solar lease | paulamspv

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In January, SunPower announced a $220-million loan from Bank of America Merrill Lynch to support expansion of its solar lease program. In December, Bank of America Merrill Lynch was the lead, and one of six lenders, involved in increasing SolarCity’s credit facility to $200-million.

Residential solar leases are increasingly looking like a trend and not a fad. Why? This model enables homeowners to install PV systems without the high upfront cost of installation thus emulating the traditional utility model of renting electricity. For solar businesses committed to this particular model the initial hardware investment should be more than offset by the eventual high margins. For investors, there are those eventual high margins to look forward to ensuring (maybe) either a profitable exit or repayment at a profit.

Though this model looks as if it is a winner for both parties (lessor and lessee) it is too early to make a judgment in this regard. In the future, lessees may not appreciate the escalation charge that is a part of all the lease structure. Also, in the future the difference between financing a PV system and leasing a PV system may make cost of leasing (as time goes on) seem less and less like a good deal.

For businesses engaged in the solar lease model, it is too early to assess the costs of unimaginable outcomes such as another US housing crash – foreclosures and abandoned homes and solar leases, or, continued strong growth in the housing market that encourages homeowners to trade up (an owned PV system may be an asset, a leased one may not be an asset). Legislated and thus enforced standardization of escalation charges (among other things) could take a hunk out of margins. New connection charges from utilities could annoy lessees. Direct competition from utilities with their own lease models could well make this model less attractive (hint, partner with local utilities now before they figure out how to capitalize on this potential revenue stream).

Finally, remember that everything changes – everything – and sometimes the changes are swift. The example in this regard is the feed in tariff model in Europe – back in the day (and this day is relatively recent) practically everyone thought that this was the incentive model of the future and investors believed FiT systems provided a safe and reliable investment. Now every investment in a FiT installation is one retroactive change away from going bust.

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Are utilities missing an opportunity? No doubt, the landscape of how electricity is sourced is shifting – and it’s about time. For decades electricity customers in industrialized nations have focused on renting electricity from the local utility. With stronger growth in residential and commercial PV deployment – than was previously envisioned – and with PV systems sized to serve a customer’s complete electricity needs, as well as the (still remote) possibility that storage will allow energy consumers to truly be independent of the grid, utilities are concerned about losing a reliable monthly revenue stream. Though there has certainly been decades of time to plan for a paradigm shift in utility business models, it is not too late for utilities to get ahead of the curve and build the distributed generation model of the future. Instead of installing PV in remote areas miles away from the customer base and requiring expensive transmission builds and upgrades, why not lease customer rooftops? Put another way, why not partner with local neighborhoods and install the energy generating asset where it will do the most good. It’s not that farfetched to envision a future where utilities partner with their residential and commercial customers to harness customer owned PV and sell the true commodity – electricity. This model, which is essentially a version of the community solar idea, is common in the developing world where connection to the grid is not an option. In off grid communities values such as cooperation and conservation are part of daily life and not considered sacrifices.

Utilities should be encouraged to get ahead of the curve in this regard and test the viability of this model by choosing test neighborhoods, installing PV systems on cooperating customer roofs, arriving at a reasonable lease rate for the customer and then taking advantage of the fact that the PV generated electricity once fed into the grid is available to everyone in the utility’s territory. Result: utility ownership of a long term, DG, low maintenance energy generating asset, a closer relationship with electricity customers as well as participation in change – much better than playing catch up as change rushes by.

Ideally, this would take the solar lease model one step further, that is, involving utilities in changes that may happen with or without their involvement. As long as the agreement between the utility concerning the monthly lease/rent is fair to both parties, and the costs relate directly to the true costs of managing a photovoltaic installation and do not have an arbitrary escalation cost built into the contract this is, as the business cliché goes, a win-win. In Japan, Panasonic and energy management firm EPCO are launching a business at the end of January to sell aggregated (PV generated) electricity from residential roofs in advance of the potential liberalization of that country’s retail electricity market in 2016. It is too early to announce a successful result to this announcement, but it points to a forward direction for utilities, their customers and stakeholders everywhere – after all, these often disparate groups are partners whether they like it or not.

Notes from the solar underground: Residential Solar Leases

Notes from the Solar Underground: Utilities should quicken business model changes that include distributed generation PV