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Clean Power Credit: Keith Ramsey

Published on May 12th, 2014 | by John Farrell

23

High Cost Of The Solar Middleman

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May 12th, 2014 by  

If there’s no such thing as a free lunch, then how can Americans get solar on their roof with “zero money down” and lower their electric bill?  Solar leasing, as it’s often called, is a clever market solution to poor federal and state policy design that otherwise requires Americans to do financial acrobatics to power their home or business with solar.

But solar leasing adds significantly to the cost of solar energy.

Data from the Massachusetts Department of Energy Resources published last year suggests that state taxpayers that will pay (a lot) more to make solar easy to install for individuals and businesses, and to make solar energy lucrative for solar leasing companies.

The report estimates the necessary production based incentive (in dollars per megawatt-hour of electricity produced) to support the development of solar. Specifically, the researchers priced a “10-year levelized incentive…that allows system owners to achieve their target economic rate of return.” The analysis notably focused on ownership structures, either 3rd party ownership (solar leasing) or host ownership (owned by the home or business owner).  The following chart shows the difference in state incentives necessary to support a small-scale (15 kW or less) solar array that is either owned by a 3rd party or the actual electric customer.

host v 3rd party ownership solar incentive mass

The bottom line is that leased solar arrays require more than double the incentive needed to support customer-owned solar arrays.  Not only do leasing companies require more revenue, but customers of leasing companies get less than solar owners, because they presumably sign contracts for electricity that are less than the net metering they would receive in owning a solar array.

Why does solar leasing cost more?

In the words of the report authors, “These transactions often require attracting additional tax-motivated parties to the project financing, and at considerable expense for transaction and capital.”  How much more expensive?  A host-owned solar array is expected to get financing at 4% interest and have a return on equity expectation of 4%.  A solar leasing company is expected to pay 6% interest on shorter-term debt and to require 15% return on equity.

It might seem convenient to blame solar leasing companies for this problem, but they’re merely opportunists in a poor policy environment.  Making your money back on solar in America is complicated.  It requires a combination of tax savvy, skilled navigation of state bureaucracies, persistence at a local permitting office and limited options for low-cost financing. Compared to Germany, with a simple, non-nonsense long-term contract that permits low financing costs and broad participation, America’s solar market is a joke (and the installed cost of solar is much higher as a result).

Furthermore, big banks have also played a role in inflating solar leasing costs to taxpayers, using a legal loophole to collect tax incentives based on (higher) estimated costs of solar installations instead of actual costs.  Leasing company SolarCity was notable targeted by the Treasury Department for its participation in the practice.

Paying twice for poor policy

In other words, we pay twice for bad solar policy in America.  Complicated tax incentive, interconnection, and contract policy makes solar cost more to install than in mature markets like Germany. Solar leasing middlemen simplify the complications, but at a price premium to (complicated) individual ownership.

Even though sunshine is free, no kind of solar power is a free lunch.

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About the Author

directs the Democratic Energy program at ILSR and he focuses on energy policy developments that best expand the benefits of local ownership and dispersed generation of renewable energy. His seminal paper, Democratizing the Electricity System, describes how to blast the roadblocks to distributed renewable energy generation, and how such small-scale renewable energy projects are the key to the biggest strides in renewable energy development.   Farrell also authored the landmark report Energy Self-Reliant States, which serves as the definitive energy atlas for the United States, detailing the state-by-state renewable electricity generation potential. Farrell regularly provides discussion and analysis of distributed renewable energy policy on his blog, Energy Self-Reliant States (energyselfreliantstates.org), and articles are regularly syndicated on Grist and Renewable Energy World.   John Farrell can also be found on Twitter @johnffarrell, or at jfarrell@ilsr.org.



  • JamesWimberley

    American households, like British ones, have very low rates of saving by world standards. Leasing is unlikely to be attractive in countries where middle-class families have fatter nest-eggs.

    • http://zacharyshahan.com/ Zachary Shahan

      Curious to see a link on that… definitely believe you, just curious to see the stats.

      • Ronald Brakels

        Well, Australia has a higher savings rate than most countries and solar leasing is almost non-existent here. Of course, the state feed in tariff for solar is now zero in Queensland the (anti) Sunshine State and quite low for new solar everywhere else, so it’s not as if a solar lessor could get a guarranteed income stream from selling electricity to the grid. “Let’s see, this particular system has exported a total of 1,520 kilowatt-hours to the grid this year for a total return of stuff-all. And on a completely unrelated note, our solar leasing business is going bankrupt for some reason.” Whether or not leasing works or will be pushed by financers really depends on the policies within a particular country and how reliable the government is perceived to be on these policies. In Australia the Federal Government and 4 out of 5.2 state governments are now actively opposed to rooftop solar, so it’s not a very friendly environment here for leasing. (Yes, Tasmania only counts as 0.2 of a state. I’m sorry, but it’s true.)

