Other People’s Money: How Crowdfunding Lowers The Cost Of Solar Energy

By Jesse Morris, via Rocky Mountain Institute.

From Forbes to Fortune, Bloomberg to the Wall Street Journal, a young company named Mosaic has been getting a lot of attention of late. Why? Because Mosaic is bringing crowd-sourced funding to the world of solar PV.

Crowdfunding is nothing new. Companies such as Kickstarter have allowed individuals to fund everything from their next indie film to extensive out of pocket medical bills with pooled donations from family, friends, and other supporters. But thanks to last year’s JOBS Act, debt-based crowdfunding is now an option as well, in which investors come together to fund startups and small businesses in return for repayment plus interest from a company like Mosaic.

It’s inclusive, meaning that investors of all shapes and sizes can get into the game. And it currently makes for a good, low-risk investment. Mosaic — with more than $1.1 million invested in solar projects to date — boasts 4.5 to 6.5 percent risk-adjusted annual returns, besting the latest interest rates on 30-year Treasury bonds.

But much of the crowdfunding solar coverage under-emphasizes a key point: funds raised from the crowd — in addition to providing attractive returns for investors and enabling more solar installation period — also have the potential to lower the cost of electricity from solar PV systems in the here and now.

Solar Finance: Credit Card Vs. Mortgage Rates

Imagine for a moment that a credit card company issues a card with a $200,000 limit. Next, let’s imagine a homeowner taking that card and buying a new home for $200,000 with a thirty-year term, just like most home mortgages. This lucky homeowner just bought a new home for $0 down!

There’s a problem, though. Financing a home purchase with this hypothetical credit card is a seriously bad deal for the homeowner since the annual interest rate would be 13 to 15 percent, according to, which translates into extremely high monthly payments. Instead, most homeowners finance homes on thirty-year terms with more reasonable interest rates in the 3 to5 percent range. Such inexpensive single-digit bank debt is a key to making the financing work, since the cost of the debt is a huge factor in the overall cost of the purchase over the term of the deal.

Just as financing solutions like credit cards and home mortgages help families buy new appliances and homes, several different finance solutions are helping solar energy systems be deployed on homes and businesses throughout the U.S. today. In fact, about 75 percent of residential solar photovoltaic projects and 40 percent of commercial ones are financed with different “third-party ownership” models, where electricity users install a solar system with little to no money down and start saving money from day one.

But the capital used to deploy these third-party-owned solar projects has an effective interest rate that looks more like that of a credit card than a mortgage. This translates into high monthly payments for electricity from solar systems — just like a homeowner making steep payments on a credit card in the home purchase example. Although it’s not the only factor at play, high interest rates (closely related to “costs of capital”) are one of the big reasons we only see lots of solar in places like Hawaii (where residents pay the highest electricity rates in the nation), but not Kentucky: solar developers can only produce savings for customers in areas with a combination of high electricity rates, good sunlight, and attractive local incentives. Think California and Arizona, two leading states nationwide for total installed solar capacity.

For folks interested in deploying as much solar in the U.S. as quickly as possible, this is a problem. Right now, the capital structure behind most solar projects in the U.S. is prohibitively expensive for the economics of solar to pencil out in most of the country. So, we’ve got to help make capital for solar projects look more like home mortgage loans than credit card debt.

There are a number of ways to do this, but many of the most popular solutions, such as master limited partnerships and solar-specific real estate investment trusts, require regulatory and/or federal legislative changes and aren’t likely to become large-scale solutions in the near term. However, there’s one solution that’s already upon us — crowdfunding.

Crowdfunding Lowers Costs

Created with Admarket’s flickrSLiDR.

As shown in the animation, the “credit card-like” capital that’s currently used for solar projects is composed of expensive equity from two sources: tax equity investors (companies able to absorb the tax benefits associated with solar projects) and solar developers. This equity is expensive and, in simple terms, has an effective interest rate of over 15 percent. This translates into a high cost of electricity from solar systems.

