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Peer-to-peer power? Finance tech comes to solar energy

What happens when two disruptive industries meet? Peer-to-peer lending is changing the way solar energy is being financed and invested.

If you have used Venmo to pay a friend back or Apple Pay to make a purchase at the store, you likely are familiar with the rise of financial technology (also known as fintech).

Increasingly, however, this disruption is not only playing out with traditional retail banking activities. It's also becoming a new way for businesses to finance solar projects.

As banks grapple with this disruption, likely one of their biggest concerns is the growth of Peer-to-Peer (P2P), or marketplace lending, including companies such as Lending Club and Prosper. The industry rapidly has grown in the past year, and some analysts are projecting the industry to reach $1 trillion by the end of 2025. 

In addition to the documented rise in peer-to-peer lending with traditional banking activities, this type of lending for debt financing solar energy projects is also growing — albeit more slowly, according to Peter Renton, founder of peer-to-peer lending news and analysis provider Lend Academy.

We are using technology to get around the high transaction costs.

With peer-to-peer lending, borrowers and investors can bypass the role that traditional banks have played as intermediaries. A borrower can be matched directly to investors for a loan instead of going through a bank, and investors often can find more returns than a savings account or a certificate of deposit. 

Companies such as Oakland-based Mosaic and New York-based Open Energy Group are providing businesses and governments interested in solar energy projects with this same opportunity. Rather than going through the traditional lending processes or a green bank, solar developers wishing to borrow money can go through a streamlined online platform.

Bypassing the banks

One advantage of going through a peer-to-peer or marketplace lender is that as a borrower you are not subject to the transaction costs and fees that a bank generally might impose, according to Graham Smith, CEO of Open Energy Group. 

"We are using technology to get around the high transaction costs," said Smith.

Smith mentioned how borrowers might be subject to these high fees as a result of a project’s fixed costs which might include legal costs or costs associated with the review process.

According to a report  by international law firm Morrison and Forester, peer-to-peer lending operates in "regulatory purgatory" and is not held to the same regulation as traditional banks, although it might face more regulation in the future. As a result, the industry can bypass fees derived from regulation.

"It’s definitely taking off," said Mary Rottman, president of the Solar Energy Finance Association. "It’s sort of a shadow banking industry, and like a lot of the disruptive industries it's taking out a lot of the costs."

Smith said that demand for the company’s loan origination business has "rocketed" recently and documents the rise in part to the extension of the federal investment tax credit, which gives developers a 30 percent tax credit, as well as solar renewable energy certificates (SREC) in certain states, including New Jersey and Massachusetts.

"The proposition is very simple to the customer in saying, 'Would you like a 10-20 percent discount on your electricity?'" said Smith. "It’s not, 'Do you want to save the Earth?' It’s, 'Do you want cheaper power?'"

Investing risk and reward

Beyond the attraction for borrowers who might be drawn in by lower rates and the ease of using an Internet platform, investors who are providing the funding for the loans also may be presented with an opportunity.

"People are looking for different ways to invest," said Renton. "Whenever we see these stock market crashes, you start to see more interest in alternatives."

While both companies allow investors to invest in solar projects, Mosaic offers investors the chance to invest in residential solar projects and in part solicits investment from retail investors. Open Energy primarily focuses on large net worth institutional investors and looks for projects that will require between $500,000 and $10 million in loans.

Mosaic provides investors between 4.5 percent and 7 percent return depending on the type of project, according to its website. Open Energy offers investors between a 5 and 6 percent return.

Although Mosaic and Open Energy are allowing investors the ability to invest in solar projects through a different process, this process does include certain risks and difficulties that may not be attributed with going through a traditional bank.

One way that the companies provide debt financing for borrowers is through unsecured loans, which means lenders do not have to put down any collateral. This is generally equated with more risks.

With a 20-year lease, I mean, some people might not be alive in 20 years.

Another concern for borrowers and investors is that the contracts for the lending agreement can be up to 20 years, which can be a long time for investors to commit to projects where future demand is unknown.

"It’s an uncertainty when you have a long-term investment, and that’s the problem with a 20-year lease," Rottman said. "People are typically comfortable with a short-term, three-to-five year [lease], but with a 20-year lease, I mean, some people might not be alive in 20 years."

With Open Energy the contracts are between 10 and 15 years, but Smith explains that for large institutional investors such as pension funds who are looking for a steady return, or looking for a socially responsible investment, the company provides an ideal investment.

"It's sticky long-term money," said Smith. "This isn’t for investors looking to make a quick buck; it’s to allocate billions needed."

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