  • Loren McDonald

    Why does everyone always say “just take out an equity loan” instead of a
    PPA? Maybe folks don’t want to take out an equity loan? Maybe they’ve already tapped out their home equity? Maybe they took out an equity loan to redo their roof and cut down trees before going solar? Maybe the simplicity of saving money with a PPA is good enough? Not all consumers base all their decisions on Excel spreadsheets.

    • Ronald Brakels

      What’s a PPA?

      • Loren McDonald

        PPA is acronym for a Power Purchase Agreement. It is kind of like a lease. You enter into an agreement for a specific number of years (often 20) and pay a specific amount every month for the term of the PPA. So your electricity costs are locked in for the term. You can either put nothing down or or put down a payment up front that reduces your monthly payment.

        The argument often heard here is that buying your solar panels is a better ROI than a PPA. This may be true, but assumes that a homeowner has the cash or ability or desire to finance their solar purchase versus simply paying less each month to a solar provider than they would their existing utility. You make the choice as to what is right for your situation.

        • Ronald Brakels

          Oh right, thanks for the definition. Maybe when solar gets as cheap in the US as it is here leasing will seem just as weird as it does to Australians. Of course minimum wage here is like $17 an hour so that probably has an effect too. It doesn’t take us too long to either save up for or pay off a $2,000 system.

        • jeffhre

          Too bad folks don’t have a relationship with their local credit union. A small line of credit secured by the home could allow people to compute their ROIC on “zero invested capital,” conveniently and on excellent terms.

          Not paying for gasoline or electricity will allow me to pay for mine in 18 months. And the terms allow me to pay it back as interest only for eight more years or to just pay the loan off in 18 months from my savings on gasoline and electricity bills.

    • John Ihle

      One still has to finance it regardless of whether it’s a ppa, fit or net metered. You sort of infer that consumers aren’t smart enough to understand economical perspectives laid out in excel. The economics are obviously key and ratepayers aren’t likely to be involved in projects which don’t make economic sense. Maybe America needs new finance rules which don’t favor corporates ala itc, ptc, macrs, and tax breaks which are complicated and discriminate, etc. Since most states are under the governance of utility monopolies perhaps green bank funding by utilities for their ratepayers is one way in which to facilitate finance which could do away with third party finance simplifying finance processes which would consequently keep more energy dollars from being exported and arguably keep rates relatively lower.

      • Loren McDonald

        John, Im NOT saying people aren’t smart enough to do the math, what I’m saying is 2 things: 1) People make many purchase decisions for reasons other than the lowest cost, highest ROI. Many people go the solar route first for the “green” benefits and secondly for cost savings. A PPA, regardless of the fact that it is financed by someone, requires little to no money down and provides immediate and long-term cost savings. I’m personally saving about $100 a month – which I’m quite happy with. I’m sure I could have saved more money through a purchase, but it isn’t the route I preferred to go at the time.

        2) Every commenter I’ve seen here and elsewhere always says “people can take out a home equity loan.” Well, maybe they can or maybe they don’t want to or can’t. Maybe they’ve already tapped out their equity line or just don’t want to take on that debt.

        So what I’m saying is the exact opposite – people are making a conscious decision to go with a PPA over a purchase and loan – knowing they are saving less money, but it is the route they prefer to use to go solar.

        • John Ihle

          Loren, I understand and I probably misstated the “inference”. I’m not a fan of the third party ppa/lease model but it sounds like a better deal than what your electric provider is willing to offer. Couldn’t your electric provider offer a lease/ppa model, too? Wouldn’t that facilitate more solar if the utility were pushing it instead of fighting it all the time, and wouldn’t the utility win with long term revenue streams, which are now inflated and going to the third party? Ratepayers would win, too. I think the utility industry has squandered a couple years of investment opportunity while fighting the RE industry and they should have seen the writing on the wall years ago.

          • Loren McDonald

            I agree John. The electric utilities need to evolve their business models and get into the solar game directly. But like every incumbent industry tied to their old ways, they will squander the opportunity, go kicking and screaming and by the time the get into the game companies like Solar City will have a 15 year head start on them …

        • http://zacharyshahan.com/ Zachary Shahan

          Yes, it is a very one-sided argument in almost every comments section where it comes up. I have a lot of guesses why that is, but no clear evidence any of them is right.

