RESIDENTIAL SOLAR
LEASING
THOMAS J GRANT, PhD, PE
XanaduEnergy
GROWTH OF SOLAR IN THE US
SOLAR GROWTH BY STATE
REASONS FOR SOLAR GROWTH
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Dramatic decrease in the cost of PV panels
Capability for Excess electricity sold to the grid
Federal tax credits
State and local incentives
Improved performance and warranties
General acceptance by public, regulators,
utilities, and banks
• Third party financing
SOLAR PANEL COSTS
SELLING ELECTRICITY TO THE GRID
• Net Metering – meter runs forward – meter runs
backward, at retail rate.
• Market Rate Net Metering – dynamic price based
on some function of wholesale price
• 46 States have net metering ranging from retail
rate to some market rate. MO – market rate, KS –
retail rate
• Feed In Tariff – FIT – a set price for each KW-hr
which can be higher or lower than the retail
price. Mandated by state. (6 states)
FEDERAL TAX CREDIT
• Tax credit equal to 30% of residential
system installed cost. Expires in
12/31/2016
STATE INCENTIVES
• Tax credits or exemptions (MO, KS)
• Loans (MO, KS)
• Mandated FIT (not MO,KS) or Net-Metering
(MO, KS)
• Rebates (MO)
• Renewable Portfolio Standard (RPS) with
subsequent REC market (MO has RPS but no
REC market yet, KS has neither)
TYPICAL WARRANTIES
• Solar Panels –
– Defects/Workmanship – 10 yr
– Performance -20-25 years , typical loss of 0.5-1%
per year
• Inverter
– Central – 5-15 years
– Microinverter - 20 -25 years
• Batteries – 5 years
• Balance of System – 5-10 years
ACCEPTANCE
• ENERGY POLICY ACT OF 2005
SIGNED BY GEORGE W. BUSH
• Many incentives for solar to
include requiring public
utilities to offer net metering
THIRD PARTY
FINANCING
LEASING
• A lease is a contract to rent property or a specific
asset under certain terms
• Lessor is the owner, the Lessee is the renter
• Also referred to as “Third Party Financing” or
“Third Party Ownership”.
• It is usually more expensive to lease than to
purchase outright but the lessee may conserve
capital, and may allow lessee to focus manpower
and expertise on its main business.
BRIEF HISTORY OF LEASING
• Land leasing is recorded in Mesopotamia in
2000 BC
• Western leasing law derives from the Statue
of Wales in 1284
• 497 of Fortune 500 companies now lease all
their equipment
• 26 % of all new auto purchases in US are
leased
SOLAR SYSTEM PURCHASE OPTIONS
• Customer purchases the system using cash,
bank loan or other credit
• Customer leases the system and gets to use
whatever power it produces
• Customer executes a Power Purchase
Agreement (PPA) and pays for the power
produced at a set price
• Customer leases his roof or other space to
another party who sells power to the utility
RESIDENTIAL SOLAR LEASING IN US
• Started in 2007 by Sunrun, a startup finance
company led by two young Stanford business
graduates
• They needed to overcome the rebate and
interconnection processes that were based on
homeowner ownership
• They persevered and today 75% of all
residential solar is sold by leasing
RESIDENTIAL LEASING CONT’D
• Solar leasing is available in more than 16
states
• Primary limitation is regional viability of the
leases
• Only 3 states prohibit it
• Available today in limited areas of KS (KCP&L
territory by Cromwell) and MO (KCP&L and
Ameren territory, by Mo Solar Apps (nonresidential), and Greangrid (Ameren, PPA))
MAJOR SOLAR LEASING COMPANIES
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Clean Power Finance (Match.com owner)
NRG Sunlease - sub of NRG Energy
OneRoof Energy
SolarCity – largest, well financed
Sungevity – pioneered the open source web
model, all work subcontracted
• SunPower – PV mfg expanded into leases
• Sunrun – finance company w/dealer network
TYPICAL RESIDENTIAL LEASE
• A solar system is provided at little or no up
front costs to the lessee. The lessor maintains
the system and provides warranty assistance
• The lessor retains all rebates, tax credits and
depreciation
• The lessee receives the electricity and pays a
monthly lease payment that typically escalates
over the course of the lease
• Leases can run from 15 to 25 years
WHAT HAPPENS AT THE END OF THE
LEASE?
