As an Investment, Can Ownership Compete with Leasing?

By Pamela Cargill and Liz Merry

The residential solar lease has become the first-tier option provided by the largest solar installers in the country. With the announcement of SolarCity acquiring groSolar’s residential installation business, we expect this trend to spread rapidly across the country.

We recognize there are a wide and growing variety of solar lease provisions. Here, we are specifically discussing residential solar leases and not Power Purchase Agreements which are a related but very distinct financing mechanism.

For clarity, we’ll define a solar lease as “a monthly payment for a minimum guaranteed amount of PV-generated kilowatt-hours.”  There are many variations on the basic solar lease, including:

• upfront payments
• annual escalator
• buy-out provisions
• included maintenance and equipment replacement
• requirements for transferring the lease to the new building owner.

In the light of this fast-paced trend, we want to explore how or whether residential solar installers without access to customer leasing remain competitive.

We had a long, long list of both pros and cons for both solar ownership and leasing. For clarity we took our top four and compared the benefits of solar leasing against the benefits of solar ownership.

Benefits

Ownership Benefits

Fixed Hedge Against Utility Rate Increases
When you buy the system you are locking in your cost of power for the next 20-30 years at today’s rates an inflation levels. While we can’t accurately predict how system prices and incentives will rise and fall, we do expect electricity rates to rise over time. Therefore, when you buy your system whether with cash or a loan you know your exact costs and your financial return increases proportionately to rising electricity prices.

Financial Transparency & Clarity
System ownership means understanding a fairly straightforward calculation between your utility bill, the cost of the system after incentives, and system production.  Maintenance costs should be low and inverter replacement can easily be included in the cash flow analysis.

Financial Certainty
System ownership means recouping full financial benefits from both REC ownership and utility savings .

The Renewable Energy Credits (RECs) ascribed to system owners are a mostly unknown value in unregulated markets at this time. While growth in the solar industry in New Jersey and Massachusetts can be ascribed to the valuation and trading of RECs, especially Solar RECs (SRECs), it is unclear how these attributes will change in value over the long-term. System owners retain the rights to their rights to potential future REC income.

See SRECTrade for more information about the particulars of SRECs.

Also, one of the strongest financial arguments for system ownership is “free fuel from the sun.” After the initial investment and payback period, all the solar energy is free to the system owner. With a lease there is an annual cost escalator – whether tied to the utility rate or at a flat rate. The system lessee is gambling that their contract price increases continue to provide a positive cashflow over time.

Flexibility in System Size and Design
Customers purchasing their own PV system have a wide range of flexibility when it comes to the sizing and design of their system. Depending on their budget, the system can be designed to completely zero out their annual utility bill. Systems can also be designed with a wide range of PV panels and inverters, often tailored completely to the customers’ needs ranging from available roof space, aesthetics, and whether or not equipment was Made-in-America amongst other options.

Leasing Benefits

Potential for Immediate Positive Cashflow
 While it isn’t true in many, many instances that require $1,000 deposit or more toward the system lease, there is the potential for an immediate positive cashflow for the lessee.

Ease of Process
PV companies offering a lease make the entire process of going PV seem simple. They provide the energy use and budget analysis, decide on the equipment, and provide a minimum production guarantee. The lessee simply reviews the contract and begins making monthly or sometimes annual payments once the system is installed.

This “one stop shopping” model is a big draw for lessees. Many turnkey PV installers offering direct ownership often are missing that one key ingredient: how to pay for the system.

Inclusion of Maintenance and Monitoring
While there should be very little maintenance involved in a PV system, new customers are attracted to the idea they won’t have to worry about anything that comes up. Furthermore, while most customers won’t track production closely over the long term, the availability of production data on the web indicates a level of confidence possibly missing from the turnkey installer that doesn’t include online monitoring services.

Small, Lower-Cost System with Targeted Utility-Savings
Lessees are offered a much simpler array of choices from a Lessor. In California especially, where residential electricity is billed based on a tiered system, a small leased system can be a tiny investment that can completely change the rate tier in which a household falls. Lessors offer a few different pre-defined system design options to bring a leasee into a lower rate tier. It’s simpler for the lessor and simpler for the leasee.

Considerations and Resources

• Pro-leasing articles and financial analysis are plentiful on the web. NREL’s “Solar Leasing for Residential PV Systems” compares leasing very favorably against an 8% home loan for system purchase.

• SolarTech has a template for an Operating Lease Agreement for sale.

• CalFinder (Solar Leasing 101) and many others have articles on how and why to lease.

• And, from CalSEIA, a great list of considerations and questions for consumers to ask when considering a lease agreement.

• There are also Leasing critics (such as http://solarleasedisadvantages.com/), available to explain all the potential pitfalls of leasing.

Conclusions

We see the purchase vs. lease decision as “Pay Now or Pay Later.” Customers who arrange their own financing to purchase PV outright are investing the time and money at the beginning of the project. Lessees are handing the decisions and finances over to their leasing company at the outset but they maybe hit with big decisions and financial barriers at the end of the contract period. In many cases, lessees are handing those constraints over to the next home buyer who might take over the lease.

It is no surprise that many consumers choose “now” and “simple” over what can seem like a very confusing time-intensive decision process. The lease option is clearly accelerating the adoption of PV, generating local jobs, and growing our solar industry.

The question remains: Is the rise of leasing the “death” of ownership? Not necessarily.

In a constantly shifting economy, what is most profitable or simple for a solar installer to offer today might be off the table tomorrow, especially as there are many uncertainties in the incentives marketplace (see recent announcement of Xcel in Colorado cutting back their residential PV incentives overnight) and in residential utility rate structures that also has the possibility of overnight change.

Sales staff for installers offering either the lease and/or ownership model should be fully prepared to offer information about the pros and cons of each. Installers offering only ownership models would be wise to educate their prospects about the benefits listed here and research additional benefits they can bring to the table. Bottom line: solar sales is about educating and removing skepticism, helping a customer find the right solution, and maintaining profitability for the installation company. Sales staff should be armed with the best information possible to help achieve those goals.

 Pamela Cargill is the principal "chaolyst" at Chaolysti and provides marketing and operations consulting and industry analysis to small and growing renewable energy companies and green brands. She writes about issues facing the solar industry, marketing best-practices, and shines a light on renewable energy at work in her travels. Follow her on twitter: @chaolyst.

 Liz Merry owns Verve Solar Consulting, through which she teaches seminars (“Energy Careers and Business Opportunities,” for the Pacific Energy Center, and "Solar Business and Technical Sales Training” for Solar Energy International), writes solar business curriculum, and provides business and solar career consulting. Liz's latest resources and opinions can be found at  SolarToday.org/Liz and at VerveSol on Twitter.