          Notably, aside from some people preferring the PPA/lease process, that often is actually better than getting a loan: http://solarlove.org/solar-leasing-worst-option-going-solar/

          Of course, cash is going to save you more in the long term, but not many people have that much cash lying around and there’s also the matter of opportunity cost.

          Thanks for balancing the debate a bit here. That benefits the conversation.

          • Ronald Brakels

            Well, leasing appeals more to people with high discount rates than people with low discount rates. And people who are concerned about the future are likely to have lower discount rates than people who are more focused on the present. And so people with lower discount rates are more likely to read a clean technology site and turn up in the comments. So a lot of commenters here look at the terms of solar leasing and say, “You’ve got to be joking!” because with their personal discount rate it makes no sense to them. But to many people with higher discount rates solar leasing makes a lot of sense from their point of view. They don’t have to give up anything now to get rooftop solar even though it means they get less in the future and that is perfectly rational from their point of view, even though to me it seems crazier than glueing two dogs together in a nun’s closet. We just have different points of view, that’s all.

            Note: I make it sound as though people have one discount rate, which isn’t true – only economists do which is why they have no friends – but trying to be precise blows out the length of my comments and I am lazy.

  • Ronald Brakels

    While I can see how leasing appeals to some people and it definitely has an environmental benefit over not installing solar, in general it makes much more financial sense for homeowners to buy their rooftop solar rather than lease it. After all, the people offering the leases wouldn’t do it if they weren’t taking a hefty slice of delicious financial pie. Australia has one in five households with solar and it is basically all privately owned by the households with almost no leasing. But I am actually all for honest, mutually beneficial solar leasing, as it can and will save lives by reducing greenhouse gas emissions by more that what would occur without it.

    • Kyle Field

      People should just buck up and do the math…then realize that purchasing outright is a better call…then save up and install it themselves. Oh wait…that sounds a lot like work. Nah, let’s go with a PPA instead lol :/

      • http://zacharyshahan.com/ Zachary Shahan

        I think it really depends. There are different people who will benefit from each option. However, the key always is “do the math!” And get quotes from multiple companies. Then things get pretty objective, or you decide between having more cash for other investments or having most of your electricity paid off for decades.

        • Kyle Field

          Agree. I’m an excel dork so that’s “fun” for me. Comparing some of the retail purchase price options and the leases…it actually comes pretty close. My payout on 5 panels installed by a provider in late 2011 came out to 18.6yrs payout (assuming no increases in energy price, inflation). There’s a HUGE opportunity right now for someone to reapply the model used in Germany where they can install a system in a matter of days (vs months here in the US) for half the price (~$9k germany vs $20k US or so for equivalent system if i recall correctly) here in the US. It would absolutely kill all of the ROI issues, price parity issues, haters, negaters and make it a truly investment grade purchase. I did my low budget install last year of 7 panels with a payout of 5.6yrs so there’s a huge opportunity fo sho’ :)

  • Shiggity

    At the end of the day, SolarCity is still a utility. They look good compared to the incumbant utilities, but they’re still a utility.

    • http://zacharyshahan.com/ Zachary Shahan

      Hmm, that’s an interesting and pointed way of putting it. (Just remember that SolarCity isn’t the only company in this game — also Sunrun, Sungevity, Vivint Solar, SunPower (partially), and many others.)

  • spec9

    Solar leasing is a terrible deal for most people. They should just take out a home equity loan and give the job to the lowest bidder. Take the 30% tax-credit yourself and deduct the interest payments on the home equity loan. The solar leases are a rip-off.

  • Fact_Flint

    because of limited income, not everyone has a tax liability that can be eaten up by the tax incentives. Because of this, leasing works now. Later, after the lease is up, the value of the panels will be a fraction of what they are worth today. If your lease agreement has a determined minimum price (assuming that 15/20 year old panels, rails, and inverter, etc.) you can buy them outright at a discount. The total of these payments (lease+payment) is a fraction of new purchase today. I think this is where lease offers a benefit. Sure it is a gamble of value later, but I’m willing to bet on effeciency upgrades making the leased installs obsolete (and thus worth even less).

    • Matt

      So Fact_Flint you agree, US policy is not set up to allow many individuals, non-profits, co-ops, or public building take advantage of PV. While the FIT policy use around the world works for all those group, and anyone that cold have use a tax deduction based approach.

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