datasets to make credit decisions — for example, offering loans to lower FICO customers because of payment history. Third, credit unions are natural lenders across the risk spectrum in other asset classes like auto, credit card, personal loans, and mortgages. Credit unions fund 31% and 8% of loans in cars and homes, respectively (CU Times). And finally, credit unions are pillars of the community involved in non-profits and programs that support marginalized communities.

Several credit unions like Technology Credit Union (Tech CU) and Clean Energy Federal Credit Union support solar lending and even specialize. A majority do not. While researching public documents, the credit unions mentioned above continue to grow their solar portfolios and lending commitments. For example, Tech CU has funded billions of solar loans through Sunlight, Tesla, and Sunpower over the last decade — and has committed to $2.5B over the next three years. No credit union would make that size commitment unless these loan portfolios performed.

Credit Union Business Models

There are three main business models that credit unions use to support solar. The first model is direct to members. Credit unions originate the loan with their members directly through traditional branches and digital channels. The second model involves selling through a solar intermediary (fintech)-the credit union partners with a fintech that sells directly to the consumer or through solar developers. Solar fintechs like Mosaic, Sunlight, Goodleap (Loanpal), and Dividend Finance are innovators in this industry. These fintechs act as a technology bridge between solar developers (installers) offering on-demand loans to their clients and capital sources. Capital sources include wholesale lines, non-bank investors, banks, and credit unions. The third model provides a direct wholesale credit facility to solar developers to offer to their clients.

Solar/renewable lending offers credit unions a low-risk strategy to drive new organic growth and diversify their balance sheet. Securitization of loan portfolios over the last five years provides valuable insights to lenders. The loan portfolios have higher credit scores (680+), low and consistent loss ratios (0.2–1.2% per annum), and few write-offs.

Customers tend to pay their bills based on a hierarchy of needs. After food and shelter, electric bills are a close third. The solar bill is an equal or cheaper swap of a portion of the electric bill in many locations. Additionally, solar allows customers a fixed $/kWh for a part of their electric bill for at least 20 years.

All this to say that current residential solar penetration is around 2%, fixing equitably in renewable lending would significantly improve adoption. In addition, credit unions know how to price in risk for auto, home, credit cards, RVs, pools, personal loans, and farm equipment — solar loans should be straightforward.

Barriers

Why aren’t more credit unions offering solar loans? The residential solar market is growing. ESG momentum and government support should remain strong for at least four more years, if not decades. Auto loans have declined because of chip shortages, leaving gaps in credit union balance sheets (solar loans could be a nice plug). Lending diversity offers risk mitigation for credit unions. And there is a smoking hot secondary market to offload these loans if room on the balance sheet is limited.

There are several systemic reasons credit unions may get excited about solar and then pass.

1. Complex Loan Structures — Right or wrong, the solar industry has developed loan types over time that are complex because of tax credits, longer loan durations, competition for capital, and aggressive sales strategies. Credit union lending comprises vanilla fixed and variable rate products with clear APRs and interest rates (a good thing). Solar products sold from solar fintechs include lender discounts as high as 25+ percent used to pay down the loans to market interest rates of 0.99–1.99% over 15 to 25-year durations. The customer’s real rate (APR) for these loans, including amortization of these fees, is much higher, approaching credit card and unsecured personal loan APRs.
2. Loan Origination Systems (LOS) — Credit unions often have older LOS systems. These systems require customization to handle the loan products described above. These loans often include a principal payment in month 18, corresponding to a 26% federal tax rebate. If the consumer uses the tax rebate to pay down the principal, the consumer maintains a low monthly bill, usually less than $150. If the tax rebate is not applied, then the monthly payment increases to cover the lost principal associated with the tax rebate. This loan optionality needs custom coding into systems designed for simpler loan constructs. The authorization to add technical resources to a full slate of digital transformation projects is often a challenge in resource-constrained credit unions.
3. Unique Loan Risk Types — There are two common risk types — secured loans (autos and mortgages) backed by the asset and unsecured loans (personal or credit card loans) tied to creditworthiness. And then there are solar loans. These loans live somewhere in the middle under a loan type called a UCC-1(Uniform Commercial Code). UCC-1 loans have some risk mitigation features but require local and state regulatory expertise concerning their administration. Unfortunately, credit unions have limited legal and regulatory resources to create a UCC-1 loan playbook or administer the program.
4. Politics — Credit unions try to walk a non-political line, like most businesses. This stance works for auto, home, RVs, and credit card lending. But alas, renewable projects are politicized, and this is enough for many credit unions to table these initiatives despite positive economic, member, and social upsides.

Solutions

Despite these barriers, the solar lending market is evolving. New intermediaries and solar mavericks are trying to solve these challenges. Here are a few solutions that I’ve been researching.

• Federal/State Green Banks — Allowing some infrastructure dollars to flow into green banks to back loan loss reserves. These reserves would allow credit unions to support LMI lending confidently. Green bank loan reserves are not a new idea, as there are examples at the state/local level. However, 4X solar deployment requires scale and simplicity that is difficult to achieve with today’s local organic efforts.
• New Fintech Solutions — Several well-funded bank-in-a-box startups can support solar lending platforms independent of the LOS. While this may mean having a separate tech stack for solar lending, credit unions would have a valuable platform to test and scale new products.
• CUSOs — CUSOs are startup structures (think LLCs) specific to credit unions. A CUSO allows credit unions to team up and invest in novel startups or business models. For example, credit unions could create a CUSO specifically for solar lending. The CUSO could handle the mechanics of the products and tech stack while allowing credit unions to manage origination through solar fintechs or direct.
• New Asset Class — Designing a simple renewable asset class, similar to UCC-1, at the federal level. With enough risk features (teeth) to minimize loan losses and a platform-agnostic admin stack to report and track loans in case of default.
• Solar Developer Outreach and Education — I’ve talked with many excellent solar developers who are mission-driven, client-focused, and excellent operators. As a generalization, they are not accountants or bankers. Fintechs have taught solar developers how to sell complex solar loans at very low-interest rates. However, consumers pay high APRs because they absorb most of the upfront fees to pay down the loan. This practice works at a 2% solar penetration, but I don’t believe it scales to 40–45%. I posit that regulatory and governing bodies will obligate the industry to be clear about consumers’ actual cost of capital.

Renewable lending is an economical, social, and nationally relevant endeavor — that is doable. Credit unions and solar developers have a common superpower. A combination of local know-how and customer/member obsession. By working together, 4X solar deployment is achievable equitably. And dare I say, the only way the administration has a chance of hitting its solar deployment commitments.

Originally published at https://www.linkedin.com.