Video: Residential solar financing outlook post-RE+
Another RE+ is in the books. On this edition of Power Forward!, Solar Builder Editor-in-Chief Chris Crowell chats with Joshua Tinaglia, finance program manager at BayWa r.e., about the state of solar financing, why third-party ownership (TPO) is an important financing tool for solar installers, how the domestic content adder is being utilized, and what to think about going into 2025.
Watch the full episode right here, or read a partial transcript below…
RE+ 2024 recap
Crowell: Josh, excited to have you on because financing is dictating so much about the solar industry right now. I had a lot of conversations about what means for our audience at RE+, and I’m wondering what you were hearing from installers and customers at RE+?
Tinaglia: The folks I talked to, a lot of the conversations centered around the 10% domestic content tax credit adder, and how it could be leveraged for not only homeowners but providers like TPO providers and maybe even installers. Being a distributor, a lot of that conversation steered around supply chain, and how that’s going to look.
… And we knew, TPO for the last 18 months, because interest rates have gone up, have been steering the ship when it comes to finance, and loans have kind of lost their flavor with contractors.
Of course, that just changed. We got a 50 bp drop in interest rates from The Fed, which is right in the middle of the road of what a lot of people are calling for. We had the 25 bp call outs, and the 75 bp, which is really aggressive. We found the difference there in the middle.
TPO vs. loans
Crowell: Let’s zoom in on that. What’s your outlook on TPO versus loans now, going forward?
Tinaglia: TPO still, despite interest rates coming down, have a really good tailwind with the tax credit adder. Depends on how it’s structured; it depends on the provider. But let’s call it, for easy math here, 10% less on a contract versus going with a loan where you might not get that as a homeowner. It might still make more sense to shift yourself over to a TPO because they provide lots of benefits to homeowners still. You have the flexibility of a lower payment perhaps, no cash down or deposit required, and you throw O&M on top of it.
I think what’s driving TPO still is interest rates are still historically higher than they had been, at least in my solar lifetime dating back to 2017 when leases started to fall out of favor. So, given interest rates are where they are still despite a 50 bp drop, I think TPO is still going to be the winner through the end of the year, but we have two more opportunities where the Fed’s going to drop rates. It’ll be really interesting to see what happens there.
Crowell: Did you glean anything else, anything new from the fintechs and the lenders at the show, from their side of things?
Tinaglia: Where we sit as a distributor, we had a lot of interesting conversations with manufacturers and those TPO providers about, ‘hey, how can we team up together and work on this challenge together?’ We’ve got guidance from the IRS that has these specific guidelines that if you follow, you can get the 10% adder. We’re talking mostly inverters and racking are what’s going to get us there. Modules are slowly starting to be in that conversation because that’s how things are going to evolve and change.
What I’ve gleaned is just how can we help provide more value to the installers when we team up better with the TPO providers and the manufacturers. We’re at the central hub of that as a distributor. We have those relationships. How can we better itemize SKUs? How can we verify this is domestic and provide that to TPO providers who ultimately are the ones getting audited for this. They want that security of working with a distributor who’s tracking it, managing it all effectively, so that everyone’s covering their own tails.
Crowell: Beyond the domestic content adder, what else should we be thinking about in that category into 2025?
Tinaglia: If I’m an installer, looking at what’s happening with rates, maybe I’m still not offering TPOs, and I’ve been sitting on the sidelines thinking that if rates come down, am I good to stay with this and not dabble in TPO? I think no. I think you should absolutely still consider getting a TPO product in your tool belt.
What happens if rates don’t go down? What happens if something else happens and all of a sudden TPO becomes the flavor again? …
A short way to say this is: have the tools you need to help your customers be able to pay you. Because, you’re going to be able to approach different markets if you have extra ways to finance. It doesn’t hurt to have a TPO provider even if you’re not comfortable with it. Learn about it. Have someone who does both perhaps because there’s definitely fintechs out there who do both.
Who saves with domestic content?
Crowell: In thinking about TPO being the trend now, and part of the incentive being the 10% domestic content adder, did you get an inkling of where that 10% is actually going? Are consumers getting a better rate because of the adder, or is it just the fintechs, or who whoever’s offering it, feeling more stable in their profit from it?
Tinaglia: Different TPO providers have different strategies in how they’re going to monetize the tax credit. You have some on one end who are like ‘we’re going to keep it all for ourselves, and you don’t have another option — you can only do TPO with domestic stuff.’ Then you have flavors of the other spectrum which I’ve heard is ‘we’re going to give full flexibility to the installer to either make more margin or pass that to the homeowner to get savings for themselves, and we don’t care.’ And of course, you’ll have mixes in the middle.
Contractors need to be asking that question for themselves and looking out for themselves because they’re ultimately looking out for their customers too. If I’m being forced into not passing savings on, who am I benefiting really? It ain’t me; it ain’t my customer. That hurts the general market, whereas if I’m an installer, I look at the other folks and see you’re giving me the ability to make more money or save my customer money, and make me more competitive compared to someone who’s using these guys. It just depends on the strategy of the fintech and what they want to do.
[Editor’s note: The next edition of Power Forward! will go in-depth on how/why to offering TPO financing, if you are just now getting into it]
Crowell: What else do installers need to think about in terms of financing?
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