But this is where groups such as Mosaic step in. Expensive tax equity is still used to pay for about half of a project, but instead of using equity from the solar developer, crowdfunding providers can step in with funds from the crowd. Capital raised from the crowd has a much lower interest rate (about 6.5 percent) than equity put in from a solar developer (about 15 percent), so the combined interest rate for the solar project goes down, along with the cost of electricity from the solar system.

Finally, at some point in the future we could imagine crowdfunding companies providing all of the capital for a solar project. This would mean a very low interest rate on the entire project and a very low cost of electricity from the solar system.

There are a number of different solutions in development that will help lower interest rates associated with solar PV financing. But crowdfunding excites me for one main reason: it’s here now. And if we’re to get on pace to realize RMI’s vision of a secure, low-carbon, and affordable U.S. electricity system by 2050 — as outlined in Reinventing Fire — we need solutions that drive deployment of existing technology as soon as possible.

— This piece was reprinted with permission from Rocky Mountain Institute. It was originally published at GreenBiz.

10 Responses to Other People’s Money: How Crowdfunding Lowers The Cost Of Solar Energy

  1. Superman1 says:

    “For folks interested in deploying as much solar in the U.S. as quickly as possible, this is a problem. Right now, the capital structure behind most solar projects in the U.S. is prohibitively expensive for the economics of solar to pencil out in most of the country.” There’s also another slight problem. The fossil boys are not going to roll over and lie down. Every credible forecast I have seen reflects this and does not show a fossil decrease in the next two-three decades, whether government, inter-government, or industry. Fossil is the ‘pea’; the renewables are the ‘shell’.

  2. Merrelyn Emery says:

    Crowd funding is an excellent idea and could really push solar along, much as the Grameen Bank rescued many women from poverty, ME

  3. Omega Centauri says:

    I’m very much for it. In fact I have already started investing. But to make a real impact, it has to expand from a few megawatts per year to multitple gigawatts per year. I.E. something that isn’t dwarfed by the predicted 30GW of global PV installation this year. Thats one heck of a big scaleup.

    They can’t do it if lots of people don’t show up, so I encourage people to find their personal favorite crowdfunder. But, its going to take a huge effort to expand this to the necessary scale.

  4. John Hollenberg says:

    Unfortunately, there aren’t any projects you can invest in currently. In order to sign up just to be notified of future investment opportunities they want a bunch of information, including your bank account number and routing number. I’m not that trusting at this point.

  5. Omega Centauri says:

    That did slow me down, I fully understand your reticence. There is now a project available needing funding. I’ll probably dip my toe into it.

  6. Tom says:

    I am a solar installer, frustrated by the lack of capital. How can I utilize crowd funding to pay for more projects? I’ve already invested in the Mosaic (in the 2nd project – before there was a payout for it).

    All the projects appear to be community buildings – not private homes or corporations.

  7. Addicted says:

    Large corporations can usually find cheaper funding elsewhere (cash reserves, or low bank rates). Also, investing their own money gives them tax benefits.

    Private homes are not as cost effective as a larger installation, and the risks will escalate greatly. (Much higher chance a private person defaults, than a larger organization). Additionally, collection costs for mosaic will increase.

    Private homes are not currently well suited to this model.

  8. Addicted says:

    I do think Mosaic will hit that target (they have raised over $3-4mn. At a cost of 1%, they need to have about 60mn worth of investments just to bring that money back in a 5 year timescale (their expectations are probably far more aggressive). To do that, I am sure they will open it up to private installers also. It will take a little time.

    Lets not forget that crowd funding of this nature (unlike Kickstarter, where you are donating, not investing, often with an expectation if a gift) has only been legal for less than a year.

  9. Addicted says:

    I would be surprised if they did not require those details. There are many regulatory aspects to crowd-investing, and I am sure the SEC probably requires stuff like this.

  10. Omega Centauri says:

    All the projects appear to be community buildings
    Well at least one was low income housing. Although it still public ownership. If they were able to go after every community center, public school, add in hospitals etc. It would require a pretty huge investment.