Leasing Residential PV Systems BY MICHAEL RUTBERG; ANTONIO BOUZA, ASSOCIATE MEMBER ASHRAE

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1 This article was published in ASHRAE Journal, December Copyright 2013 ASHRAE. Posted at This article may not be copied and/or distributed electronically or in paper form without permission of ASHRAE. For more information about ASHRAE Journal, visit Leasing Residential PV Systems BY MICHAEL RUTBERG; ANTONIO BOUZA, ASSOCIATE MEMBER ASHRAE Leasing of residential photovoltaic (PV) systems is rapidly gaining in popularity. By providing a one-stop shop for PV system installation and operation and greatly reducing the upfront cost, leasing by third parties can eliminate major barriers to adoption of residential PV systems. While subsidies associated with PV leasing have been criticized in the past for being unduly expensive for taxpayers, increased competition among leasing companies has led to a drop in lease prices as well as to a reduction in the associated tax credits. Given favorable policies, third-party ownership will continue to be a strong driver for residential PV deployment, at least in certain U.S. states. Overview Ten years ago, there were many reasons for a homeowner not to put solar panels on the roof. Design, procurement, and installation of a PV system was a complicated project. Permitting, interconnection, and inspection processes added to the complexity. Perhaps most importantly, the PV modules and associated equipment were expensive. With limited or nonexistent financial incentives to offset the upfront cost, project payback periods were long, with some projects never reaching break-even. Today, the economics are much more favorable. PV system prices have declined by more than a factor of two, 1 and there are compelling federal and state level incentives in place. At the federal level, an investment tax credit (ITC) equal to 30% of solar purchase and installation costs can be redeemed by the PV system owner. State-level incentives vary considerably, but they may include cash grants or rebates (24 states), tax credits (22 states), as well as net metering policies (43 states), under which utilities are obligated to buy excess power from grid-connected residential PV systems at retail electricity rates. 2 As residential PV systems have grown more economical, solar companies with PV installation expertise have become more common. These companies handle engineering, construction, and regulatory compliance issues, greatly reducing the time and effort required of the homeowner. They also track policy changes and can help their customers take advantage of available incentives, improving return on investment. Working with an installer company, however, does not change the fact that purchasing a rooftop PV system costs thousands if not tens of thousands of dollars. For many homeowners, the upfront cost and associated long payback period pose a formidable barrier to adoption. The third-party ownership (TPO) model removes this barrier. With a solar lease or power purchase agreement (a roughly equivalent contract), the homeowner does not own the rooftop PV system outright, but pays a fee to use it for an agreed-upon period of time, usually 20 years. There are various fee structures offered, with combinations of upfront and monthly payments, but in all cases the potential benefit to the customer is that the sum of the fee and the remaining utility bill are less than the original utility bill. A zero-down fee structure option enables customers to start saving money immediately. Typically, the leasing company takes on the same engineering, construction and compliance roles that an installer would for a purchased system, and additionally Michael Rutberg is a senior technologist in the Mechanical Systems Group of TIAX LLC, Lexington, Mass; Antonio Bouza is a technical manager with the U.S. Department of Energy, Washington, D.C. 132

