Third Party Owned Solar Growing In A Big Way

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.

graph of residential solar PV capacity, as explained in the article text

Source: U.S. Energy Information Administration, based on California Solar Initiative data

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.

Benefits

The third-party ownership model is attractive to both parties involved for a number of reasons.

The homeowner:

  • 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).

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.

eiaEditor’s Note: EarthTechling is proud to repost this article courtesy of the U.S. Energy Information Administration. Author credit goes to April Lee.

The U.S. Energy Information Administration collects, analyzes, and disseminates independent and impartial energy information to promote sound policymaking, efficient markets, and public understanding of energy and its interaction with the economy and the environment.

  • Ray Boggs

    There are a few important points regarding leases and PPAs that were not mentioned in this article. First, the solar lease and PPA companies typically price their systems much higher than what the homeowner can purchase the system for. When you consider the forfeited incentives, the much higher pricing and the 20 years worth of lease payments which many times has a 2.9% annual payment escalator, it is actually the consumer who is paying for any maintenance or repairs, many, many times over.
    Paying up to triple the amount that you would have paid for a solar system, simple because you’re getting $0 down financing on a rented system makes absolutely no sense when compared to a $0 down solar loan on a much lower priced system that allows you to keep all of the incentives and own your system.

    And good luck ever selling your home with a lease attached to it. What homebuyer will want to assume your lease payments on a used system, when they can buy and own a brand new, state of the art system for less than $3.00 a watt, installed, before incentives? Thousands of homeowners across the country, now have solar leases that are underwater. Don’t take my word for it, search the Internet and you’ll find many articles and posts concerning homeowners who are having difficulty selling because they have solar leases attached to their homes.

    • http://www.spiffysolar.com/ Thom Westergren

      “Lease” is a misnomer and the industry could use a better term. Mr. Boggs, this is not the same as leasing a car. Perhaps you just checked in with the wrong companies, or live in an area where solar is not a good opton right now. The lease price is NOT higher than purchase price. The third-party takes any rebates, renewable energy credits and tax credit, passing the savings on to the customer. So they are getting their money this way, not through a higher priced installation.

      It is important that customers run all the numbers and make sure that every thing is laid out clearly. Regional differences make the experience vastly different in every locale. Blanket statements like Mr. Bogg’s are not valid everywhere.

      If the homeowner can afford it, purchase MAY be the best deal, but it also may not be. I recommend looking for a pre-pay lease. But if finances mean that you need to stretch the payments out over time, look for a lease WITHOUT an escalator. If the lease payments are going to increase, you are dealing with the wrong company. I suggest that you move on to another option, they do not all increase over time.

      A little extra effort put into finding the right installer/financier with the right options FOR YOU, will be worth it. Remember it’s a long term commitment.

      P.S. If you get a pre-pay lease, and sell your home, the transfer will be simple as no payments are involved at all.

      • Ray Boggs

        Mr. Westergren, spoken like a well trained solar lease salesman. Pricing for leasing IS much higher than purchasing. You failed to mention that several major solar leasing companies are currently being investigated by the U.S. Treasury Department for allegedly pricing their systems above fair market value so that their investors can claim a higher tax credit. Google. It’s all over the news.

        I have in my hand a recent quote for the purchase of a solar system from a MAJOR solar leasing company. Their system’s price per watt is $4.98 before incentives. Our purchase price on the same quality 7.35kW system is $2.85 per watt or a difference of $2.13 per watt or $15,655.00 lower. And unlike the leasing companies, we post our prices on all of our websites so I’m not playing any games with the numbers.

        In the same solar leasing proposal, there is a quote for a Prepaid PPA that you speak so fondly of. The pre-paid amount in California after incentives is $22.240.00 for the same 7.35kW system. Our purchase price after incentives in California for the same 7.35kW system is $13,774.86. A difference of $8,465.14!

        That $8,465.14 will go a long, long way toward any maintenance and repairs and you’ll own your solar system for a much better return on investment instead of renting a solar system that will probably interfere with the sale of your home.

        Here’s a neat trick that every solar lease salesperson absolutely hates. When the solar lease salesperson shows up at your home, demand that he or she provides you with a document showing you, what their lease or PPA system is priced at to determine the amount of the tax credit. Not just what your lease payment or prepaid amount is.

        Also demand to be provided with the amount of the tax credit that will be applied to the system that you’re leasing from them.

        And finally, demand a document that guarantees that you will not experience any problems selling your home that are directly attributed to your solar lease or pre-paid solar lease.

