Residential Solar Embraces Leasing, Power Purchase Agreements

The use of power purchase agreements (PPAs) and similar leasing instruments to finance residential solar power installations is poised for a boom this year which could prove to be as healthy as the commercial solar PPA market was in 2007, several solar integrators in California suggest.

“There were approximately 10,000 homeowners with solar power last year in California, and most say that there will be a 30-to-40 percent growth rate in the state this year,” says Nat Kreamer, CEO of Sun Run, a Silicon Valley start-up that offers power purchase agreements to finance most of the cost of installing a system.

Jon Guice, head of research at green energy consultancy AltaTerra, in Palo Alto, is bullish on PPAs in particular. “PPAs can drive the residential solar market because it makes the acquisition financially acceptable; it could change the whole solar value chain,” he reckons. “Last year half of all the commercial solar installs in the United States were PPAs, and this year that number is running between 60-to-80 percent,” he notes.

Sun Run appears to have been the first company to tap the PPA contract for residential applications in the United States, when it began offering the deals in fourth quarter 2007. “Sun Run is the first PPA-based residential distributed power company in this country — I’m not sure about the rest of the world. We have customers throughout the PG&E, SCE and SDE utility regions which are buying electricity from us under PPAs,” says Kreamer.

“Our standard agreement provides electricity at US 13.5 cents per kilowatt-hour (kWh) for 18 years,” Kreamer says. Under tiered billing by California’s PG&E, tier one power costs US 11 cents per kWh but is limited to a usage allocation, then tier two power costs US 22 cents per kWh up to another usage threshold, and then tier three power costs US 33 cents per kWh. “If you do a 30-year look-back, residential electricity rates in California have risen an average of 6.7 percent per year,” he says.

Sun Run requires an up-front payment that can vary so that as the up-front payment increases, the cost of the delivered electricity decreases. “We found that the sweet spot for customers is up to US $10,000 for prepayment, and that they want flexible options for reassigning the contract when they move, and not a big buy-out at the end,” Kreamer says. “At the end of the term, customers can renew their contracts for a year at a time, or buy out the system at a fraction of the installed cost,” he adds.

While Sun Run does not install systems, it has aligned itself with two large installers, REC Solar, in San Luis Obispo, and Borrego in the San Francisco bay area and San Diego. Sun Run, which is financed by unidentified individual investors, does not reveal the number of residential systems it has contracted under PPAs, but its installers have done thousands of residential solar systems in California.

The feature of having maintenance included in the PPA is appealing to many Sun Run customers, the company indicates. “Sue Koepp-Baker, of Morgan Hill, chose the Sun Run PPA package and pays US 15 cents per kWh. Sue went with Sun Run because her son works more than 60 hours per week and doesn’t have time to deal with the solar system if something goes wrong,” says Caitlin Cieslik-Miskimen, a company spokesperson.

Another form of financing for residential solar systems that requires less or no up-front payments is leasing, like that offered by Solar City of Foster City, CA. “What we are doing is a lease, which has advantages over, but is not enormously different from a PPA,” says David Arfin, vice president of customer financing at the company. “The big difference is with a lease, there is no money down, and in most cases homeowners are saving money from day one,” he says. “We also offer an extended warranty and performance guarantee, so the host is not at risk for system underperformance,” he says.

Solar City leases typically run for 15 years, after which time homeowners can purchase the system for 20-to-30 percent of the cost of the installed system. Leases can be extended for five-year increments.

“With a PPA, the residential host agrees to pay for certain kWh produced on his or her roof, and they have a variable payment depending on what is produced and used. With our lease, there is a fixed payment every month, but they still get the benefits of whatever excess power is generated,” he explains. “It’s sort of like the difference between leasing a car by the mile or by the week,” he adds.

“There is going to be a boom — massive adoption — in the residential market, which we can already see this year,” says Arfin. “If people can go green and save money why would they not do it?”

Charles W. Thurston is a correspondent based in California.

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