Selling solar in a high interest environment

selling solar in a high interest environment

This piece comes courtesy of Adam Gilbert, head of sales for Greentech Finance Solutions (GFS), the financial services arm of Greentech Renewables. It was originally published in the Q3 2023 edition of Solar Builder, in the Business Builders section.


The solar coaster may be on one of its most interesting rides during the last two years, experiencing rapid growth, contending with price volatility across the cost stack, all while achieving landmark legislation to solidify investment in solar. Despite the challenges, the industry continues to recruit top talent and has shown momentum that is hard to knock off course.

The Federal Reserve’s actions early in the pandemic to lower the benchmark rate to near zero was a major catalyst to the growth of residential solar, which kept the money flowing. Despite the COVID shutdowns, residential solar grew 15% in 2020 over the previous year, according to Wood Mackenzie data. With the Fed holding rates all the way through March 2022, the low cost of finance helped accelerate residential solar growth, opening nascent low-cost power markets where solar previously did not pencil, and resulted in annual growth between 30% and 40% in 2021 and 2022, respectively.

Cheap money and high consumer demand brought new capital into the space. More competition drove new products, longer term loans (out as far as 30 years!), lower pricing and higher applicant approval rates to expand the addressable market. All these factors made going solar a no-brainer for eligible homeowners.

While monthly payments were going down, the average project cost was going up. Lower interest loans come with higher dealer fees, or platform fees, which are commonly used by lenders to compensate for selling below-market coupons, blended with platform tech costs. The lower the interest rate (and longer the loan), the lower the borrower’s monthly payment.

Many solar companies, especially in younger markets, gravitated toward the lowest interest rate options. Selling a lower monthly payment can offset higher project costs (increased fees) but can also provide cover for added margin and inefficiencies in cost and process.

As the Fed became more aggressive in addressing inflation, we saw a violent shift in capital costs, a rapid rise in interest rates and a departure of many capital providers and offtake from solar participation. These sudden changes have upended the growth model for many companies that thrived in the last few years and exposed some industry weak spots that need to be addressed.

The Fed’s goal to cool the economy and make borrowing more expensive has worked in the residential solar industry. In today’s environment, a 25-year loan with an 8.99% interest rate has a comparable dealer fee to a 3.99% rate one year ago. That is a payment swing of about $70 per month on an average project, shifting from Day 1 savings to a longer-term investment.

Consumer demand is down. Many installers have shared that lead generation is less than 50% of where it was one year ago, and sales close rates have also been halved. Many companies are working just as hard for a quarter of the conversions they experienced just last year.

With continued rate pressures, what should installers do in this environment to succeed?

Take a page from the old solar playbook; differentiate through quality sales, installations, and customer experience. Solar has been on a roll the last few years, but not all stories were good ones. A number of companies have failed for poor sales and installation practices, and PTO timelines have extended out delaying benefits to the homeowner.

Much of the growth in recent years was attributed to the specialization of roles with dedicated sales organizations, lead generators, EPCs and so forth. This segmentation of responsibilities has created a nimbler workforce that can rapidly deploy with lower expense. Each specialty in theory can sharpen their knives and invest in their core function.

Conversely, the 1099 universe has created more competition to participate with transient partnerships and oftentimes poorer outcomes in sales and installation quality. With multiple companies involved in a project, we see margin stacking driving up costs while applying price pressures in important areas like sales training and installations. Customer acquisition costs have steadily increased to $0.65/W according to Wood Mackenzie, and now average almost four times as much as install labor costs.

Even with capital costs soaring, the cost of not going solar is still higher.

Utility rates increased 14.3% in 2022 according to the U.S. Bureau of Labor Statistics. Electricity rate increases are still outpacing the Consumer Price Index in 2023. While immediate savings may not be an option, long-term savings in going solar very much are.

The electrification movement is here with EV and plug-in hybrids selling almost 300,000 vehicles in the first quarter of 2023. Are homeowners expecting to use more or less electricity over time? California’s adoption of NEM 3.0 should have other markets prepping for storage requirements going forward.

More on that point:

Many customers have shorter term solar payoff goals. Capital providers understand this, and those selling solar in the home should too. The median time a homeowner has lived in their home nationally is 13.2 years, and it is 8 years for those that sold their home in 2022 according to the National Association of Realtors. These statistics vary by age, income and region, and fast-growing metro areas like Austin and Phoenix have shorter ownership durations. Understanding your market and your customer’s goals will help shape better outcomes.

In short, many homeowners want a shorter payback target and are not scared off by higher interest rates or shorter-term loans to get there. Uncovering this can be your competitive differentiator.

Focus on providing what is sold at the kitchen table, installation quality and customer satisfaction. Many of the labor shortages and supply challenges we faced during the pandemic have eased and project timelines are more in our control. Happy customers are referring customers, providing installers with the benefit of a much lower cost lead.

Reducing costs, increasing project cycle speed and gaining satisfaction will help offset the higher costs of financing of today. Most homeowners will not easily rattle off their solar loan’s APR or monthly payment, but they will easily tell their friends about their installation experience and how their system performs.

Lastly, work with people and companies you can learn from and trust. This challenging period will pass, and the market will shoot back to rapid growth. Let’s use this moment to improve and shape what the future looks like.


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