Sunnova lands $3B DOE backing for low-income solar and battery loans

After decades of lending money to large-scale clean energy projects, the U.S. Department of Energy plans to issue a first-of-a-kind $3 billion partial loan guarantee meant to build clean energy capacity in disadvantaged communities on a household-by-household basis.

On Thursday, DOE’s Loan Programs Office announced a conditional commitment to provide up to $3 billion to Sunnova, the Houston-based residential solar and battery provider. That commitment, if formalized in the coming months, will help back low-cost loans to disadvantaged individuals and communities under a new solar loan channel that Sunnova has dubbed Project Hestia, after the Greek goddess of home, hearth and hospitality.

Sunnova’s plan, first reported by Canary Media last month, is to use the federal loan guarantee to back up the cash flows for between $4 billion and $5 billion in consumer loans. That backstop of a federal loan guarantee will allow Sunnova to bring down the cost of capital, and thus bring down the interest rates for loans, for lower-income customers who might otherwise struggle to afford rooftop solar and battery systems.

Sunnova will also provide Project Hestia customers with its Adaptive Home software that allows homeowners to track and manage their home energy usage, control how their batteries store solar-generated power and discharge it to save money on utility bills, and tap that combined energy flexibility to provide support to the power grid.

DOE’s Loan Programs Office estimates that the loan guarantee could help support solar-battery installations for 75,000 to 115,000 homeowners in U.S. states and in Puerto Rico, and deliver 568 megawatts of solar and batteries over the next 25 years.

The Project Hestia plan closely matches a concept laid out by Jigar Shah, head of the Loan Programs Office, shortly after he took the helm of the agency in early 2021. Shah proposed putting the power of the office to use in enabling ​“virtual power plants” — a departure from its support for large-scale clean energy infrastructure such as utility-scale clean energy projects, electric-vehicle manufacturing plants and lithium-ion battery factories.

Virtual power plants — VPPs for short — are collections of homes and buildings with solar panels, batteries, EV chargers, smart thermostats, remote-controllable water heaters and other appliances and devices that can be controlled en masse to mimic the grid impact of large-scale power plants.

The idea is to capture the inherent capabilities of devices that are already being bought and installed in the tens or hundreds of gigawatts across the country to help integrate more and more renewable energy.

“Solar performs at a time when the grid has needed power the most, during peak hours of the day,” Robert Lane, Sunnova’s chief financial officer, said in a Thursday interview. Batteries and demand-response technology that controls electricity use in homes ​“then stretches that out into the evening, which is when the benefit is needed.”

VPPs also provide crucial assistance during grid emergencies like heat waves or winter storms. 

“Virtual power plants are 90 percent cheaper than what they’re replacing to balance renewables on the grid, to help integrate electric vehicles into the grid,” Shah said in a Thursday interview. ​“We’re making sure that these virtual power plants become more commercial, so that they can actually reduce electricity bills for all Americans.”

Lowering income and credit-score barriers to solar and batteries 

VPPs are playing a small but fast-growing role in providing these kinds of grid services in states including California, Hawaii, Massachusetts, New York and Texas and in the storm-wracked U.S. territory of Puerto Rico. But they’ve largely been limited to tapping into the solar systems, batteries, EVs and smart appliances of customers who are wealthy enough to afford those devices on their own.

The new Loan Programs Office conditional commitment with Sunnova, by contrast, is focused on reducing the cost of entry for lower-income customers to allow disadvantaged communities to take part in the energy-saving and grid-resilience benefits of these technologies.

Research from DOE’s Lawrence Berkeley National Laboratory shows that solar adoption rates tend to be much lower for households and neighborhoods with lower-than-average incomes. Solar installers typically seek out customers in higher-income areas or with higher-than-average credit scores, due to the difficulty of offering loans or other financing structures at reasonable rates for customers who lack relatively high incomes and credit ratings.

DOE’s goal for its VPP lending is to reduce the interest rates for installations of solar, batteries and home energy software for disadvantaged customers to less than 10 percent, Shah explained. That’s much lower than the rates of 20 percent and up offered by credit cards or other sources of debt financing typically available to customers who have lower-than-average credit ratings.

