Integrate Credit Enhancement or Alternative Mechanisms

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Integrate Credit Enhancement or Alternative Mechanisms

Unfortunately, many lower-income residents face barriers qualifying for solar financing, or if they do qualify, face barriers accessing affordable (i.e., low-interest) solar loans, primarily due to their lower FICO scores. A Solarize team can play an important role in reducing these barriers by integrating credit score enhancements or alternatives.

The primary credit enhancement approach is creating an LLR to encourage and enable FIs to provide affordable financing to lower-income residents by partially covering the perceived higher risk. Lenders can draw on the LLR to cover a prespecified percentage of losses on loans due to defaults or nonpayment. LLRs are especially relevant for programs with many smaller loans, like Solarize campaigns. The primary steps for a local government to develop an LLR are:

1. Understand the market:

Local governments should start by understanding the local economics of residential solar given available solar financing offerings.
2. Design the proposed finance program:

Local governments can then define the LLR’s three key elements, namely its size (i.e., the initial amount of funding), leverage (i.e., the ratio of private capital attracted to initial LLR size), and coverage (i.e., the share of losses on individual loans that the LLR will cover). These depend on the estimated loan losses, number of loans, and risk protection provided. The DOE’s Energy Efficiency and Renewable Energy website includes a helpful example.
Secure funding:

After identifying the LLR’s ideal size, the local government needs to secure seed funding for the program.
Select an FI partner:

If sufficient interest is identified in the market research phase, the local government may either select the FI to receive awarded LLR funds through a single or ongoing financial institution RFP or simply recruit lenders on a single or ongoing basis outside of a formal procurement process, and have them sign a standardized agreement.
Negotiate terms and agreements:

If a formal procurement process is used, the local government and FI will negotiate all key terms, including the loan’s eligible borrowers, application and obligation procedures, term period, interest rate, minimum and maximum loan amounts, underwriting guidelines to determine willingness and ability to pay (e.g., creditworthiness), and prepayment option.

In addition, the Solarize team can leverage alternative credit score approaches to reduce barriers for lower-income residents. Following are the primary alternative credit mechanisms a Solarize team could pursue:

Tariffed on-bill financing (TOBF):

If available, the team could leverage TOBF, also known as Inclusive Utility Investment, where residents can work with an approved contractor to receive clean energy improvements, such as rooftop solar, and pay for the system over time through their utility bill. The defined energy tariff typically requires the post-improvement energy bill to be lower than it was previously. This mechanism enables lower-income residents as well as renters to access solar by using utility bill payment as the primary qualifying metric and by tying repayment to their utility bill and meter as opposed to personal debt. For example, the 2023 Solarize O’ahu campaign leveraged a similar on-bill repayment program, Hawaii’s GEMS, to enable residents to install solar with $0 up-front cost and lower their utility bill without taking on additional debt. Where TOBF is not available, the Solarize team could use its campaign to highlight lower-income clean energy challenges and advocate that the state public utility commission expand TOBF.
Mortgage or bill payment history:

The team could consider using mortgage payment history (e.g., the Green Jobs–Green New York program) or utility bill payment history (e.g., Solarize Philly’s financing option) as qualification metrics for solar loans.
EnergyScore:

The team could also integrate Solstice’s EnergyScore as a credit score alternative for installers and financial institutions to better predict a resident’s ability and willingness to make solar payments. The EnergyScore algorithm has been shown to increase the number of LMI applicants approved for solar by 11%–14% at 30-day delinquency and by 1%–4% at 90-day delinquency at a FICO score cutoff of 650–700, while being just as accurate as a FICO score in predicting a user’s ability to pay.

These approaches are also transferable to a third-party ownership model, where a third party covers the up-front cost, operation, and maintenance in exchange for monthly payments from the household over a 10- to 20-year period, since most third-party owners (e.g., solar installers) require a FICO score of 650 or higher for residents to qualify.

Suggested Next Steps:

Determine credit alternative or enhancement approaches to integrate into the campaign. Consider using Part 3 of RMI’s forthcoming Inclusive Solarize Campaign: Developing LMI Financial Solutions Worksheet for assistance.

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