One of the biggest developments in the U.S. residential solar photovoltaic (PV) market over the past few years has been the significant growth of residential solar PV systems not owned by homeowners. These are often referred to as third-party-owned systems.
Data from the California Solar Initiative (CSI) program, the largest and longest-running residential and commercial solar incentive program in the United States, show that third-party-owned residential installations grew rapidly as the solar industry created and refined the third-party ownership model. In 2012 and 2013, more than two-thirds of residential installations in the CSI program were third-party owned. Industry reports have indicated that the growth in popularity of third-party-owned residential solar PV systems is occurring in other states as well.
Note: Installation dates assumed to coincide roughly with the date projects submitted an incentive claim request. Nameplate capacity given in direct current (DC) megawatts. (See end of this article for a brief discussion of DC vs. alternating current.)
How the third-party ownership model works
Homeowners can contract with a company—sometimes called a solar leasing company, solar finance company, or third-party ownership company—to have a solar PV system installed on their rooftop (or elsewhere on their property). Depending on the agreement, the solar leasing company will often be responsible for financing, permitting, designing, installing, and maintaining the PV system. The contract between the homeowner and solar leasing company is typically structured in one of two ways:
- PPA option: the homeowner buys all of the electricity produced by the solar PV system at an agreed-upon price (or set of prices) through what is known as a power purchase agreement (PPA). The PPA prices are usually lower than or competitive with the homeowner’s local electric utility rate. PPAs are usually longer-term contracts with terms of up to 20 years.
- Lease option: the homeowner makes pre-established monthly payments to the solar leasing company. The payment amount is not tied to the PV system’s actual output, but it is calculated to be competitive with the homeowner’s existing electric bill.
Both of these contract options will usually offer a buyout option at the end of the contract term or during certain points over the contract period that would allow the homeowner to purchase and own the PV system.
The solar leasing company, as the PV system’s owner, will generally receive all of the federal, state, and local incentives for which the PV system is eligible. These include additional commercial incentives, such as the federal Modified Accelerated Cost Recovery System (MACRS) incentive for solar equipment, which the PV system would not otherwise be eligible for if the residential homeowner owned the system. The solar leasing company will also usually own the renewable energy certificates (RECs) generated by the PV system, where such incentives are available.
The third-party ownership model is attractive to both parties involved for a number of reasons.
- Can install a PV system without paying large upfront costs or expending time and effort to knowledgeably purchase and arrange installation of the system.
- Will not have to operate or maintain the PV system if these responsibilities are included in the service agreement.
- Can lock in long-term costs for electricity, which could be a major benefit if the homeowner expects electricity prices to rise in the future.
The solar leasing company:
- Secures a guaranteed buyer for all of the electricity produced from the PV system at agreed-upon prices that allows the company to ensure a sufficient return on its investment.
- Can realize economies of scale not achievable by individual system owners, such as lower financing, operational, and PV system costs.
Challenges and limitations
- The homeowner may pay for the convenience of having someone else build and maintain the system by having to share some of the available incentives with the solar leasing company, although this may be offset by the convenience of the arrangement and the potential reduced cost structure offered by the solar leasing company.
- The third-party ownership option is not consistently available throughout the country. According to theDatabase of State Incentives for Renewables & Efficiency (DSIRE), third-party solar PV PPAs are currently allowed or in use in all or portions of at least 22 states and the District of Columbia.
The growing volume of distributed generation, aided in part by the rapid growth of third-party-owned solar PV in some states, is challenging the role that electric utilities have historically played as the sole provider of electricity to customers. This new development has led to debate around what the appropriate level of compensation should be for distributed solar generation fed to the grid and what distributed generation customers ought to pay to utilities for non-electricity services, such as grid maintenance, as well as for electricity when their distributed generation system is not producing power (e.g., when the sun isn’t shining).
A 2012 report by the National Renewable Energy Laboratory (NREL) explored the third-party ownership model, along with other residential solar PV financing options, in more depth.