![Loanpal Now No. 1 in the Booming Solar Loan Market](https://www.eqmagpro.com/wp-content/uploads/2019/12/Loanpal-Now-No.-1-in-the-Booming-Solar-Loan-Market.jpg)
WoodMac finds that loans now claim a majority of the solar financing market, but third-party ownership isn’t going away anytime soon.
Solar loans started outperforming third-party-owned solar in early 2018.
According to a new WoodMac report, the first half of 2019 saw loans claim a majority of the solar financing market first time, at 55 percent market share.
Loan providers are continuing to build networks of installer partners around the country. Many are also looking to home storage loans and the lower- and moderate-income customer segment for growth — including the newly minted top solar loan provider, Loanpal.
Third-party ownership (TPO) providers are staying relevant with new customer-acquisition strategies and partnerships in California’s new-build home solar market.
The rise of solar loans
More residential solar systems are being financed with loans than ever before.
The solar loan market grew by 40 percent year-over-year in the first half of 2019. Solar lending companies and traditional lending sources have expanded their solar loan offerings, giving installers and consumers more financing options.
Smaller installers are driving much of the growth. These installers can find it difficult to partner with TPO providers, and as WoodMac noted earlier this year, many are embracing loan products as a result.
Loans are expected to maintain a majority of the solar financier market share into the 2020s. Notably, while loans took market share away from TPO in 2018, growth in the loan space in early 2019 in large part came at the expense of cash sales.
Two trends to watch in the loan space as the 2020s begin: battery storage and risk-based loan products.
Opportunities to finance storage have been relatively insignificant for loan providers until recently. As the residential storage market doubles in 2020 and reaches $1 billion in value for the year 2021, this may change. Many loan providers have started to offer solar-plus-storage products and report that more customers are starting to finance battery storage via loans.
Loan providers are also increasingly looking at creative ways to responsibly service low- and moderate-income customers by offering products to customers with FICO scores under 650. Once thought of as unviable, these “risk-based” loan products are slowly gaining traction, although it will be necessary for providers to monitor default rates into order to assess performance.
Sunlight and Loanpal already have risk-based loan products in the marketplace to serve customers with lower FICO scores; Mosaic and Dividend both report that they have products under development.
The future of TPO
While there is a clear trend toward residential customer ownership via loan, TPO remains key for residential solar finance in some markets.
TPO volumes shrank year-over-year in the first half of 2019, but only modestly, as lead TPO providers Sunrun and Vivint grew enough to partially offset the decline. Strong TPO performance can be seen in some Northeast states where Sunrun, Vivint and other leading TPO providers have a large presence.
A few key TPO providers dominate the new-build home solar segment in California, which will provide a boost for third-party ownership in the 2020s as this segment grows. Due to the common practice of offering leases/power-purchase agreements or rolling solar into the mortgage in the new-build home market, solar loan providers that do not offer mortgage financing will have fewer opportunities to acquire new-build residential customers.
Competitive landscape
Loanpal entered the market just two years ago but is now the top residential solar financier in the United States, having overtaken Sunrun in H1 2019. Relationships with leading residential solar providers have been key to the company’s quick rise. (Read more on the newcomer’s ascension here.)
Many loan providers reported profitable growth in the first half of 2019. Almost all companies in the space are growing, with Mosaic the only major loan provider to see a market share decrease between 2018 and the first half of 2019.
Mosaic had increased its pricing in 2018, slowing the company’s growth somewhat in order to make the business more sustainable for the long term. (Tesla, a major user of Mosaic loans, also saw its volumes shrink during the period.)
Sunlight Financial and Dividend Finance both entered the top five financiers in the first half of 2019.
In the TPO space, Sunrun and Vivint Solar have started to see the benefits of changes to sales and customer-acquisition tactics that were implemented around late 2018 and early 2019. However, customer-acquisition costs for Vivint and Sunrun remain stubbornly high.
Last year, Vivint adopted a dynamic pricing model under which sales staff are incentivized with higher commissions to sell more profitable residential systems. Vivint’s gross margins have continued to improve through the first half of 2019.
Sunrun has maintained positive gross margins, but total operating expenses continue to outpace revenue growth. What’s more, labor shortages may strain the company’s ability to deliver on its 2019 guidance.
Sunnova went public in July 2019 and has lower customer-acquisition costs, as most of its TPO business comes from financing leases and power-purchase agreements through local and regional installer partners. However, Sunnova’s operating costs also remain high. The industry is still waiting to see whether Sunnova will be able to consistently achieve positive gross margins with its unique business model.