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3 provides maintenance and online-enabled system monitoring. Most leasing companies also guarantee system output on an annual basis, thereby taking on the risk of an underperforming system. Since they own large portfolios of solar installations and have ready access to performance data, leasing companies are well-positioned to manage this risk. From the perspective of a customer with a tight cash flow situation, the arguments for TPO solar are compelling: low-hassle installation and operation, combined with a payback period that is shortened or non-existent. 3 Solar leasing is not without its critics. Absent strong competition among leasing companies, a leasing company can set relatively high fees. The customer may still save a modest amount on monthly electricity expenses, but in the long run a purchased system could yield a better return on investment. Homeowners, of course, can decide on an individual basis whether the ease and low upfront cost of PV leasing outweigh the long-term cost savings of a purchased system. Planned duration of homeownership may also factor into their decision: if the house is sold before the end of the lease, the seller must either prepay the remainder of the lease or pass the lease on to the subsequent owners (if their credit rating allows). A 2012 report by DOE NREL gives a thorough review of the various applicable financing options. 4 An objection of broader concern is that leased PV systems can sometimes cost governments (and thus taxpayers) more in subsidies than equivalent purchased systems would. The reason is related to one of the strongest government incentives for PV, the federal investment tax credit (ITC). In the PV leasing model, the 30% ITC goes not to the homeowner but to the leasing company and its investors, since they own the system. Because of the accounting methods involved, the dollar amount on which the ITC is based is more closely related to the price of the lease than the cost of the equipment. So where limited competition leads to higher lease prices, the government pays more (in the form of lost tax revenue) to incentivize a leased PV system than for an equivalent purchased system. As the TPO solar market has matured, competition has increased and the problem of high lease prices has lessened. A recent analysis by the Climate Policy Initiative (CPI) found that in the state of California the prices for FIGURE 1 Annual deployment of residential scale (<10kW) PV in California, by ownership type MW 8 MW 6 MW 4 MW 2 MW Purchased Leased Advertisement formerly in this space purchased and leased PV systems had converged as of 2011 and remain comparable today. 5 Energy Savings According to CPI, in the absence of a TPO option, it is highly unlikely that all PV lease customers would have purchased their systems. 5 Consequently, the energy saved by deployment of a leased PV system is about equal to the energy generated by that PV system. TPO-leased solar now accounts for more than 50% of new residential PV deployment in Arizona, Colorado, Massachusetts, and California 6 (Figure 1). Installed residential deployment of leased PV in 2012 in California, for example, was more than 10 MW, compared to just under 5 MW for purchased PV systems. Using a yearly average of five sun-hours available per day, California s 10 MW of leased PV systems generate and save 18,250 MWh per year. Market Potential Realizing the potential of TPO solar leasing is highly dependent on favorable regulatory, economic, and financial factors. For example, state regulators must recognize and allow TPO solar. Historically, the electric power sector has been regulated with large-scale, 134

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5 centralized generation in mind. In some states, TPO solar companies are technically defined as utilities, resulting in regulatory obstacles. 7 Currently, at least 22 states have implemented regulations explicitly allowing TPO solar. 2 Federal tax policy has helped to drive the adoption of leased PV systems via ITCs. ITCs are tax credits and, since tax credits reduce tax liability, are most beneficial when the amount of tax owed is equal to or greater than the amount of the tax credit. Consider a rooftop PV system priced at $10,000. To take full advantage of the 30% ITC, the PV system owner must owe at least $3,000 in federal taxes. A leasing company, however, whose fee revenue from each leased system is spread over 20 years, may be unable to benefit fully from the ITC. To maximize the benefit from the ITC, leasing companies can seek tax equity investors as partners. A Advertisement formerly in this space. tax equity investor is an entity whose tax liability situation permits taking full advantage of the tax offset provided by the ITC. The fixed costs associated with a tax equity transaction favor larger dollar value transactions over smaller ones. Consequently, solar leasing companies have spent relatively aggressively on sales and marketing to acquire large numbers of new customers. 5 Only a handful of organizations (about 20) are currently active as tax equity investors in renewable energy projects, resulting in a finite pool of funding for additional TPO solar deployment. 5 In the near term, financial innovations such as solar securitization may overcome this limitation. 8 In the longer term, policy changes away from tax credit-based incentives towards cash-based incentives may reduce or eliminate the need for tax equity financing. While the cost of PV equipment has so far continued to decrease, 1 the federal ITC is currently due to expire at the end of 2016, and state-level incentives are generally declining as well. There is some short-term uncertainty around the future of net metering, and longerterm concerns about the stability of a grid with high penetrations of PV (last month s column 9 discussed the related implications for energy storage). Where the balance of economic forces is favorable overall, however, the third-party ownership model will continue to be a powerful catalyst for residential photovoltaic deployment. References 1. LBNL Tracking the Sun VI DOE (accessed). DSIRE Solar Summary Maps. com/49lo5ub 3. Rai, V., Sigrin, B Diffusion of environmentally-friendly energy technologies: buy versus lease differences in residential PV markets. Environmental Research Letters NREL Residential Solar Photovoltaics: Comparison of Financing Benefits, Innovations, and Options Climate Policy Initiative Improving Solar Policy: Lessons from the solar leasing boom in California GTM Research U.S. Residential Solar PV Financing: The Vendor, Installer and Financier Landscape, com/myamxfz 7. NREL Solar PV Project Financing: Regulatory and Legislative Challenges for Third-Party PPA System Owners. com/keoteg3 8. GreenTechMedia. September The Encyclopedia of Solar Securitization, Part Ponoum, R., Rutberg, M. and Bouza, A Energy storage for PV power. ASHRAE Journal 55(11). 136

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