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Connecticut's Solar Lease Program Demonstrates High Borrower Fidelity

Third-party financing has become the mechanism for funding solar at the residential level in many markets. For example, third-party financed systems — which can include solar power purchase agreements (PPAs) and solar leases — are reported to have made up two-thirds of installations in the California market during the first half of 2012. The reason for their popularity? PPAs and solar leases significantly reduce or even eliminate the high upfront costs associated with solar photovoltaic (PV) systems.

Launched in 2008, Connecticut's (CT) Solar Lease is one such program. CT's Solar Lease is the first in the nation to pair a ratepayer-funded organization — Connecticut Clean Energy Fund (CCEF) — with a financial institution to leverage federal incentives. The program used a combination of solar rebates, investment tax credits, and accelerated depreciation to help Connecticut residents gain access to less-expensive solar energy and lock in electricity costs. The first installation of the program ended in February 2012; the CT Solar Lease program is currently undergoing a redesign and anticipates launching the second version of the program in January 2013.

Importantly, the CT Solar Lease program has collected and shared valuable, non-personal data on its solar lease customers with the National Renewable Energy Laboratory (NREL). Analysis of this data provides unique insights into a growing segment of the solar PV market that have yet to be elucidated publicly. As one example of interest to lenders, the program has experienced a very low default rate of 0.12 percent!

About the CT Solar Lease Program

As a public-private partnership, the CT Solar Lease program stands out from other third-party financiers, many of which are strictly private sector entities. An innovative initiative of CCEF, the program is financed and owned by CT Solar Leasing, LLC, a non-bank subsidiary of U.S. Bancorp. AFC First Financial Corporation managed the application and approval process for residents and oversees lease payments. Gemstone Lease Management is responsible for the day-to-day management.

Between August 2008 and February 2012, when the first round of program financing concluded, CT Solar Lease provided 855 leases to homeowners throughout the state to support over 6.2 MW of solar PV.

How it Worked

CCEF's Solar PV Rebate program provided homeowners with an affordable monthly lease. Homeowners entered into a 15-year contract and pay a fixed monthly bill for the duration of their lease. After the 15 years is up, the lessee will (1) extend the lease for an additional 5 years at a reduced monthly rate, (2) buy the system at fair market value, or (3) not extend the lease and pay to have the system removed, according to CT solar lease data. Solar leases were assignable, thereby allowing a homeowner to sell their home with the new homeowner assuming responsibility for the solar lease.

To have been eligible, the homeowner must have lived in a one- to four-family owner-occupied home. Importantly for this analysis, the applicant's household income could not have been more than 200% of the area's median income.

The homeowner could have chosen from a list of over 25 installers that were approved by the CCEF and CT Solar Leasing. Most installations included a remote monitoring system from Locus Energy, the cost of which was built into the lease.

Cost of the Lease

The cost to purchase and install the solar system was financed by CT Solar Leasing, which provided tax equity financing to take advantage of accelerated depreciation, which is currently unavailable for direct use by residential solar PV system owners. However, as a commercial entity, CT Solar Leasing was able to use the incentives and pass a portion of the benefit on to the lessee to eliminate the need for a down payment.

The program also included a method for homeowners to benefit from the market value of solar-generated power. The exclusive Solar Dividends program represents a portion of the value CT Solar Leasing receives from the sale of renewable energy certificates (RECs), which are based on the electricity produced by the system. CT Solar Leasing accounts for the REC value earned by each system, and solar dividends are then placed into a reserve account to help pay for future operating costs of the system, such as inverter replacement and out-of-warranty repairs.

Table 1 provides an estimate of the monthly payments based on system size and total installed system cost. (During the period in which the CT Solar Lease program was being administered, system costs for residential solar PV started at $8.00/WSTC in 2008 and reduced to $5.50/WSTC in 2011. The CCEF also provided an incentive equal to about 50% of the system cost.) Based on CT Solar Lease program analysis, the monthly lease payments for years 1 through 15 is roughly comparable to the avoided electricity costs over the same duration. However, as natural gas prices have begun to drop, so too have Connecticut's retail utility rates, making it more difficult for the solar lease to compete on an avoided cost basis.

Source: CT Solar Lease 

In the event the customer renews the lease after year 15, they will pay a significantly reduced monthly bill. However, system production may have degraded some after 15 years of use and exposure, and thus the lessee may not receive as much power from the system as they did in previous years. See the CT Solar Lease program website for more program details.

In the next version of the program, due out in January 2013, monthly payments will likely decline as system prices have dropped substantially over prior years, and the term of the lease was extended from 15 to 20 years. Extended lease terms are made possible by the Clean Energy Finance and Investment Authority (CEFIA), which attracted senior lenders into the program and took a subordinated debt position as a credit enhancement to the capital structure.

Customer Statistics

The CT Solar Lease program provided NREL with data on leases issued from the start of the program in August 2008 through February 2012. All personal information was excluded from the dataset to protect the identity of the lessees.

According to CT Solar Lease, roughly 3,000 applicants applied, of which nearly one-third were approved. Over this period, the program has experienced three late payments from its 850 lessees. There has been one notice of default; however, the customer is now paying. Two lessees have gone into bankruptcy, one of whom continues to make payments and intends to keep the lease once the bankruptcy is finalized. Panels are being removed from the other home and will be reinstalled elsewhere. Thus, this public-private financing partnership has experienced a default rate of 0.12% if the reinstall is excluded — a number to take to the bank!

Note: Statistics exclude data points for 10 leases that were considered as outliers.

As indicated in Table 2, most lessees were between roughly 40 and 60 years old at the time of application, with the youngest lessee at 23 and the oldest at 90. Average annual household incomes were approaching $100,000. Somewhat surprising is the number of lessees with relatively low annual incomes: five lessees made $10,000 or less and over 130 households were making $60,000 or less. These levels are well below the median incomes for towns in Connecticut, which range from $107,040 to $195,680 for two-person households. Credit scores are generally very high — in the 770 range — with a low score of 620. The average system size of 7.4 kW is fairly large compared to the national average of 5.7 kW.

Per program staff, lease customers have found it easy to sell their home with the solar lease, which can be transferred pending the buyer meeting the program's financing criteria. In all, eight homes with a solar lease have sold, four have had deaths, and three have had divorces; all of the subsequent buyers were approved to take over the lease, according to the CT Solar Lease Program.

Conclusion

The CT Solar Lease program has been effective in supporting over 850 solar leases. But perhaps one way in which the program really stands out is in its excellent collection of customer data, which has shed light on the high quality of customer financing. Such data may prove useful to the financing and investment communities, including those interested in spurring securitization, who will look to both customer financial data as well as solar PV system performance as key indicators of the securities' quality.

This article was originally published on NREL Renewable Energy Finance and was republished with permission.

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