Clean Power

Published on August 22nd, 2013 | by Guest Contributor


Why Solar Financing Beats Solar Incentives, & What Would Be Much Better

August 22nd, 2013 by  

Originally published on RMI Outlet.
By James Mandel, PhD

In recent years, companies have made great strides in offering third-party financing to bring solar and energy efficiency to residential consumers with little or no money down. Consumers view it as free. For example, I can now put solar on my roof with a power purchase agreement (PPA) or lease and pay nothing up front. Because of recent and dramatic cost declines in hardware and an upsurge in the availability of financing, solar can provide power to customers for less than their utility’s electric rates in many locations. This is especially true when state and local incentives are taken into account.

In a typical third-party financing arrangement, I pay a solar provider a steady amount per month (for a lease) or per kWh (under a PPA). The amount I pay the solar company is less than the reduction of my utility energy bill, so I save money. My payments to my solar lease provider over time are enough to pay for the installation (for which the installer is paid up front) and cover their returns on investment, so my solar installer and financier (which can be one-in-the-same) do fine economically as well.

Free is great, and most people I speak with are thrilled to get solar for free. I’d argue, though, that third-party financing models haven’t gone far enough. Free is arbitrary. In fact, I don’t want the slow trickle of savings every month. I’d like third-party financing that is better than free, that pays me money up front for all of my expected monthly savings over the life of my lease or PPA. I suspect most consumers would prefer “better than free” financing as well, giving up monthly savings and just continuing to pay their current and future normal utility bill rates for a lump of cash today. This is why.


Historical investment returns to the average American are pretty modest, like the ~three-percent-real (i.e., inflation adjusted) return on the S&P 500 over the last 30 years and barely-above-inflation long-term returns on home ownership (i.e., real returns barely above zero percent).

Yet, despite the fact that consumers have historically accepted such low returns on investments including stocks and real estate, they demand very high returns on many financial decisions. Numerous academic studies confirm that consumers hate the future, or more accurately, don’t value it very highly, at least economically. For example, in a study on refrigerators, 50 percent of consumers would not pay $40 more up front to generate savings of $22 per year on their energy bill. To a company, this behavior would sound like lunacy. To consumers, they just assume, rightly or wrongly, they have better immediate uses for the $40, and don’t like to think about $22 dollars next year. Economists regularly quantify this type of behavior in a metric called the discount rate, which is just a percentage used to convert tomorrow’s dollars into today’s dollars. High discount rates make future dollars worth less.

Consumers demonstrate discount rates approaching 60 percent per year through their behavior. Studies have found widely ranging consumer discount rates; all are quite high (30–60 percent in the refrigerator study, 25 percent in another study). Further, acceptable discount rates for consumers change based on circumstance. Poor consumers demonstrate extremely high required discount rates that decrease (often substantially) with increasing wealth.

This problem is more than academic. Low adoption levels plague energy-efficiency programs, even when incentives and overall value are quite high—the typical post-incentive return on solar in CA is 10 percent or higher; simple energy-efficiency investments like light bulbs can pay back in under a year. But most consumers just can’t get past the price tag. That’s one of the reasons adoption rates remain challenged: for instance, on-bill finance programs for energy efficiency are considered top-tier when they can exceed a measly one percent per year in customer uptake.

Compare this to corporate discount rates. Most firms pursue returns that are 2–10 percent above their cost of capital, depending on the risk of the cash flow. R&D expenditures, which have a high chance of failure, are often discounted much more.

So what has this meant for solar? Traditional programs that use incentives but not financing have largely been ineffective. Zero-down-payment financing has been vastly more effective in attracting residential customers, yet has still only helped bring us to the current ~0.5 percent adoption level. Of the 5–10 percent of consumers for whom solar makes economic sense on its current energy pricing fundamentals, a small subset, only about 5–10 percent (so about 0.5 percent overall), have taken steps to install systems.


If one believes the data about consumer discount rates, even with “free” no-money-down financing, solar providers are missing a huge discount rate arbitrage opportunity on a product (a thirty-year savings stream on a utility bill) that consumers don’t value very highly, or at least discount aggressively.

Other industries have caught on to this discrepancy, and offer products that arbitrage discount rates between consumers and companies. For example, if you watch daytime television, you’ve probably seen commercials for companies offering to buy out annuities, pensions, or any other future payout with an immediate lump sum payment. In addition, most lottery winners today prefer and accept an upfront payment that is worth much less than the value of their 20-year payout, by any metric. A 2012 Business Insider reader poll found that an overwhelming 88 percent of respondents would take the lump sum option.