In exchange for the loan guarantee, Sunnova will be required to structure its business to ensure that it targets a significant number of lower-income customers in disadvantaged communities and that these customers come out ahead financially, saving more money overall than they pay for the products being installed. (The precise terms of the agreement are confidential.)

Today, roughly 10 to 15 percent of Sunnova’s customer base have FICO scores below 680, Lane said. This is generally considered to be the residential solar industry’s cutoff for making loans that can be backed by investors in the securitizations on which large solar lenders like Sunnova rely.

“We’re restricted a lot below 650” FICO scores — ​“not because of poor customer behavior, but because it’s difficult to get financing,” he said. ​“Folks have low FICO [scores] for a lot of reasons that have nothing to do with their willingness and capability to pay their bill.”

That view is backed up by an increasing body of data from DOE labs and other sources that indicates lower-income customers and people with lower credit ratings do not default on solar loans or fail to keep up with payments at significantly higher percentages than customers at large.

Shah noted that lower-income customers, and most residents of Puerto Rico, ​“are systematically discriminated against by the rating agencies,” which use other measures of creditworthiness such as credit-card repayment data to limit access to low-cost finance for solar and battery systems.

To counteract that, DOE’s loan guarantee will back 90 percent of the loans made under the Project Hestia portfolio. That will make these loans more akin to home mortgages in terms of the risk they present to investors, Lane noted.

“Mortgage companies are able to keep rates lower [for] their customers because their cost of capital is lower, because the government is guaranteeing a portion of their cost of capital,” he said. ​“There’s a whole new class of investors who’ve never invested in solar before but understand the Fannie-Mae, Freddie-Mac kind of thing,”

At the same time, Sunnova has agreed to provide DOE with information to prove it’s adhering to the project’s goals, including monthly service reports on the performance of its hardware and software. It will also be required to meet criteria on serving customers with a range of credit scores and ​“certain concentrations of customers located in disadvantaged communities,” Sunnova’s press release stated.

Hitting those criteria will be important for meeting the goals of the Justice40 Initiative, the Biden administration’s pledge to deliver at least 40 percent of the benefits of all federal climate and clean-energy funding to disadvantaged communities historically overburdened by climate change and pollution.

Shah said that each installment of DOE’s loan guarantee to a tranche of debt securitization raised under Sunnova’s Project Hestia portfolio will be reviewed by DOE ​“to make sure they’re meeting all their requirements under the loan guarantee for innovation, that the virtual-power-plant software is launching, that a certain percentage goes to Puerto Rico.”

Sunnova will also track the carbon emission reductions that result from its solar and battery loans. Those reductions can come both from the rooftop solar power that’s displacing fossil-fuel-generated power from the grid and from the way that storing and shifting home energy reduces the demand for fossil-fired generation.

Opening up untapped markets for solar-battery companies 

Sunnova will stand to benefit more broadly from the loan guarantee, Pavel Molchanov, director and equity research analyst at Raymond James & Associates, said on Thursday. Project Hestia could increase Sunnova’s customer base by nearly 40 percent, lower its cost of capital, and improve its environmental, social and governance profile through its lending to disadvantaged customers, he said.

Sean Morgan, managing director at investment banking advisory firm Evercore ISI, said on Thursday that he expects ​“to see publicly and privately owned competitors seek similar financing arrangements with the DOE to bolster their ability to reach lower-income households.”

These households represent a significant proportion of the country’s 87 million single-family homes that remain hard for solar vendors to reach, given that many ​“fall below typical credit-underwriting standards for private-capital deployment for solar,” Morgan said.

Shah noted that Sunrun and SunPower, two major U.S. residential solar providers, have joined a recently launched consortium with General Motors, Google Nest and others that is aimed at expanding the opportunities for virtual power plants across the country.

While Shah wouldn’t comment on whether those or other U.S. solar installers were seeking out loan guarantees similar to Sunnova’s from the Loan Programs Office, he did say, ​“You can imagine that the work we’re doing is inspiring the entire solar industry to think about virtual power plants.”