Would you rather own or lease your rooftop solar?

RMI

rsz_blog_2014_08_19-1On 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 per cent of residential solar systems in Australia are customer owned. This is in stark contrast to the US, where last year 66 per cent 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 TRAVELED

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.

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.

WIN-WIN

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: RMI. Reproduced with permission.

 

Comments

4 responses to “Would you rather own or lease your rooftop solar?”

  1. juxx0r Avatar
    juxx0r

    If a system will pay itself off in 2-3 years, then what is an appropriate rate or timeframe for a lease?

    We need to be told the comparison rate for a lease, that would remove the leases that are just not playing fair and open up the market.

  2. David Martin Avatar
    David Martin

    Being in the US, and retired, my 8.8Kw system (32 panels) made sense for me to lease. I don’t have much tax liability so the tax credits I couldn’t use. But the leasing company could lower their costs (and therefore mine) by having that credit for themselves. I had zero up front cost, with an immediate savings over my previous electric bills of about $600/year when compared to lease cost plus minimum electric bill. So, over the length of the lease the savings is about $12,000 with no investment on my part. Plus all maintenance, including inverter replacement expected after about 12 years, is not at my expense. At the lease end market value for a 20 year old system is estimated at zero, so the lessor will quit claim the system to me — in perfect working order as through the previous day the system will still be under maintenance. I’ll take a zero initial investment that saves $12K over 20 years anytime. And a free working solar system at lease end, even if an old one. Plus as a competitive tool Sungevity donated $750 to an NGO of my choice, and gave me a $499 iPad plus a $750 gift card! So I actually have a negative initial investment of $1249 (without even counting the NGO donation) and a $600/yr. savings for 20 years.

    In case of a decision to sell the house I can either pay off the lease, at a discount for prepayment, and raise the value and price of the house, or the new owner can take over the lease and the future savings, while making my home more attractive and affordable to a buyer either way. My monthly cost for electricity above the lease cost is only $20/month since installation in February, 2013.

    Definitely a win-win situation that I could not have afforded with an outright purchase. So what if I could have saved somewhat more in the long run by buying the system. That assumes no maintenance expense and a very significant initial investment, and that I could use the tax credits on the purchase, while ignoring the lost income I could have been generating with the invested funds. Remember, I have a $12K savings with less than no initial investment, no maintenance, and I end up owning the system in the end anyway.

    It definitely works for me.

    1. Ronald Brakels Avatar
      Ronald Brakels

      David, in Australia an 8.8 kilowatt rooftop solar system can produce about $4,000 worth of electricity a year. With 50% self consumption and no feed-in tariff that comes to a saving of $2,000 a year. And a straight forward installation might only cost about $11,000. Here there’s no net metering and feed-in tariffs range from low to zero. Now I’m not saying that leasing solar can’t be done in Australia. I’m sure it will appeal to some people and if that leads to less damage being done to the environment that’s great. However, things are very different here and so it is very hard to see solar leasing taking off in a large way. But what may take off is the leasing of home energy storage. Mid to large sized systems won’t be cheap at first and many people will be wary of plonking down a large amount of money purchasing outright something new and untried, and so there may be more of an opportunity for leasing there. (Personally I doubt it, but I’m like contantly wrong about things, so that’s not really relevant.)

  3. finn Avatar
    finn

    Don’t underestimate the strength of cultural differences. The only agreement an Aussie will enter into for 25 years is a mortgage. If they want a solar system and they have a mortgage they can add it to the mortgage and the extra repayments are almost always going to be less than the electricity savings. The only people I can see leasing in Oz are renters with friendly landlords (rare as hen’s teeth) and people who have maxed out their mortgage. Our American friends don’t seem to understand this and I think they may lose their shirts in Australia.

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