Therein lies the win-win-win opportunity. Third-party solar companies make money, consumers get an upfront cash windfall they value, and rates of solar adoption (should) jump through the roof.

Here’s my proposal to third-party financiers on behalf of consumers everywhere: I’d like a product that maximizes my upfront payment, which I love, while minimizing the long-term cash flow from savings that I receive over time, which I don’t care about nearly as much as I probably should.

Being a good consumer, I’ve tried to calculate my value to you, and I’d like it paid up front. But also note, as any good lottery winner will tell you, I’ll likely settle for a lot less if you can give me cash now.

Here’s my pricelist for a rooftop example: Please pay me $1,200 for the right to put a solar PV installation on my rooftop. I’ll be happy to keep paying the total monthly cost of my regular utility bill, even if it’s technically split between the utility bill and a solar leasing/PPA bill.

best solar financing solution

Using a reasonable 10 percent corporate discount rate (nominal), some favorable incentives for the solar consumer, and a mere two percent spread between the historical growth of electricity prices and escalation of solar PPA/lease pricing, I estimate my solar PV savings versus my former utility bill has a net present value (NPV) of more than $2,400! (This is after third-party finance, so represents value after the installer/financier/servicer have taken their cut of profit.)

A solar provider could offer half of this, or less, and still have something enticing for a consumer. A typical consumer with a “mere” 20 percent discount rate should settle for a sum of around $1,400 dollars. The research cited earlier as well as an informal poll of my colleagues at RMI suggest that most would settle for less even than that. The implication is that there’s nearly $2,500 dollars of “lost” or misplaced value … $1,400 or less of which could go to a consumer, the balance of which could be profit for the third-party solar company.

Figure 1 shows how converting the savings strip to upfront payments reveals this massive value opportunity for solar providers. In finance, this conversion is known as a sale of a “forward strip.”

Figure 1. Conceptual diagram demonstrating value created through an upfront payment.

Figure 1. Conceptual diagram demonstrating value created through an upfront payment.


It’s time for some inventive solar lessors to rise to the challenge and offer up money in our pockets today. Due to my and many other consumers’ seemingly irrational discount rate dynamics, we’re more than happy to be “exploited” to allow others to take advantage of our perceived versus real discount rates. These lump sum payments today could mean significant returns to solar companies tomorrow, not to mention the best opportunity for transformational market growth. So, solar companies, consider the gauntlet thrown! Please exploit me!

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  • Omega Centauri

    I wonder how much os the steep apparent discount rate is really a distrust factor. The consumer doesn’t trust that the long term savings/benefits are real, and therefore “discounts” their value.

    I’ve heard of cases where people tried to give CFLs to poor people. Mostly the targets refused, because they think there is some sort of hidden gotcha involved.

    The other thing I can easily imagine, is the consumer taking this cash payment (which is effectively an advance with a payday loan type rate), and then investing it at 5% or so.

    Part of the problem is an educational deficit, consumer finance/economics needs to be taught in high school. Otherwise the poor keep getting poorer, partly because they can’t make good financial decisions.

  • Nick

    I’m pretty sure these companies can also depreciate their equipment where the equipment is super cheap after some time (I’m no business tax pro but am sure they do something like this). Can they also get tax credits on top of that too?

    I’m thinking I read an article about this going on in NC but on a larger scale – selling to the grid but basically not paying for the equipment after deductions/depreciation etc. pretty cool stuff and makes me wonder if you could start a biz that put solar on your roof yourself and get the long term tax savings- I know, you still need the upfront capital..

    I like the article idea for poorer people or retired who can’t take the deduction.

  • RobS

    I think this is all academic, its only a discussion because we are in a window period as solar prices fall. Once you can buy 25 years of power for substantially less then the cost of a new car financing becomes irrelevant. Here in Australia you can buy 5kw for $8,000, it fully pays itself off over 4 years and then produces free power for ~25 more, even rolled into a standard home loan it is simply a no brainer. We are literally reaching the point where half a lifetimes power cost less then 4 paychecks. Leasing companies know that solar is a gold mine and would rather keep 2 decades of free money for themselves, only a fool would let them.

  • Ray Boggs

    There is nothing free about 3rd party financing and there is absolutely no such thing as a “no money out of pocket” solar lease or PPA.

