Rooftop, Solar

The Importance of “Switching Costs” to the US Residential Solar Industry

The DoE and numerous organizations and governments globally are focused on driving down the cost of solar convinced that lower costs will drive higher deployment. The cost of manufacturing modules and soft costs are in focus as is driving down LCOE.

Switching costs are more difficult to address, however, they are a crucial piece of the residential PV deployment puzzle.

The term “switching costs” refers to the effort or expense or inconvenience or all three required to switch from one product or service to another. The more expensive the cost of the switch in terms of money and inconvenience and the more habits and routines that must change to make the switch the higher the switching costs.  

In the U.S. homeowners have traditionally rented their electricity from a utility.  They use electricity and they pay for exactly the electricity that they use. They do not have to understand the electricity that they use.  They are not responsible for maintaining the grid except for the amount that they pay on their monthly utility bill for this purpose.

Switching to PV system ownership requires an effort, some degree of inconvenience and includes the upfront cost of installation, likely including financing.  Incentives can help mitigate switching costs as can lower electricity bills after the PV system is installed. To get to the point where the benefits of choosing solar can be realized, however, switching costs must be overcome.

The U.S. solar residential lease, like it or not, directly addresses switching costs by offering free installation and including maintenance for either a monthly lease payment or a continuation of paying for electricity by the kilowatt-hour.  The impact of the annual escalation charge on the total financial outlay overtime is overlooked because homeowners are used to utility rate increases and in general do not raise the point that the sun does not come with an annual rate increase — nor do utility rates increase annually.  System lessees poorly understand the fact that the maintenance for a residential PV installation is very low and the components are covered by warranty.  The offer of included maintenance implies the necessity of maintenance.  Offers of free solar that include maintenance do a very good job of ameliorating switching costs and are driving deployment of residential PV in the U.S. Figure 1 depicts growth of the residential PV application in the U.S. from 2009 to 2014 and through the forecast period.

Figure 1: US Residential PV Growth, 2009-2019

The Downside of Free Solar

The real downside of Free Solar is that it is not truly free. Over time the annual escalation charge renders the PV installation more costly than it would have been with reasonable financing.

Base charges on utility bills (charges paid before one kilowatt hour is used) are increasing and many utilities are pushing for higher charges for customers with PV systems on their roofs whether or not the system is leased.

Utilities are also pushing for smaller recompense for residential PV systems that over produce electricity.

Net metering is currently under challenge by utilities in many states.

The one thing that the offer of Free Solar accomplishes is to effectively address the customer’s switching costs.  The customer continues to rent electricity just as it did with the utility.

The now-entrenched solar lease model has effectively shown that making the PV installation ever cheaper by addressing manufacturing costs and installation costs (including soft costs) will not kick the last leg from the stool of customer objections.  The solar lease model allows the customer to continue renting electricity as the customer has been used to doing for his or her entire kilowatt-hour using life.    

The Residential Solar Lease Model Remains Flawed

The solar lease has shown quite clearly that free trumps cheap even if it is not truly free, that is, over time the escalation charge will more than make up for the upfront installation costs. Deployment under this model is accelerating and the flaws in the model need to be addressed.

The sales process including customer qualification and incentive programs for salespeople needs to be scrutinized.  

Customer education needs to be part of the lease process because if customers have the means of electricity production on their roofs they should understand how it works and what it will and will not do.

Monitoring needs to be visually appealing and easy to access and read.

The escalation charge needs to be addressed because a) the sun does not include an annual charge for shinning b) utility rates will continue to rise meaning that the customer will be paying for more than one increase, that is, the increase charged by the lease company and the increase charged by the utility and c) over time there will be further fees charged by utilities.

The value of a leased PV system when the house is sold should be made clearer, or, simply clear.  Most realtors do not view a leased PV system as an asset while an owned PV system is considered an asset.

And Finally,

Government programs focused on lowering the cost of solar would do well to address switching costs and look for innovative and fair-to-everyone business models as well as financing schemes that help overcome the upfront cost of deployment.

Finally, switching costs would likely be ameliorated and residential PV system ownership could accelerate with federally backed zero-interest financing.

Lead image: Solar PV. Credit: Shutterstock.