Buy now, pay later05 / 2012, Financial & Legal Affairs | By: Jonathan Gifford
Solar leasing: The success of solar leases in the U.S., a kind of residential solar power purchase agreement, continues to impress and a range of non-conventional financial products and initiatives are delivering significant funding for PV. The securitization of PV installations is now appearing as the next development along these lines. pv magazine investigates whether this innovation represents a good deal or will end up giving PV a bad name?
It’s certainly true for most homeowners that the purchase of a PV system is a big investment. As such, and with the U.S. economy limping along, solar leasing is proving to be a popular way to get solar installations onto roofs. In fact, in October of last year, PV Solar Report published findings showing that in California, solar lease or third-party owned installations outnumbered those financed by homeowners in 2011 for the first time.
Sunrun, Sungevity and SolarCity are three of the most prominent solar lease companies and while all three are based in the San Francisco area, they have expanded their programs into other U.S. states, as solar economies have become established. Solar leasing firms essentially can install a PV system on a home or office, with little or no up-front payment. The leasing firm owns the installation and the building owner pays to lease the installation, generally at rates lower than those utilities charge for grid electricity. The rates charged by the lease provider generally increase by around 2.5 to three percent a year, as opposed to a six-percent average utility rate increase throughout the U.S. The leasing firm pays for the PV system, its installation, and upkeep and inverter replacement.
The leasing firms have additional and very lucrative sources of income besides the lease payments received from its customers. A range of tax deductions and government incentives are on offer for renewable-energy investments. The lease companies either collect the incentive outright or then on-sell things like tax credits to businesses wishing to reduce their taxable income. The tax savings delivered can represent, for the purchasing company, a bigger saving than the cost of purchasing the credit. While not securitized – bundled together and then sold as tradable financial goods – tax credits were an important financial factor in this sector. While this market has changed with the expiry of the Section 1603 Federal Government tax credit of 30 percent at the end of last year, securitization of another form is occurring in the PV sector.
In its recent “Market Size Update 2012” report, Lux Research pointed to the emergence of PV asset-backed securities as driving growth in the small installation market.
Lux Research’s Matt Feinstein explains that by spreading risk across many small roofs, in a number of geographic locations and across various equipment suppliers, the risk of poor performance of the systems underpinning the asset-backed security is minimized. Therefore securitization is better suited to the small-project market as opposed to utility-scale projects.
“We’re seeing a couple of small private projects. Wells Fargo did a broad renewable bonds project in New Jersey towards the end of last year,” says Feinstein. “But the expectation is that the large equity financing funds that the residential financiers have been raising, will be converted to securities with large banks like Citigroup or Bank of America.” Feinstein adds that the industry sentiment is that the first of these conversions will occur later this year.
The funds that Feinstein refers to have been attracting headlines for some months. In August 2011, Citigroup created a US$50 million fund with lease provider Sungevity. Sunrun reports that to date it has attracted enough capital to support the purchase of nearly US$1 billion in solar equipment.
And funding has not only been flowing from the merchant banks. Internet search engine giant Google provided US$280 million for lease provider SolarCity in June. SolarCity had previously raised US$40 million from Citigroup in February.
The residential market potential in the U.S. is certainly great. The U.S.-China Quarterly Renewable-Energy Market review, released in the northern hemisphere summer of 2011, found that of a potential market of 40 to 70 million U.S. homes – at the time of the market review’s writing, only 200,000 had solar installations. Lux Research’s Feinstein says that leasing has unlocked some of this market in the past and with securitization, this trend may accelerate.
“Leasing has been critical in the U.S., particularly in the residential market – regardless of how it is financed in the back end,” says Feinstein. “When we talk about securitization then we’re talking about the backend, changing where the money is coming from, lowering the cost of capital and making it more practical for everyone involved.”
Leasing has also been shown to be increasing the diversity of PV consumers. An NREL and U.S. Department of Energy study, published in July 2011 in the journal “Energy Policy,” found that third-party-leased solar systems appeared in neighborhoods where the average income was US$100,000 or more, as opposed to US$150,000 or more – which is the norm for resident-owned systems.
The report’s author found that as PV system prices dropped, a corresponding increase in adoption from lower-income households didn’t occur. Report author Easan Drury notes: “But a new business model – leasing – did pick up a new customer demographic.” The report was based on data from California and through applying this trend on a national basis, the report authors estimated that an additional market of 13 million people could become PV customers through solar leases. The additional benefits of a lease specified in the report – lower upfront costs, less complexity and risk, immediate savings and a requirement for less capital in the home – attracts a different set of PV customers. “Not just the people who buy Priuses (hybrid vehicles) or who are the first to buy the latest electronics,” remarks Drury.
As Drury indicates, one clear advantage of solar lease schemes for the end consumer is their ability to take the hassle out of accessing rebates and incentive programs. Additionally, the companies also control all aspects of the installation, making the whole process “hassle free.” The value of this should not be underestimated and it meets a major need of customers: convenience. However, that is not to say that solar leases are themselves always free of trouble.
Good for the consumer?
After signing a solar lease, there is the potential that a problem for the homeowner may arise. The solar leases themselves generally run for 20 years, after which time the homeowner can decide to opt out, and have the panels collected, or continue with the lease. But if the house is sold, then it may become problematic if a potential buyer doesn’t want to take over the solar lease. Sunrun’s Susan Wise says: “Studies on PV installations have shown that solar increases a home’s value.” She adds that it is relatively uncomplicated for a solar power service (or 3rd-party-owned solar) to be transferred with the sale of a property.” Under a solar lease, the company, such as Sunrun, is also responsible for the maintenance and upkeep of the solar array. Solarpraxis Project Engineer Rajkumar Subbiah says that maintenance may not be such a significant factor. “As we tell our clients, the beauty of PV is that there are no moving parts, so the maintenance factor is minimal.” However, Subbiah adds that ensuring inverter performance and its replacement after 10 to 15 years will remain an unavoidable cost for the leasing company.