    Your next three months worth of paychecks are not considered “money in your pocket” until payday arrives. Would you be willing to hand over your next three months’ worth of paychecks as a down payment and then make an additional 20 years’ worth of lease payments on a system that you’re basically renting? In essence that’s exactly what most consumers across America are doing when they forfeit their 30% Federal tax credit and cash rebates to the leasing and PPA companies.
    Add the 30% federal tax credit and any applicable cash rebate that you’re giving away and the 20 years’ worth of lease payments and any payment escalator (if you were foolish enough to agree to an escalator), and that’s the true cost of renting that solar system.
    The 30% federal tax credit alone, on a typical 6 kW solar system at the lease and PPA company’s much higher pricing is about $10,000 which is about 3 months’ worth of take home pay for the typical consumer who would qualify for a lease or PPA.
    Wake up people, don’t let the leasing and PPA companies pull the wool over your eyes. Add up all of the numbers and you’ll find that solar leasing and PPAs make absolutely no sense when compared to buying in today’s market.

    • Bob_Wallace

      “forfeit their 30% Federal tax credit”

      Some people can’t use the 30% Federal credit.

      Seniors with modest incomes pay no tax on their Social Security income and their standard and personal deductions can wipe out taxes on other income streams. That can leave them paying no tax, thus no use for the tax credit.

      Families with modest incomes and even a modest number of dependents can also be in a non-taxing paying category.

      • Ray Boggs

        Yes, retired people can’t use the 30% federal tax credit, this is true. But people with modest incomes or people who are at the poverty level that are in non-taxpaying categories would not qualify for a solar lease because of the stringent income to debt ratios and credit requirements anyway. So the retiree market is where the lease and PPA companies should be focusing their marketing.
        Instead, leasing companies are targeting the tens of millions of consumers who do pay or owe federal income taxes, who would benefit from the 30% federal tax credits and applicable cash rebates or SRECs.
        If the lease and PPA companies were to price their systems at a reasonable $3.00 or less per watt, installed level, before incentives which is available to any purchaser across the U.S., we wouldn’t be having this conversation. Instead they are pricing their system at more than double this amount to enhance their return on the tax credit.

        • Omega Centauri

          My irritation, is that people naieve-tee is being taken advantage of, in order to capture the bulk of the savings for the third party. I’d be much happier, if the consumer wasn’t being had to the tune of an usuerious interest/discount rate.

          • Bob_Wallace

            After the leased system is in place will the home owner be paying more or less for their monthly electricity?

          • Omega Centauri

            Thats the sort of cheap thing the salesman says in order to rope in the suckercustomer. The same customer who is abdicting his possibility to lock in much larger savings he could get by financing a system himself.

            Now if I were a home buyer, would I want to purchase a house with a leased system promising me 10% lower rates, or a similar house that I could put my own system on (or one with a owner owned system). What would be the impact on my offer price for those three comparisons?

          • Bob_Wallace

            You did not answer the question.

  • JamesWimberley

    Since we are talking about irrational consumers, it´s possible that the upfront payment – call it a cashback – need not be for the entire sum. Say a round $1,000, which still allows the promise of lifetime lower rates than grid-only electricity.
    Solar leasing companies are booming under their current marketing models, so it´s not obvious why they need to go further.

    • 1- Good point.
      2- Solar leasing companies are booming, but that doesn’t mean they couldn’t boom a lot faster.

  • I saw this somewhere before, I think it’s a pretty interesting idea. Worth a deep investigation!

    In certain markets, I think we could do a form of this already. But to be honest, most people I work with treat solar as a longer term solution.

    I think presenting the choice to the consumer would be the best strategy. Lump sum or monthly savings.

    I’ll look into it from my side.

    • From my experience “studying people” and the info above, the data presented on how much people are willing to give away simply to have the money up front is pretty absurd. Solar is touching the long-term thinkers right now, but to tap the masses, this would be the most effective model, imho. Of course, nothing guaranteed until it’s tested in the real world.

    • Omega Centauri

      Yes. My neighbor took a Sunrun lease rather than buying the system outright. This lets the corp pocket 80-90% of the savings. But, it is easily sold as a cost and risk free transaction.

      • Everyone talks about the best solution for solar. There are a lot of “if”s on what constitutes the ideal solution for any one person. Sure, buying can make sense if you can get the Federal ITC and a competitive cost. Many people also don’t want to take out a loan or another line of credit against them. I think that the options should be weighed fairly and people given a choice.

        This proposed solution would hit a certain segment of the residential market who can’t qualify for the ITC, don’t want another lien on their home or line of credit, want a little more energy security, and want to know their power is partially coming from clean sources. Getting a paid upfront to protect their roof is not a bad deal.

        In Ontario there are similar programs and they are extremely popular. People know that they aren’t getting the “best financial deal” but that’s not everyone’s intention with these types of projects.

        Some people buy Nissan Leafs, others buy Hummers. That’s life!

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