With his invention of the SolarLease for SolarCity, he revolutionized the US residential solar market. Now, David Arfin, CEO of First Energy Finance, wants to take his business model to other parts of the world, including Europe, and apply it to other technologies, like wind, energy efficiency and geothermal heat pumps. In an exclusive interview with Energy Post, he explains his approach and what future financial innovations he sees coming.
This interview is republished from Energy Post with permission.
“The idea that all assets have to be purchased in cash by the user long before they get the benefit of them is an inefficient path to mass adoption,” says David Arfin, Founder and CEO of First Energy Finance, a California-based company that offers products and services to drive the uptake of clean energy technologies. This is a venture that “welcomes the chance to create outside-the-box solutions to traditional energy financing problems”.
Certainly Arfin is an out-of-the-box thinker. His claim to fame is as inventor of SolarCity’s SolarLease, an unprecedented solar financing program that jump-started the U.S. residential solar market. In November 2009, SolarLease came top of a list of 20 world-changing ideas in Scientific American to build a “cleaner, healthier, smarter world.” Prior to SolarCity, Arfin co-founded a number of other companies in the software and technology sphere, including GlooLabs, which was acquired by Cisco Systems.
Today, Arfin sits on the boards of many clean energy start-ups in sectors from electric vehicles and solar to wind and energy efficiency, active in markets from the U.S. to Latin America to India. He was a special advisor to the US Department of Energy from 2011 to earlier this year. In this exclusive interview with Energy Post, Arfin talks about the essence of his thinking: innovative financing enables customers to pay for clean energy when they benefit from it, not upfront. “We’re still very early in the game to know what the right consumer products are going to look like,” he says, but “a lot of it depends on the regulatory environment”. Arfin plans to do what he did for solar for other clean energy technologies, and he wants to do it the world over, Europe included.
Q: How did you get involved in the energy sector?
A: I got involved as a consumer actually. In 2006, I had watched Al Gore’s movie An Inconvenient Truth and was in the process of getting a new roof on our house. I went out and got three quotes for a solar system to go with it and the economic payback on them was ridiculous. The best of the three was 33 years simple payback. If you want to do it just for the environment then that’s a justification, but it wasn’t good enough for me.
So I tried to understand why other people went solar and I started learning about things like the California Solar Initiative, investment tax credits, depreciation schedules, and net metering policy. When I had an understanding of what the drivers and economics were, I had this “aha” moment – if I owned my own solar system it would have a very long payback. However if a business owned it, it could have a very short payback because of the various economic incentives the government provided.
To cut a long story short, I ended up connecting with SolarCity just as they were beginning. They liked the idea and they liked me. I joined in 2007 and in 2008 we rolled out the first solar leasing program in the U.S. That enabled homeowners to put solar on their roof with no money down [no upfront payment] and to save money over the period of the lease. It completely transformed the residential solar industry. Now there are gigawatts, not kilowatts, being installed each year. About 98% of SolarCity’s business went from being a direct purchase to a financed system.
Q: What was the essence of this financial innovation for you?
A: For the homeowner it was a chance to do what they wanted to do – get a solar system – but not have to make a very difficult decision as to what to give up in the short run to be able to do it.
Homeowners know they’re going to be using electricity for the rest of their lives. They know they would like to see alternative energy become commonplace, and they know they would prefer paying less than more, of course, for their power. They also wanted to have a reliable partner to build and service the system. For just about everybody, it is a major decision to spend $20,000-$30,000, particularly when they had never bought a solar system before and they didn’t know how it worked. The idea that somebody else would service and monitor it brings a kind of peace of mind.
Behind the scenes, we had to do an enormous amount of work to make it easy and transparent for the customer. We also needed to integrate it into the sales process. So when the salesperson was on the phone or at the kitchen table talking to a family about going solar, financing options became part of the same discussion. It wasn’t: “This is how solar works. Now let me give you the phone number of a bank that might be willing to finance this.” We had to make it a user-friendly experience. But we also had to understand the regulatory process for both electricity and consumer finance, how the federal, state, and local incentives worked, attract equity and debt investors, and pull together contracts that were both tight for the financiers and fair to our customers.
