Economic Trade-Offs Of Owning vs. Leasing Solar Photovoltaic Systems Explored By New NREL Reports

The economic trade-offs of owning rather than leasing solar photovoltaic systems was explored in depth by a pair of new reports from the Energy Department’s National Renewable Energy Laboratory (NREL).

These reports go over the various options available to customers when deciding on which way to go about financing solar energy systems — whether with regard to residential systems or commercial ones.

Amongst the findings of the new reports, NREL analysts determined that businesses utilizing low-cost financing when purchasing photovoltaic (PV) systems, and also homeowners utilizing solar-specific loans, are able to save up to 30% as compared to those that lease solar PV systems through conventional third-party owners.

Here’s an overview of the key points of the two reports:

With regard to the first report — Banking on Solar: An Analysis of Banking Opportunities in the US Distributed Photovoltaic Market — it’s purpose is to provide an overview of the developing US solar loan product landscape.

Here are some of the key points:

• The levelized cost of energy (LCOE) for residential systems with solar loans was lower than the LCOE for residential systems with power purchase agreements (PPAs) by 19-29% (varying by the term of the loan), because of the higher cost of capital necessary for the sponsor and tax equity in a PPA transaction.
• There are additional operational and financial risks associated with owning a solar asset, and many of the savings calculated depend on market environment and the specific situation of an individual homeowner or business. For example, changes in a homeowner’s credit rating and the term of the loan can more than double the interest rate payments on the loan.

“Market interest rates on solar-specific loans currently range from 2% with special provisions to 8%,” noted Travis Lowder, an energy analyst and coauthor of the new report. “Compare this to a weighted average cost of capital of 9–10% for third-party systems financed through tax equity investments. Using the lower cost rates provided by the loans could help to make solar power more affordable to more consumers, and more competitive with utility rates in more states.”

With regard to the second report — To Own or Lease Solar: Understanding Commercial Retailers Decisions to Use Alternative Financing Models — its purpose is to identify the trade-offs between financing methods for businesses installing onsite PV systems. The report uses case studies of two large commercial retailers (IKEA and Staples), using the two different approaches.

Some of the key findings are:

• The LCOE for the modeled self-financed system is approximately 30% lower than the LCOE for the PPA-financed system, given a commercial customer’s pre-tax discount rate of 10%; however the LCOEs are equivalent when the discount rate rises to 23%.
• Companies may view the risks of ownership differently than those for a PPA-financed system. If a company assumed a 10% pre-tax discount rate for a PPA versus a 23% pre-tax discount rate for self-financing, then the LCOE would be 14% lower using the PPA.

“The most appropriate PV financing option for a particular business depends on the characteristics and circumstances of that business,” stated David Feldman, a senior financial analyst and lead author of the report. “A company must work across its different business groups to decide what is most appropriate for its situation. With that said, if a company has less expensive sources of financing and is comfortable with the risks, it can often save on its energy bills by owning a PV system.”

You can find the two reports here and here.