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.
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.
This article was originally published on RMI and was republished with permission.
Lead image: Solar rooftop via Shutterstock