Q: What is the advantage of this leasing model versus for example a loan or the pay-per-kWh option that SolarCity offers? Wouldn’t a loan work out cheaper in the long-run?
A: If you think of who is bearing what risk, with a traditional loan where you have a financial institution lending you money, if you say, “My system didn’t produce the way I thought it was going to produce,” they say, “We’re sorry, but you signed here for the money, we’re not solar experts, we’re a bank.” However, when you get a loan or a long-term service agreement with SolarCity, if the system is not performing then you don’t pay until SolarCity fixes the system.
Some of it has to do with customer psychology, too. Some people are happy to do leases or power-purchase agreements. Others want to own things; they want more flexibility in the event that they move, or they view this is as a sound investment.
My view is that we started solar leasing in 2008 and it’s been an incredible success. We have hundreds of thousands of American families going solar every year. I also think we’re still very early in the game to know what the right consumer products are going to look like over time. The current deals still have a fair amount of complexity. We’re still at the beginning. There’s a lot of product innovation in progress and that’s going to provide customers with more and better choices.
Q: What kinds of future financial innovation can we expect to create even more attractive products for customers?
A: There are a lot of moving parts – regulatory, financial, and technological.
A lot of it depends on the regulatory environment. I can think of two areas, both related in some way to regulation. First, the way that solar is incentivized and how the payback comes will change. So in the U.S., for example, we have an investment tax credit that has been going strong, but that will be reduced from 30% to 10% at the end of 2016. In Europe, you’ve had feed-in tariffs that have gone up, down, away, and sideways. Second, any movement away from net metering or self-consumption changes the value of distributed generation.
At the same time, you have technological innovation such as lower cost structures for installation, storage and batteries, smart meters, demand-side management, and intelligent thermostats and the like.
On the financial side it’s also very dynamic and indeed a large cost driver: factors here include what project investors believe about the system’s production over time, and how comfortable they are with the installation, components, installation companies, servicing agreements, and future prices of retail power.
The hope here is that entrepreneurs will create or track these changes, then capture and use the data to innovate with new offerings that in turn accelerate clean energy adoption. For me – a serial entrepreneur – this is fun.
Q: Are regulations, financing, and technological innovation all still moving in a positive direction for clean energy technologies? Which area is now driving things forward?
A: Good question. The technological side is getting better and more sophisticated, in part [because] as storage comes into play we can measure and control more things. There’s certainly innovation there. The regulatory side is a roller-coaster. We’ve seen a lot of dramatic changes to feed-in tariffs – in Italy, Germany, France, England, and Spain – and policy instability creates a bad environment for everybody (whether installer, customer, or financier) that wants to invest.
I think a lot of the artificial noise in the system is going to disappear and core economics will drive things more and more. That means: a combination of where the sun is better (so you can produce more solar at the same cost), and where storage is allowed and encouraged through policies (so consumers can use the energy created by solar for more hours in the day and even at night). Then the regulatory environment comes down less to feed-in tariffs and direct subsidies and more to whether a country has intelligent net-metering policies and self-consumption rules that are solar-friendly.
Q: How will the innovative financial models you describe cope as subsidies go down? What kind of products are you moving towards?
A: It depends. In some areas of the U.S. the reduction of the tax credit will be devastating; in other areas it’ll just mean a little bit tighter margins.
I think there will be more ownership by the homeowner of systems in the form of loans that get paid back through the power that you generate, for example. There will be more peer-to-peer lending. Banks require a high return on investment but individuals who want to invest in a solar bond may take a lower return than a bank requires, so I think you’ll see innovation here. You’ll also see innovation on what is called the PACE financing here in the U.S., so that the loan gets paid back together with the property tax bill.
I think a huge area of innovation is going to be “community solar.” That’s the idea that a lot of people would like to use solar power, but are not living in a place where they can put it on their roof (either because they’re living in a multi-story building or they have shade or they are renters). You’ll have community solar fields as well as fields located in one area delivering virtual power to another area.
