The Mass Solar Loan Program: Bringing Solar Ownership to Low-Income Homeowners
The Mass Solar Loan Program, launched by the Massachusetts Clean Energy Center (MassCEC) and the Massachusetts Department of Energy Resources (DOER) in 2015, combines strategic incentives and partnerships with local banks and credit unions to increase access to solar PV financing, while creating a robust solar lending market. Most recently, its incentives have focused exclusively on supporting low-income homeowners who want to own solar PV systems, addressing challenges such as limited ability to utilize the federal tax credits and lower credit scores.
To date, 77 percent of program funding awarded has been to income-qualified residents. Since December 2015, over 5,400 loans totaling approximately $173 million have been closed, activating 46 megawatts of residential solar PV in 342 of 351 Massachusetts municipalities. Loan requirements, such as fixed-rate terms, capped closing fees, and capped interest rates, ensure customers have a consumer-friendly option, while lenders gain greater experience with solar. This approach has fostered a durable and competitive market for residential solar lending, even as program incentives phase out over time.
Mass Solar Loan Program Background
Over the past five years, the Mass Solar Loan program has allowed a broad range of customers to access solar ownership’s economic benefits, despite income or credit score limitations. This has been done through a combination of increased financing options and thoughtfully targeted incentives. Increasing the number of capital providers for solar has helped create and maintain a competitive marketplace. Incentives were designed to be more generous at the beginning of the program—to jump-start the market and reduce risk for lenders—and then they were stepped down over time while continuing to support income-qualified customers.
MassCEC and DOER developed the Mass Solar Loan program following a 2013 study commissioned by DOER to evaluate solar financing models. The study found that the financial benefits to PV system owners and the local economy are greater when a solar project is owned by the customer instead of by a third party. Backed by the study’s findings, the Mass Solar Loan program was designed to encourage direct ownership of residential solar through the creation of a low upfront-cost financing option that would be competitive with leases and provide more economic benefits than Power Purchase Agreements (PPAs).
In 2014 and 2015, MassCEC and DOER developed the detailed program design and structure through significant stakeholder outreach to the solar industry, local banks and credit unions, and local industry associations. The program enables customers who previously may have had no options to install solar PV to take advantage of the full benefits of owning a PV system (such as production incentives, energy savings, and tax credits). As the solar market strengthened and matured, the program focused its incentives exclusively on income-qualified customers.
Current Program Incentives
The Mass Solar Loan program was originally a $30 million program, but an additional $15 million was allotted over time to support continued incentives for income-qualified customers. Mass Solar Loan now offers three incentive types to help expand access and reduce the costs of financing for low-income customers. These incentives have tiered down over time to focus funding most effectively on customers most in need:
- Interest Rate Buy Down, which currently reduces the lender’s market rate by 1.5 percent for income-eligible customers.
- Income-Based Principal Reduction, which currently is a 30 percent buy down of the loan principal (capped at $10,500) for income-eligible customers.
- Loan Loss Reserve, which acts as an added security to lenders for lending to income-qualified customers with lower credit scores. A Loan Loss Reserve account is created for each lender, reserving funds for recovery of a portion of a qualified customer’s loan balance in the event the loan defaults. Any unused funds are returned to the program.
The program incentives are paid directly to the lender and then applied to the customer account, vastly reducing administrative payment efforts. In addition, the program offers ancillary benefits to participating lenders that ease the burden of launching a new loan product in a market that may be unfamiliar to them. These benefits include a built-in program loan structure (disbursements, required timelines), technical requirements, installer vetting and oversight, quality assurance efforts, technical review and approval of each application, and final review of each application to confirm installed details.
Program Goals to Expand Financing
Since the start of the program, the Mass Solar Loan program has achieved important program goals:
- Supporting growth of a competitive marketplace and financing options. Mass Solar Loan has partnered with 17 local banks and credit unions, which offered solar loan products through the program. Some of these lenders have since launched their own solar loan products, signaling that lenders intend to continue solar loan offerings beyond program timelines. MassCEC has also leveraged lessons learned, program materials, and data to educate many additional lenders considering independent solar financing products.
- Expanding financing access to broader ranges of customer incomes and credit scores. Over 50 percent of loans closed have been to income-qualified customers (2,814 loans), and 16 percent have gone to customers with lower-than-preferred credit scores (866 loans). Participating installers have consistently indicated that the reduced costs for income-qualified customers has enabled them to reach new markets and provide attractive solar ownership options to customers, whom they were previously unable to serve. Similarly, participating lenders have indicated that the Solar Loan program’s incentives have enabled lending to customers who might have been otherwise denied.