        One of two things will probably happen. Your solar lease PPA salesperson will probably make a bunch of excuses as to why he or she can’t provide you with this information and may abruptly leave or you’ll be so upset when you find out the truth about how high the leasing companies price their system’s at or how large the tax credit is, that you’re forfeiting, that you’ll probably ask the solar lease salesperson to leave.

        The proof is in the pudding. A solar lease salesperson will never disclose a leased or PPA solar system’s pricing or the leasing company’s tax credit amount to you because it benefits them. A solar purchase salesperson always will, because it benefits you.

        • http://www.spiffysolar.com/ Thom Westergren

          Mr. Boggs, thank you for the service of letting customers know what to look out for. It should help them to find the right purchase or lease arrangement for themselves.

          All the numbers you quote make it apparent that you missed my point. Let me reiterate. Regional differences, customer finances (and preferences) as well as installer offerings all need to be considered.

          When I purchased my system everything was above board. All pricing was revealed, and I had the choice of purchase, pre-pay or lease with three different deposit amounts—all in the same quote. Pre-pay was far below the purchase price and included maintenance (primarily inverter replacement). The decision was a no-brainer.

          This was several years ago, and admittedly much has changed in that time, including the huge popularity of leasing. It is simply not fair to denigrate the majority segment of the industry and claim that your preference should always be preferred.

          • Ray Boggs

            Mr. Westergren, on the contrary, I believe you missed my point. We are a national dealer that has been in the solar PV business since 1997. About a decade longer than any solar lease or PPA company has existed. The equipment and pricing that I quoted and the $0 down loans that I mentioned are available in virtually every state. We maintain a comprehensive list of licensed, experienced installation contractors, again in every state, that charge in between 85 cents to $1.40 per watt, so regional differences do not apply.
            I personally review and approve better pricing on about a half dozen solar lease and PPA quotes and contracts per week. Never have I seen the amount of the 30% federal tax credit or the amount that the lease/PPA company is claiming when applying for the tax credit revealed to the consumer. Both of these numbers have a direct impact on what the consumer will pay. This is why I suggest that consumers always demand to see these numbers. After all, the consumer is the one making the 20 year’s worth of payments so they have a right to know what these numbers are. Go back and read your contact. Does it say what these numbers are? I don’t think so.

            My purpose in providing these posts is not to claim that my preference “should always be preferred” but rather to educate the public so that they can make an educated decision regarding the various pricing and financing options that are available and how those options impact the consumer’s bottom line.

            The leasing/PPA companies have tens of millions of dollars to spread their message which effectively drowns out any opposing message, even though those messages are of great benefit to the consumer. When was the last time that you read an article concerning $0 down FHA solar loans or the fact that system pricing has fallen below $3.00 per watt before incentives? No, it’s always “the high upfront cost of solar” or “a solar lease make solar more affordable” Many of the articles that are written concerning leases and PPAs are simply paid advertising for the leasing industry. It’s called propaganda, Mr. Westergren.

            Just like the tobacco companies attempted to drown out the message of lung disease, the solar/lease company’s greatest nemesis is the dealer who educates the consumer on the fact that there’s a whole other world out there when it comes to pricing and $0 down financing options.

            The bottom line is that solar leasing and PPAs are yesterday’s far more costly method of financing solar. $0 down solar loans coupled with today’s real world sub $3.00 a watt pricing is far more beneficial. The consumer can fall for the marketing tactics of the leasing/PPA companies or they can choose to educate themselves and make their own comparison. In the end, I guaranty you, the leasing/PPA companies, just like the tobacco companies, will lose.

          • http://www.spiffysolar.com/ Thom Westergren

            Well, thanks for the information. When I talk about regional differences I’m referring to SRECs, rebates and utility rates which need to be calculated into the total. I’m not simply talking about equipment and labor.

            I’ve already got my system and I’m very happy with what I got for my money. The landscape is ever changing. I hope others find your post and that it helps them.

          • http://www.spiffysolar.com/ Thom Westergren

            Perhaps the tide is turning your way? You seem to be pretty well on top of the media coverage, but here’s an article in your favor. I didn’t want you to miss it: http://realestate.aol.com/blog/2013/09/24/solar-power-home-buy-or-lease/

  • chrissutor

    Another option to solar leases tried around the UK is Free Solar PV. That’s where the solar PV system is installed, incentives go to the investor and the free energy is used by the homeowner. The lease includes a clause that any mortgagees in possession can ask for the system to be removed, so its still easy to sell and re-mortgage properties.

    http://www.allecoenergy.co.uk/Own-Your-Free-Solar.html

  • http://www.sterling-energy.com/ kristahiles

    Yes people are not aware about the prices. They have misconception
    about its price. Earlier it was high but now the cost of solar panels has gone down.

    …………………….

    http://www.sterling-energy.com/