In Europe you’ll see that where you have high electricity prices, say in Germany and Italy, you’ll get more and more encouragement of self-consumption, and with that, more storage options. Vendors, installers, and manufacturers will sell integrated solar and battery systems for cash to homeowners. Eventually that will go from straight equipment sales to services agreements. Instead of having to put down â‚¬15,000, the customer will agree to a long-term agreement and somebody else will either completely or partially finance that system and the homeowner will capture the benefits over time without having an upfront payment.
Last, new types of contracts could even include a pricing guarantee so that the homeowner will always be better off for having adopted the system. It addresses that part of the market worried about making a decision now and later regretting that decision. Today you only have performance and production guarantees. I recently co-founded www.certain.solar to address this need.
Q: What is the role of traditional energy companies in this fast-paced world of innovation?
A: Ultimately utilities will likely stop fighting these changes and start owning some of these systems, billing for them and making them easier for customers to adopt. They will be the ones who want to control the energy systems on your roof and collect the monthly payments.
But they will be rather clumsy about it. It’s hard for a traditional utility that has had a monopoly for 100 years, appears to be fat and happy, to create a culture of fast innovation and to react quickly to changing policies and market conditions. I can’t imagine American utilities going around and aggressively selling a new system. But they will likely partner with installers and nimble entrepreneurs to capture changing markets. These utility guys have been around for a long time. They can afford to take their time and take a lot of losses. They’re not a start-up that has nine months of run rate in the bank.
Q: To what extent are these new business models applicable to technologies other than solar, and indeed energy efficiency?
A: We want to do to small wind, energy efficiency, geothermal heat pumps – you name it – what we did with small solar. Electric vehicles, charging stations, and batteries can and should be financed.
It has traditionally been harder to package energy efficiency home performance contracts. Financiers are less comfortable with them and it is harder to measure energy savings than energy generation. Moreover, homeowners call SolarCity primarily because they want solar; they don’t want a variety of other solutions that SolarCity could carry. Energy efficiency is not cookie-cutter either. With solar you’re putting 4, 6, or 8 kW on a roof. With energy efficiency, each home needs its own audit. You need to look at the appliances, usage patterns, insulation, etc. These audits can be done and are not that expensive, but it involves a more complex set of decisions.
Q: What future developments are you most excited about?
A: I’ve helped create major change in the U.S. market. I’d like to bring some of the lessons of that model to other markets around the world. We’re at the very beginning. I’m excited about Europe, India, Mexico, Brazil – they all have good sun, place a high value on electricity and have some regulatory stability. I see opportunity all over the place.
I’m involved in a company in India called Simpa Networks that is providing small solar home systems with a battery and six light bulbs and a fan to rural farmers. They are getting electricity for the first time. They make payments over a 2 to 3 year period because they can’t afford a $300 system up front but they do already pay for kerosene or diesel. Servicing the bottom-of-pyramid and providing access to electricity will bring a lot of progress – with it, users can charge their cell phones, connect to the Internet, have lights for reading at night, etc.
Meanwhile in the Netherlands, Germany, Denmark, and France, you may not have quite the same sun but electricity is very expensive, so there is an opportunity to provide renewable energy solutions for less than customers are currently paying. I think it’s a winner.
Q: How would you sum up the direction of innovation in financing for clean energy?
A: What I like to think about is how you take clean energy systems and better connect, when the customer is benefiting to when the customer is paying. The idea that all assets have to be purchased in cash by the user long before they get the benefit is an inefficient path to mass adoption.
It’s as if I get a cell phone I know I will use for the next 30 years. But I don’t pre-pay the bill for 30 years. I pay for it every month, as I’m using it and benefiting from it. The same should be true for electricity: you have these long-term uses and benefits, so to have to come up with all that money up front is a large barrier to adoption.
I’m confident the pace for innovative solutions to increase adoption of clean energy assets will increase. We have seen how it has been a game-changer in the U.S. residential solar market and similar models will be replicated by other technologies and around the globe.