Innovative solutions can help solar companies reach the low-to-moderate-income market, according to a report from Vote Solar. According to 2016 Census and FICO data, 44-78 million people in the United States qualify as low-income and/or low-credit. But many of these customers are being left out of the clean energy transition because of financial barriers to securing access to solar products.
In August, Vote Solar, in partnership with Sustainable Capital Advisors, published its “Inclusive Solar Finance Framework.” This report identifies financial barriers to solar financing and opportunities to overcome them through innovative market-based solutions. It profiles various creative solutions designed to overcome these challenges.
The report is a how-to guide for clean energy and economic-justice advocates, policymakers, financiers and/or developers.
A central argument in support of the clean energy transition is its role in advancing environmental justice. However, there are many market failures holding back equitable access.
According to the report, "Not only is inclusive solar finance the right thing from a policy, social and environmental justice lens, but it is also advantageous from a business standpoint.”
Barriers to Inclusive Financing
The report said customers generally access solar products through a range of services. These can include grant funding, direct payment, consumer loans, solar leases, community solar, and utility procurement. Property-assessed clean energy (PACE) programs also play a role.
But many of these tools are unavailable to customers who do not own their own homes. This creates challenges for low-income, low-credit customers because they are likely to rent.
Low-income customers often face difficulty securing loans in general because of their debt-to-income ratios.
This requires customer credit scores above a certain threshold.
Low-income customers also face challenges making use of the federal Investment Tax Credit (ITC) because they do not have enough taxable income. This requires third parties to monetize the economic benefits on behalf of customers, complicating the process.
Ways to Increase Access
The report describes five key policy- and market-oriented interventions that can help overcome structural barriers like these and bring underserved households more fully into the clean energy transition. These include:
- Refundable tax credits
- Reprogrammed energy funds
- Credit enhancement options
- Alternative credit scores
- Community solar programs
The report said it recommends adjusting ITC policy to give customers more options for receiving the financial benefits. This could include assigning the tax credits to a third party that can provide a one-time cash payment to the customer. By allowing low-income customers to receive the full economic value of the ITC without requiring multi-year deals, restructured tax credits could address a number of structural financial barriers.
While this type of intervention requires engagement at the federal level, the most significant progress can often happen through state-level intervention.
Melanie Santiago-Mosier, program director of access and equity at Vote Solar, said the Mass Solar Loan program in Massachusetts is a noteworthy example. Mass Solar Loan provides loans exclusively to low-income and low-credit households. Its success so far offers lessons for other states working to improve their inclusive solar finance offerings.
Another potentially transformative solution is the use of alternative criteria to evaluate customers’ credit and risk profiles. Utility- and rent-payment history illustrate the potential to move beyond FICO scores and income. In many cases, customers are less likely to stop paying their utility bills than they are to postpone other expenses. By using utility-payment history, lenders can more accurately predict subscriber default rates and increase solar access.
For example, Solstice, a nonprofit working to expand solar products into underserved communities, has developed an EnergyScore program that uses utility-payment history as an alternative to FICO scores.
The report said traditional banks should expand their criteria for assessing customer risk. However, the authors said the goal should not be to create portfolios that consist entirely of low-income customers. Instead, banks and investors should include low-income, low-credit customers in existing portfolios to increase diversity within a larger pool.
Reprogramming existing energy funds is another promising way to build inclusive finance options into programs that are already active. The Colorado Energy Office, for example, recently became the first state office of its kind in the country to receive federal approval from the United States Department of Energy to integrate inclusive solar offerings into its weatherization program. Its efforts are promising so far. The results provide lessons for how to successfully align federal assistance dollars with inclusive solar finance products.
Trenton Allen, managing director and CEO of Sustainable Capital Advisors, said community solar and credit enhancement are two particularly promising solutions. Santiago-Mosier said she agrees.
According to Allen, one benefit of community solar is that it does not rely exclusively on the credit history of individual subscribers. Instead, it relies on financial underwriting at the project level.
Credit enhancement offers additional market-based solutions for improving the ability of customers to repay loans and reducing the risk exposure of lenders. This could include creating reserve funds for defaults, serving as financial guarantors, or reducing the cost of interest.
Many large banks do not currently see low-income solar projects as scalable investment opportunities. Santiago-Mosier said green banks and community development organizations can play a role in filling this gap.
Connecticut Green Bank, for example, has implemented a successful “Solar for All” program in a unique partnership with PosiGen. With financial support from the green bank, PosiGen makes solar leases available to low-income households regardless of creditworthiness.
Toward an Inclusive Market
The bulk of Vote Solar’s report focuses on financial considerations for why low credit scores and income levels create challenges for accessing solar financing. But the authors also note the need to acknowledge socioeconomic issues that provide context for better understanding these barriers.
According to Allen, while the solar industry is starting to reckon with the complicated history between the financial sector and low-income, low-credit customers, the financial community is only slowly beginning to do so.
There is a long history of profit-motivated exclusion of low-to-moderate-income customers from numerous products and services. These concerns about risk and profit affect solar development, distributing solar differentially based on neighborhood incomes.
It is important to avoid prescribing single solutions for low-income, low-credit customers, the authors said. Instead, to make progress, programs should offer diverse products that reflect a collaborative process.
Allen said his vision is that “inclusive solar finance becomes solar finance.” And that requires deliberately designing financial products and policies to be inclusive from the start.