California embracing third-party residential PV ownership

According to a new report by the U.S. Energy Information Administration, in 2012 and 2013, third-parties owned more than two-thirds of residential installations in the CSI program.

The trend has accelerated due to the solar industry’s efforts to refine and market the third-party ownership model among residential installations, according to the report, which cites data from the California Solar Initiative (CSI). Third-party ownership in residential PV systems is growing in other states as well.

How the third-party ownership model works

The model allows homeowners to contract with third-party ownership companies, solar leasing companies or solar finance companies to have PV systems installed on their rooftops. The companis are usually responsible for financing, permitting, designing, installing and maintaining the system.

Contracts between homeowners and solar leasing companies are 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 through 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.

The two contract models usually offer a buyout option allowing homeowners to eventually purchase and own their PV systems.

The solar leasing company, as the PV system’s owner, will usually 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.

Advantages for homeowners and solar companies

For the homeowner, the model provides the opportunity to install a PV system without paying large upfront costs or investing time and effort to knowledgeably purchase and install the system. In addition, the homeowner won’t have to operate or maintain the PV system if these responsibilities are included in the service agreement. Lastly, residents can lock in long-term costs for electricity, which could be a major benefit if electricity prices rise in the future.

The solar leasing company wins by securing a guaranteed buyer for all of the electricity produced from the PV system at agreed-upon prices that ensures a sufficient return on its investment. It can also realize economies of scale not achievable by individual system owners, such as lower financing, operational and PV system costs.

Third-party ownership models, however, are not available throughout the country. According to the Database of State Incentives for Renewables & Efficiency, third-party solar PV PPAs are currently allowed or in use in at least 22 states and Washington, D.C.

A challenge for utilities

"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," the report adds.

As a result, lawmakers and regulators are examining things like the appropriate level of compensation for distributed solar generation fed to the grid and what distributed generation customers should 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.