Rocky Mountain Institute.
By Robert McIntosh.
On a recent trip to Australia, I noticed that very few residential solar systems are leased. The vast majority are customer owned. Talking to industry experts, some claimed more than 90 percent of residential solar systems in Australia are customer owned. This is in stark contrast to the U.S., where last year 66 percent of residential solar is leased from third-party owners like SolarCity. Why such different approaches to ownership of residential rooftop solar?
Americans, for one, love finance. The average American household carries nearly $16,000 in credit card debt. We finance almost everything: our homes, our cars, our smartphones. And now we finance our rooftop solar, as well. Leasing—not to own, but to obtain electricity—has been an important driver of solar’s impressive ascent here.
The growth of the solar industry in the U.S. has been exceptional. Just this year we surpassed Germany, the former world leader, in new annual installations (though Germany still has more cumulative installed solar capacity). It is no coincidence that the massive growth of residential solar installations has coincided with the growth in solar leasing. No-money-down, third-party-owned residential solar leases have removed the significant hurdle of upfront costs, making rooftop solar accessible to more homeowners than ever before. Thus third-party ownership is expected to hit a record 68 percent of residential solar in the U.S. this year, with third-party-owned systems accounting for as much as 90 percent of new installs in places such as Colorado.
Two Different Roads Travelled
Australians value ownership and consumer independence. During a survey of potential Australian solar customers, third-party financing was the least popular option for obtaining solar electricity (though attitudes seem to be slowly changing). Upfront purchase was the most popular. It was described as “the Australian way.” Unlike the U.S., where financing and debt are usually a part of everyday life, Australian solar customers were less comfortable with the idea of an outside group being involved in ownership of their energy system. What if the company goes bankrupt? What if I move? What if a better option becomes available? Australians survey respondents enjoyed proprietorship of systems because it provided more certainty.
When the Australian government increased its solar incentive program in 2009, it made sense for customers to buy systems up front. A 4 kW system costing $10,000 (back in 2009 or 2010) could, with rebates and FITs, pay itself back within 2–3 years, providing electricity and making money for the homeowners for decades thereafter. But now that the market has fully developed, those incentives have been rescinded. Things are changing.
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The U.S. never offered the level of solar incentives Australia did, so there was no massive growth. Solar prices did not drop precipitously like they did Down Under. Most customers could not afford to wait 5 or 10 years for a system to pay itself back before they started saving money. Banks were wary of loaning cash for solar systems (it was a new market); few options were available. Third-party finance bridged the gap and (arguably) helped save the U.S. solar market; solar became economically appealing to a much wider range of customers.
As solar prices fall, though, the market may shift. In fact, we’ll likely see more Australian homeowners opt for solar leasing, and more United States customers opt for system ownership (some are already speculating that 2014 could be the peak for U.S. solar leasing).
The Pros of Leasing
Solar customers in the U.S. enjoy third-party financing in part because they don’t care about the system itself; they only care about the electricity it produces. Forget the roughly $20,000 sticker price for an average 4 kW system. Forget the 10- to 15-year payback. Owning the system might save more money years down the road, but we’ve historically preferred to save less money today rather than more money tomorrow. Leasing means a customer saves money on electricity today.
Beyond this, there are potential headaches associated with owning solar systems that convenience-minded customers could find a turn off. A system’s maintenance is your responsibility. If it breaks, you pay for it. Obtaining the rebates, renewable energy credits, feed-in tariffs (FITs), or other incentives requires filling out lots of paperwork. And most consumers don’t have enough tax liability to take full advantage of the federal tax credit.
Third-party financing lets the solar company deal with these hassles; they are more experienced and can more fully monetize incentives. As installing and maintaining the system costs less and less, the additional money the retailers save can get back to the consumer through lower-priced contracts. Potentially.
The Pros of Owning
If leasing is so great, then, why isn’t everybody doing it? In the U.S., 30 percent or more of customers still opt to buy their solar systems up front. In Australia, almost everybody does. The potential total savings for customers is greater if they can afford to wait out their system’s payback period. Leasing passes this long-term savings on to the financing company. And homeowners—especially ones with larger tax liabilities—can take fuller advantage of federal and state tax incentives for installing rooftop solar.
Meanwhile, financing through a lease can add to the cost of solar—both the overhead costs to arrange the lease and the added cost of interest over time. This may be a large part of the reason solar systems in the U.S. cost roughly twice as much as Australia and Germany. At this point, almost half the cost of solar systems in the U.S. is consumed by unclear margins and finance overhead, compared to about 10 percent of costs in Australia and Germany. Buying up front eliminates these added costs and makes the price of systems more reasonable.
In addition, financing can reduce incentives for companies to lower costs for customers. The price of solar electricity just has to be lower than the alternative utility bills. If a customer can already—through a lease—obtain solar electricity for less than their previous utility bill, then financing companies don’t have to drop lease prices even as the price of solar falls. Solar system price reductions become added margins for retailers, rather than savings for customers. In Australia, where companies have to compete on purchase price, there has been a drive to drastically cut costs as companies compete for customers. An argument could be made that competition for lease terms would do the same thing, but it has not happened so far in the U.S. Buying systems up front seems a far more reliable way to lower total system costs.
A Blended Future
How might solar markets evolve? Is third-party finance or upfront buying going to put more solar on rooftops?
In Australia, the rapid growth in installations is starting to slow. With declining incentives and increasing average system size, fewer Australian customers are willing to wait for a longer system payback. Though it is impressive that 10 percent of Australian households now have a solar system, there still may be a considerable number who cannot afford to buy up front and would require some leasing option. To continue to make solar appealing to that consumer group, Australian companies will need to offer leasing opportunities. Australia could look to the U.S. for how an effective solar finance market develops (and what problems can occur).
Meanwhile in the U.S., the solar market is also shifting. Prices continue to decline. The federal tax credit for solar finance might expire. Loans are becoming more widely available in the U.S., allowing customers to own their systems instead of leasing them. Like Australians, some Americans may just prefer to own their power generation equipment. Outside of solar leasing to date, Americans tend to finance to own. For example, more than three-quarters of us would rather own than lease our new cars, even if we finance the purchase and pay off the vehicle in monthly payments.
When more Americans are looking to buy systems outright, companies will be forced to compete more on upfront costs and solar system prices will fall. Capitalism in action. These falling prices will open up the solar market to a whole new group of customers who prefer ownership over leasing, and can now afford a system. New customers means more solar on roofs.
Is third-party or customer ownership the solution? Neither. Both. Which one makes sense depends on what the customer wants economically, socially, and culturally. The U.S. and Australia both need to shift the way their markets work in order to make both options viable and give customers the freedom to decide, rather than predominantly favoring one. This is going to ensure the lowest prices, the maximum of customer choice, and (overall) the greatest adoption of rooftop solar. That last point is great for everyone, so we can live in a world where we harvest the limitless (for a few billion years, at least) energy of the sun and have minimal carbon in the atmosphere.
In the meantime, we’ll watch two of the world’s leading nations for distributed solar PV approach residential rooftop solar from nearly opposite ends of the ownership spectrum. What each can learn from the other and how their respective solar markets continue to evolve will be illuminating to watch.
Source: Rocky Mountain Institute. Reproduced with permission.