• Lease details differ but typically there are
three options for the homeowner:
1. Renew the lease or convert to PPA
2. Purchase the system at a nominal or fair
market price IAW the lease
3. Have the system removed from the roof
WHAT HAPPENS IF YOU SELL YOUR
HOUSE BEFORE THE LEASE ENDS?
• Typically the homeowner has four options:
1. Get the new homeowner to assume the
remaining lease term (most popular but new
owner must have good credit score)
2. Pay out the remaining lease and adjust the
house price accordingly
3. Have the system removed and installed on
your new home (fee)
4. Cancel the lease and have the system
removed and pay cancellation charges
HOME SALES
• Solar companies feel that having a leased solar
system on your roof should increase the value
of your home.
• Experience to date shows the opposite – it is a
negative factor in the home sale.
WHAT IF I NEED TO REPLACE THE
ROOF?
• Lease typically has a provision
that the lessor will remove and
replace the system during roof
repair for a set fee.
LEASES ARE COMPLICATED
DOCUMENTS
THERE ARE
ABUSES
CURRENT ISSUES
• High Pressure Sales Tactics
www.youtube.com/watch?featur
e=player_detailpage&v=fNdgTBSL
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www.youtube.com/watch?featur
e=player_detailpage&v=QRdm3D
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CURRENT ISSUES CONT’D
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Selling the home – buyer reaction
Value of the system is inflated
Savings or performance exaggerated
Escalation factor higher than actual electricity
escalation
• Installation problems – surprisingly SolarCity
has the most complaints compared to smaller
firms.
POTENTIAL ISSUES
• Default issues – fixture lien
• End of Lease fair market value
• Cant upgrade – you are stuck with a system
for 15-25 years
• Bankruptcy or default of companies in the
supply/installation chain
• Warranty disputes
• Lower quality components
ENOUGH OF THE
THEORY
LETS GET TO REALITY
CROMWELL SOLAR LEASE
• 6 KW system, stated value of $20,427
• 15 year lease, payments escalate $60/yr starting
at $931.48
• Assume electricity escalates at 7%/yr starting at
$0.111/kWhr
• Estimated 8,328 kWhr production first year with
.8% annual decline
• Assume ownership after 15 yrs at nominal fee
• Estimates savings of $31,855
WHAT SEEMS RIGHT
• System price of $3.40/watt is a little on the high
side but in the ball park for systems about 8
months ago.
• Annual production of 8,328 kWhr is about right
for 6 kW system in Paola, KS. NREL calculator
estimates with optimum angle/direction for Paola
is 8,415 kWhr/yr
• PV Degradation is about 0.5 – 1.0% a year. Their
number of 0.8% is in the ballpark
• Pollution prevention numbers appear correct
assuming this is mainly CO2
ISSUES
• Minor math errors
• No O&M costs are given for owner after 15 years,
especially since an invertor will surely need to be
replaced. NREL calculator suggests $126/yr
• No fair market value stated after 15 years for
ownership transfer. Literature search suggests a
few percent of original cost.
• 7% energy escalation greatly above national
average last 10 or 20 years – KEY!!!
SPREAD SHEETS
KS ELECTRICITY ANNUAL ESCALATION
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2015 EIA Prediction 1.7%
2013-2014 actual 3.1%
2002 – 2012 actual 3.59%
1992 – 2002 actual 0.3%
KCP&L(Paola, KS) requested 12.5% for 2015
KCP&L (Paola,KS) 2009 – 2014 actual 5.39%
KCP&L (Paola,KS) 2004 – 2014 actual 4.07%
WHAT HAPPENS IF ENERGY ONLY
INCREASES BY 3.5%/YR?
• Breakeven isn't until year 19
• Total savings decrease by more than 70%
• Assumption of energy escalation is key to
financial savings
HOW WELL DO THE BANKS DO?
• IRR = 8% in this case
BOTTOM LINE - PROS
– No upfront cost
– You are helping the environment
– You are insulating yourself against large (>3.5%)
electricity annual price increases
– You are part of a movement pushing utilities to
change their model
BOTTOM LINE - CONS
• Direct purchase would be more economical,
especially with zero down financing options
available
• You are betting that rates will escalate greater
than historic levels
• You will have house sale issues
• Net metering rules could/will change
• You are locked in to the same system for 25
years to achieve the stated savings