The process of securitization – which may increasingly be the source of funding for solar leases in the future – itself has had a mottled history, especially in terms of mortgage-backed securities in the U.S. These have been widely blamed for the predatory lending practices that were a key-contributing factor behind the recent global financial crisis.
This notwithstanding, Feinstein says that the securitization of consumer credit, car loans and mortgages, is something financiers are familiar with. Their willingness to apply the model to PV displays a certain amount of confidence in the technology and its bankability. “When things move into securitization, it’s just a model that financiers are used to and they seem comfortable with it and excited about it, for now.”
Spreading the message
By attracting the much-needed finance and introducing PV to a whole new set of customers, solar leases and the funding behind them is helping to spread solar’s message and demonstrating its effectiveness and reliability to any potential doubters.
On this front, innovative new businesses have been acting as PV evangelists. Some of these new companies are based in Silicon Valley and are applying innovative “dot com” business models and marketing strategies. As PV installations have become more common on roofs throughout states like California, pro-PV “infographics” have begun appearing more commonly in Twitter feeds and being shared on Facebook.
The companies behind the campaigns are employing “crowdfunded” and “groupon” business models. One Block Off The Grid (1BOG) applies the groupon model to PV, which has proven popular for a range of products and is accessed and organized online. Similarly to how the Groupon website allows users to harness group purchasing discounts for things like airline travel and white goods, 1BOG allows consumers to pool their purchasing power online and buy solar panels in bulk. By doing so, significantly discounted rates from manufacturers and wholesalers can be delivered.
1BOG, through its website, also assists consumers to avail themselves of the various state and federal incentives – as, when and where they are available. Users can simply check out whether their state has a Groupon deal going and when enough people have signed up, a discounted PV installation comes their way. Not to be left out of the potential profits in solar leasing, 1BOG has also made leases available. 1BOG also recently produced an infographic that illustrated the effect these incentives can have on an installation’s affordability and payback period. The price of an identical PV installation can fluctuate wildly (see left).
“Solar for renters”
Another development from the dot com sphere to make an impact in PV is what’s become known as “crowdfunding.” Solar Mosaic introduced a crowdfunding model to the PV space in 2010. Crowdfunding is an online phenomenon that has changed how a range of projects get funded, like new board or card games, films and art projects. It allows many “micro-investors” to contribute to a project and the biggest U.S. crowdfunding website, called Kickstarer received pledges towards projects worth close to US$100 million in 2011. Projects only receive the funds if the project attracts sufficient support, so not all of these pledges had to be delivered. But with a success rate of 46 percent last year, the potential of crowdfunding to fund major projects is impressive.
Solar Mosaic has translated the crowdfunding model to PV and now claims to provide an opportunity to those who don’t have appropriate roof space to invest in PV. The San Francisco Chronicle newspaper labeled the concept “solar for renters”. Similar to the solar garden or community solar projects, Solar Mosaic allows individuals to buy into solar installations on public or community owned roofs. They draw on the metaphor of a mosaic, with individuals investing US$100 to purchase a ‘tile,’ representing a piece or section of a PV installation.
Once the installation has paid for itself, through savings on the building owner’s utility bills, the capital is reinvested in the next project and from then on the savings on utility bills flow through to the NGO or community group that owns the building. One of Solar Mosaic’s first completed projects was a 28.8 kW installation, at the Asian Resource Center building in Oakland, California. As can be seen with the 1BOG and Solar Mosaic models, accessing state-based incentives for PV installations play an important role in making many of these innovative financing models work. Non-profit GRID Alternatives has turned this into an art. In what is possibly the first PV-based charity model applied to the U.S. market, GRID Alternatives accesses a range of PV financial incentives which, together with private donations, provides a residential PV installation at low to no cost to the homeowner.
Some of the incentives are targeted at low-income households and by accessing them, along with volunteer labor and some panels donated by manufacturers such as Yingli, GRID Alternatives racked up nearly 1,000 installation in 2011. While that totals only 2.5 MW of capacity, it truly has been a community effort. GRID Alternatives works with households who qualify for an installation to directly get involved in the installation process in some way. “Even if that just means making coffee for the guys on the roof,” explains co-founder Erica Mackie.
GRID Alternatives’ work in California relies heavily on the Californian Public Utilities Corporations’ low-income solar incentive scheme, but Mackie says that it has plans to expand interstate, starting in Colorado with a series of installations starting in September or October this year. GRID Alternatives also plays a role in providing experience in working with PV through its job training partnerships.
In its “Market Size Update” report, Lux Research forecasts newly-added U.S. installed PV capacity in 2012 to total 1.43 GW, only a slight increase on 2011. But in the absence of the 1603 incentive, some may consider this not bad going. What is clear is that the residential market will continue to play an important role and consequently, a range of innovative financing models will be required.
These models are appearing and pointing to the PV market becoming truly mature. The irony of this occurring while much of the supply side of the PV industry is in crisis is not lost on Lux Research analyst Feinstein: “In the industry as a whole, you started to see suppliers really start to crash in 2011 and now you’re seeing the financing really starting to open up. It’s horrible timing on the part of the industry. It’s kind of a comedic tragedy and we’ll see who will survive.”