Monday, June 3, 2013
How OneRoof Energy's Solar Leases Save Money, Not Just The Planet
Story by Benjamin F. Kuo
There's been a subtle--but very significant shift--in the solar power market in recent years, particularly in California, where it's actually cheaper in many cases to lease solar panels on your roof, than to pay the power company. One of the companies that has taken advantage of that is OneRoof Energy (www.oneroofenergy.com), a San Diego company headed by David Field. OneRoof--which is backed by Black Coral Capital and others--has been supplying solar leases, financing and installing solar panels to residences to the market. We caught up with Field to learn more about solar power leasing, why this segment of the solar power industry has done well--in stark contrast to solar technology developers--and what's keeping the market from growing faster.
For those not familiar with your business, can you explain what you do?
David Field: In a nutshell, we, and others like us, exist to help homeowners save money on their electric bill. If we can't help them save money on their electric bill, the only other reason would be for the environmental benefits. But, it's all about the economics.
Can you explain how a solar lease works?
David Field: With a solar lease, what we allow a homeowner to do is lease a solar power system, and get the benefits of solar typically under a zero money down, long term lease. The homeowners begins saving money starting with day one, and that savings typically increases over the life of the lease. During the lease, we provide the performance guarantees, all operations, and maintenance.
How did OneRoof Energy come about?
David Field: My background is probably more finance than anything else. I've been in the power utility sector for many years, developing power plants and utility assets. About seven years ago, I was asked to step in to lead a roofing and building integrated PV products company. Basically, what we did was develop products which were roofing products for residential homes. Also, contained within those products, were traditional solar products. That literally gave you a solar rooftop. Through that business, we actually installed a couple of thousand homes, mostly in Southern California and Northern California, with new home builders like Centex, Lennar, and others. From that experience, we figured out that what homeowners want, is to allow their rooftop to generate cheap electricity, but that they just didn't want to go through the hassle of financing those systems on their own, or have to maintain their own systems. From that experience, I developed OneRoof Energy.
It's an interesting market, where solar technologies companies here have faced some big challenges, but solar finance leasing has not - for those not familiar with the differences, can you explain?
David Field: When people think of solar, they are usually thinking of solar products and manufacturers of those products. At the present, and what has been the case for the last several years, is there has been a world wide glut of overcapacity for solar products. That's in part because of a significant investment in China around solar manufacturing. Because of that oversupply, the cost of panels and value of solar technology has gone down. That's what you read about. But what we do, is different. Instead, we provide a service, instead of a product. We compete with the local utility, when you really think about it. We are a totally different business. I'm in the energy business, as opposed to manufacturing of the product.
Installing solar is a costly proposition to homeowners--what makes that investment appealing to capital providers?
David Field: There's two different dimensions of this. On the buy side, for the consumer, there's an average of a seven year payback on a system. But, they cannot monetize all of the federal tax credits for a solar system. For example, they can't monetize the accelerated depreciation available to businesses in the U.S. However, if a homeowner leases, they can save 20 to 25% on their energy bill on day one, with zero down. On the flip side, for investors, they see a residential lease performs much, from a quality perspective, like a prime mortgage instrument. It's a 20 year, long term lease, which is very predictable in terms of cash flow and payments. They're also high quality. In leasing, the credit standard is 700 FICO and above. From an investment perspective, they have been very, very few defaults on residential leases over the past five years. That means, from an investment perspective, this performs much like prime mortgage credit, which currently yields three to four percent in the marketplace. But, since it's priced against the local utility, that investors can get a 9, 10, 11, or 12 percent yield. It's basically an arbitrage situation, from an investor's perspective. The get a 2X to 3X yield on an asset, which has almost the same credit quality as a mortgage.
Given how much this saves consumers, why aren't more people doing this yet?
David Field: A lot of it is just awareness. Because of that, we're seeing a lot of different business models coming to market to make consumers more aware. The sales process for solar in California is, although I don't want to say it, archaic. The majority of solar is people going door-to-door today. Kind of doing what they used to do with encyclopedias. It's not overly sophisticated. But, more and more, technology is allowing homeowners to get on their computer, and design a solar system on their rooftop and get a quote for it. We're rolling out an online version, together with one or two other global online participants this summer, which will allow homeowners to go into a portal, and design their own system, and get a bid that will almost virtually assure them with the lowest cost. There are more and more techniques coming to market to provide more awareness.
With as many systems being installed, how hard has it been to raise capital from investors to fund those systems?
David Field: It's always an issue. There's always more demand than capital. The reason for that, is one of the key capital components for solar leasing is tax equity investments, where the institutional investors can monetize those federal tax benefits. There's only a small number of financial institutions who have so far invested in residential leases. You can count them on one hand. That's the constraining factor. To date, we've raise money on a tax equity fund from U.S. Bank and Morgan Stanley, and we're in the middle of raising additional capital in the marketplace.
You've mentioned that companies need to be able to survive without energy subsidies to succeed in this market. Can you explain?
David Field: One of the things we have come to learn, is that as you develop new techniques and lower the cost of customer acquisition, you can significantly drive down the cost of solar by 25 to 30 percent. Once you do that, you can finance a solar lease without having to have tax equity. Let me give you an example. Currently, the majority of solar is sold door-to-door by canvassers. That's a really high cost of acquiring a customer. We currently go to market in some areas in California, with a much lower cost methodology. We use financial professionals, like insurance agents, real estate agents, and folks like that, who sell a lease as an ancillary to their core business. They already have clients, who they know would benefit from a lease, and they already have the knowledge base associated with the client. By going through that channel, instead of from door-to-door, you reduce the cost of acquiring a customer by 4 times. When I can do that, I can negate the need for federal tax benefits, which equal at least 30 percent of the solar systems. That's very significant. By driving down the cost of solar, and lowering the cost of acquisition, we're able to open up new markets where utilities rates are lower, as opposed to just California or Hawaii. We're actually working on closing another lease fund, where there aren't any tax equity investors.
Finally, what's next and where's the growth for you?
David Field: We're going to being expansion on the East Coast this summer, and continue to build out our affiliate network of agents that are selling our leases. We've been having enormous success along those lines, and will continue to roll out to new markets.