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ITC expiry, Consumer Protection, and an Open Letter to President Obama

The ITC expiration seems to be a done deal, but the question is if whatever comes next is going to be any better, and the uptick in attention to climate change makes it inevitable that there will be a “next.”

In particular the commercial portion of the ITC, section 48, has had many undesirable side effects and may go down in history as a textbook example of unintended consequences of ill-designed subsidies. For (somewhat) understandable reasons, the focus has been on helping to commercialize technologies, but as the recent MIT study, The Future of Solar Energy suggested, that is not the best place for government to spend its dollars. The ITC experiment that is now ending is a case in point.

To make the point in the most simple terms, here is a comment from a reader of a recent article of mine:

Thank you for your article. It does point out a number of the negative factors of getting a solar lease. It is interesting that this is the only truly negative article I could find on-line. All the links I found point to sites which are actually run by some business which either promotes solar in general or at best tries to persuade you that you should buy a system not lease it.
We are currently trying to sell a house with a SunRun solar lease and I have had two parties that were ready to buy, drop out because they did not want to assume a 20 year lease. A couple of issues come up. (1) monthly “rent increases from around $260 to over $400 over the life of the lease. (2) The salesperson kept telling our mother that they would just take the system off the roof if the buyer of the house didn’t want to assume the lease. They totally gloss over the fact it will cost the seller over $58,000 to buy out the system. (3) The figures they use to show how much electric prices will go up during the next 20 years are based on……a crystal ball? facts? figures generated by who?
I will agree that you should never lease a solar system – buy it if you ever plan on selling the house.

(http://seekingalpha.com/article/3553896-solar-industry-self-regulation-is-doomed-to-failure#comment-62107846)

Unintended consequences

Here are some of the principal reasons why the current rooftop solar model is faulty. Simply put, it is designed to extract maximum revenue out of the retail customers, for the agenda is collecting subsidies and satisfying investors. The economic/financial interests of the retail customers are of no concern, and unfortunately most retail customers are financially too unsophisticated to discern the implicit misrepresentations, starting with the fact that ‘saving’ money on your monthly electric bill is not only not guaranteed over the life of the agreement, but has nothing to do with the question if it makes any economic sense at all for the customer to be buying (or leasing), solar panels in the first place. The sales model only proves one thing, namely that the current financing model enables stretching the payments long enough to make the system seem cheap compared to the electric bill.

  • The mis-use of finance to pervert the decision to adopt by prospective customers inflicts direct economic harm on customers. It subsitutes ‘low payments,’ for a proper investment decision, which should be based on a positive NPV of the proposed project. “Free solar panels” was the rallying cry, and even the SEIA Solar Business Code now bans that particular practice.
  • It is motherhood and apple-pie in finance that advantageous financing can make a good project better, but can never make a bad project good, yet the new rallying cry of rooftop solar: “lowering your electrical bill,” does exactly that. In most properties many projects could be found that make a greater contribution to property value than rooftop solar, as measured by a positive NPV.
  • The current sales paradigm for rooftop solar, aside from the odd exception of a contractor who actually sells these systems honestly, is designed not to add value to the customer (positive NPV), but to extricate maximum cash flow from customers, and therefore destroys value for customers instead of creating value for them, which might be entirely possible (but not in all cases) if solar projects are analyzed correctly.
  • In reality, in most residential properties, there could be many projects that add far more value to the property, and solve a much larger part of the energy problem than solar PV (SPV) does, because it is the least efficient renewable technology available today, heat pumps both ground source and air source, and solar thermal are all wildly more efficient, and 70% of domestic energy demand is thermal. Many passive thermal solutions are also of far greater financial value than SPV.
  • Based on the above there are two reasons why the NPV of rooftop solar is negative in many cases. First, it is now a proven fact that sellers experience discounts on their property sale of 3-8% (based on a study from Arizona State Univestiy, here). This also makes logical sense: with aging panels on your roof, you are asking a buyer to assume the balance of a 20-year lease. Logically the settlement would be either you pay off the lease and sell the house with the panels, or you get the buyer to assume the lease, but give him a discount on the price. This is not disclosed up front by solar companies. Taking the eventual discount on the property into account, the ‘savings’ may be vaporized in many cases. Second, taking into account the opportunity cost of alternative projects that are being usurped by the rooftop solar project, would cause many if not most of these projects to have a negative NPV for the home owner. The impairment caused by prioritizing the wrong project is both the misallocation of capital, and may also include a misallocation of physical space, if the solar PV system locks out other, more valuable solutions, such as solar thermal.

It should be noted that pursuant to loud complaints at the end of 2014 CFPB has been looking at the issue, and the FTC has issued some type of warning, howerver ineffectual. Some states have issued their own consumer protection measures specifically for the solar industry, and now the Solar Energy Industry Association has created its own Solar Business Code, which serves to create the impression of consumer protection, but does anything but. What it does, is attempt to forestall more aggressive regulation, but in practice it merely specifies that you should only quote figures that you can back up from reliable sources, which in most cases it specifies, but it does nothing about the lies that are told with thsoe figures, primarily the fundamental financial/economic deception highlighted above.

It is high time that adequate consumer protections be enacted, in a pro-active way, and to this effect, I have just published an Open Letter to President Obama on consumer protection for energy retrofits, here. It seems we are making all the same mistakes that were made during the Carter administration, where too many renewable energy projects ended in lawsuits and prosecutions for deceptive sales practices. It is not only retail customers that are clueless, but investors in solar companies also. This is why the market in general did not understand a recent comment by Jim Chanos on CNBC, where he called SolarCity more a subprime finance company than a solar company. His point would be exactly that the trick of stretching the payments to in order to get them below the monthly electrical bill is the kind of financial deception where low payments are used to sell people things they cannot afford, on the basis that they can afford the payments. This is a prime example of abusive finance, and class action law suits have started, and more are likely to follow until the industry learns to do retrofits in ways that add value to properties, which is the only reason anybody should invest in a retrofit.

It is to be hoped that any future subsidy regime should empower property owners as buyers, and should be tied to reducing GHG-emissions at the property level, and remain technology agnostic. Along with creating a proactive consumer protection in the form of a 30-year capital budget for the property, so that projects are properly evaluated, would go a long way to ensuring that consumers do only projects that make them richer, and avoid the ones that make them poorer, as the current rooftop solar model mostly does.

Fortunately, there are positive examples of companies that are proceeding in the direction of whole-house solutions, and adding value to the property, such as FRE Renewable, and Green Mountain Power’s E-home program, and the very exciting new solar thermal concept that is being launched by Zonbak. Eventually, the market will mature because providing value to the customer is the only way to build a sustainable business. The current rooftop solar model deserves to die with the expiration of the ITC. A better alternative is needed.