- Creating a financial benefit to the customer while supporting the Massachusetts economy. Through the lender partnerships, Mass Solar Loan has provided a low up-front–cost ownership option to homeowners. Most participating installers and lenders are local companies, indicating the $173 million in total loan amount is being largely invested in the state’s local economy.
Growing the Solar Lending Market
The Mass Solar Loan program was one of the first state-supported loan programs in the country to focus specifically on developing partnerships with local banks and credit unions, as opposed to a partnership with a single capital provider. The program educates the local Massachusetts lending industry and gives lenders an opportunity to engage with the rapidly growing clean energy industry. The program also leverages local lenders’ networks and experience in underwriting and origination. This approach has reduced program operating costs and allows funding to focus on project awards. The innovative program design also allows lenders to build a product with longevity beyond the program timeline.
Some participating lenders have embraced this engagement with clean energy and gone on to offer commercial solar loans or expand offerings to other clean energy technologies. Experience with the solar loan program has demonstrated to lenders the viability of a solar loan product, and the high-quality nature of borrowers choosing to pursue a solar project that is designed to be financially beneficial. Another key benefit involves encouraging inclusivity and equitability within the Massachusetts solar market by expanding access to a wider range of borrowers, specifically those with lower incomes.
Finally, the program has demonstrated the ability of a solar loan product to facilitate new and positive customer relationships with lenders. In a post-installation survey of the solar loan borrowers, 89 percent of respondents indicated that they did not have a prior relationship with the lending bank or cred-it union, and 93 percent indicated they were likely to recommend their lender to a friend or colleague. These new relationships have brought additional business opportunities to Massachusetts lending institutions and have helped some participating banks and credit unions achieve community goals. As of January 2020, $39 million of the award funding had been reserved for projects, leveraging $176 million in total private spending.
Adjusting to Market Conditions
The Mass Solar Loan program has adjusted to market conditions. The Interest Rate Buy Down was originally offered at 3 percent to all customers, but it was gradually adjusted and is now offered at 1.5 percent to income-qualified customers only. The Income Based Principal Reduction stepped down over time from 20 percent, to 10 percent, to 0 percent for moderate-income-qualified customers, but it has remained at 30 percent for low-income customers, as this level has proven successful in enabling that market segment to access financially beneficial solar PV ownership.
Eligibility for the Loan Loss Reserve incentive is only for loans made to customers with qualifying credit scores, and it has been adjusted over time to support only low-income customers. This incentive acts as a security for lenders to recover part of an eligible defaulted balance. This loan loss reserve also provides an additional opportunity to leverage funding. If default rates remain low (current default rate under the program is 0.3 percent), much of this funding will not be expended and could become available for reinvestment in state clean energy programs. Non-income-qualified customers can still participate in the program with a non-incentivized, market rate loan.
Partnerships Lead to a Successful, Innovative Program
MassCEC engaged extensively with stakeholders and partners long before the program launched. Without this early collaboration, the program would have had many fewer loans, lending institutions, and installer partners, and would have been less successful in targeting support for the low- and moderate-income markets. This strategic planning helped inform loan parameters, disbursement schedules, and other key components of the loan product that were critical to the unique design of the program. Beyond the three targeted incentives noted above, the Solar Loan program also features the following innovations:
- Loan disbursement schedule: At loan closing, 35 percent of the loan is disbursed to cover the deposit and starting construction costs. Once installed, the remaining 65 percent is disbursed.
- Interest-only period: Once the loan has closed, the customer pays interest-only monthly payments until the system has been completed. This reduces the financial burden prior to receiving energy savings and system revenues.
- Loan re-amortization option: Lenders offer one free re-amortization within 18 months of loan closing. This allows customers to reduce their monthly payment following receipt of the principal buydown or tax credits.
The Mass Solar Loan program offers a replicable incentive program structure for state agencies or other organizations across the country. The program design could be modified to best solve a state’s or locality’s unique hurdles to developing a residential solar financing market.
The Mass Solar Loan Program was awarded a 2020 State Leadership in Clean Energy Award by the Clean Energy States Alliance. The Massachusetts Clean Energy Center presented on the Mass Solar Loan program in a CESA webinar on July 23, 2020 – watch the webinar recording here.