Solar Leasing - Consumer Guide to making an informed choice!

Solar Leasing - Creating a new Demography

Third-party solar energy system leases now account for nearly three-quarters of California’s residential solar market, and have added $ billions to the Californian economy according to reports. Popularly known as 'ZERO DOWN', leasing or 3rd party owned models have introduced a new class of 'solar demographics' those with annual incomes in the range of $75,000 to $100,000 according to NREL. According to Forbes the Solar Leasing market is expected to grow from $1.3 billion in 2012 to $5.7 billion in 2016.

Financing a Residential Solar System

In today's market there are a multiple number of options available to finance a residential system, though solar leasing  has by far gained the most traction there are other instruments which merit evaluation:

In choosing the best financing option, it is pertinent to address the following issues: 

Understanding the nuances of Solar Leasing

Solar Leasing though eloquently captured in an acronym like ZERO DOWN, has a lot a moving parts which needs careful understanding an analysis by a customer. To make an informed decision costs and benefits will have to be broken down to the individual level for examination:

Cost of Residential Solar System:

Tax Rebates: the purchase price of the system ranges from $5-$7 per kW for a system size < MW, an average residential solar system deploys a capacity size of  4 kW, which translates to a system price of  $28,000. To compensate the Federal Govt. provides for an ITC tax rebate of 30% of the system cost, besides some states also provide for a rebate on State Income Tax and Sales Tax exemptions which help lower your system cost. To check on state and county level exemptions please visit the DSIRE database which carries explicit information on this subject.

Caveat: if a customer is to buy the system or take a loan to finance his purchase, he should have a healthy taxable income to take advantage of these incentives; any unutilized tax credit can be carried forward to the subsequent year, but this will delay the project payback if all gains are not realized in year 1.

Advantage Lease: lease funds are usually sponsored by Tax Equity investors who have the tax appetite to absorb the entire tax credit in year 1, hence they can bring down the system cost and pass the benefit onto the consumer in terms of lower lease rentals.

Performance Based Incentives:

These incentives are variable, based on system output, and can be captured by the home owner / financier in equal measure. Depending on your state incentive policy, the following programs are usually provided for:

  1. PBI (Performance Based Incentive)
  2. Net Metering
  3. RECs
  4. Property Tax Incentives

These benefits accrue on output, a common measure is kWh of output, some states have a cap on the benefits they can pay out

Operations, Maintenance, Replacement Costs

Maintenance costs for Solar Residential Energy Systems are usually marginal and range from $20-$30 per year. Inverters need to be replaced in year 10-15; replacement costs vary between $3000-$5000, inverter manufacturers usually provide for a 10 year warranty on their products.

If you are under a 3rd party financing program such as a Lease or PPA; it will be pertinent to check with the financier on whose onus will these costs incur, usually 3rd party financiers bump up the lease installment amounts to account for this  cost.

If you are financing your system through your own equity of through a bank loan, you will need to factor this upgrade in year 10-15; more specifics on this will be provided by your installer.

Future Cost of Electricity

Most lessors benchmark their lease payments on the premise that future electricity rates will rise 3%-5% annually which has been the historic norm. Annual escalators on these lease payments are factored accordingly, the risk remains if the lease payments rise faster than electricity rates.

On the other hand; if the residential solar system is financed through a bank loan or through 100% equity, this risk is avoided as your costs remain flat.

Finance Costs

3rd party Finance methods be it lease or PPA usually have a weighted average cost of capital of 12%-15%, which is factored into the lease installment and recovered from the consumer.

On the other hand the consumer depending on his credit SCORE can access funds at a lower rate of 4%-8%, in the case of Home Equity Loan the interest payment can be set of against one's tax liability (please have your CPA confirm this).

Lease terms run a tenure of 15 years, loan structures are usually 10-15 years depending on the program; so this can create a liquidity issue for some.

Payback period with 100% equity investment usually ranges from 10-12 years on the average; solar power systems on the other hand have a productive life of 25 years. Once you achieve payback in year 10 or 12, all electricity generate from your panel is virtually FREE.

On the other hand once your Solar Lease expires in year 15; you will have to re-negotiate with the same or new vendor for rates prevailing then.

Non-monetary Considerations

3rd Party financed programs usually run for a tenure of 15 years; during which time a customer may choose to move homes or sell their current home.

Most contracts stipulate that if a homeowner chooses to buy out the lease prior to the end of its term, the lessor will charge a “make-whole” payment, in addition to the fair market value (FMV) of the system. The make-whole payment captures the return on the investment that the lessors would have earned if the PV system had remained in place for the original 15-year term.

  This norm also applies if the new owner is not creditworthy and does not meet the credit requirements of the lessor.

On the other hand, if the Solar Power system is 100% equity financed or partly funded by a home equity loan (which usually do not have such restrictive covenants), the owner has more flexibility to dispose of his assets.

If you will like to learn more about Financing Options and Tools please contact the author Bijou.Lulla@yoursolarsalesman.com.

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