Thursday, May 23, 2013

Leasing Solar Panels – No Free Lunch

It is not possible to lease solar photovoltaic panels in all locations. The solar leasing companies are profit making enterprises that excel at managing, government guarantee loans, rebates, incentives, tax credits and solar renewable energy certificates, SRECs, to maximize their profit while providing discounted electricity from renewable sources to homeowners with favorably oriented roofs in locations with adequate rebates. Due to a bit of luck, the dollar value of the solar power I generate from my solar panels is worth less than half the money I have sold my SRECs for over the past three plus years. However, there is no guarantee that my SRECs will be worth anything next year. However, many of the solar panel leasing companies have enough scale to negotiate multiple year deals with utilities to buy their SRECs reducing their financial risk and ensuring a better deal for them than I can get on my own.

Incentives and solar rebates have been reduced in many locations, but still exist. Some of the rebates are state wide, others are county incentives, there are rebates based on household income and many that are based on sales of SRECs which in turn are based on the power produced by the solar panels. A SREC is a credit for each megawatt hours of electricity that is produced, but used elsewhere. SRECs have value only because some states have solar set asides from their Renewable Portfolio Standards, RPS, which require that a portion of energy produced by a utility be produced by renewable power.

 You must live in a county or state where there are rebates and other incentive still available to make creative options like leasing solar panels possible. Even with the current lower cost of solar panels, without any rebates or incentives, the return on investment before depreciation for solar panels is about 6%. The return on investment after depreciation is about 2.5%. This return would not be acceptable to any investor and could not repay a loan taken out to build a solar photovoltaic array on a roof.

In this part of Virginia I buy my electricity from an electric cooperative that sells me power for $0.114 a kilowatt hour (this is slightly lower than it was five years ago), has no currently available incentives and there is no viable way to sell SRECs. Thus, there are no opportunities to lease solar panels at this time. Leasing arrangements depend on the solar leasing company obtaining enough incentives, rebates and other government incentives to produce a high double digit return for the leasing company that needs to borrow the money (with federal loan guarantees), pay their staffs of sales people, financial types that manage the lease contracts, others who navigate and manage the incentive market and profit for the subcontractors who install the solar panels.

In the typical leasing arrangement, the homeowner agrees to pay the leasing company a predetermined price for the electricity the system produces; the rate is pegged to be at least 10% lower than prevailing electricity prices in that area. Customers buy any additional power needed from the local utility at the going rate, but are locked into long-term electrical contacts from the leasing company which is in essence an unregulated, government subsidized profit making utility.

Lease arrangements are a rapidly growing part of the solar market, but the financial benefits to the homeowner are often limited. In states like California where the electricity prices increase steeply with increased usage, leased solar panels could keep the rest of the usage in a lower tier and increase the return. Leasing arrangements enable homeowners and businesses to get a reduction in electricity and the psychological benefit of having solar power without paying the full cost of the still expensive systems. The problems with leasing are two fold. The first the return to the leasing company is much higher than to the individual homeowner and practically all the return to the leasing company is based on incentives that are ultimately paid for by the taxpayer and electric rate payer. The contract with the leasing companies is written (by the leasing company’s lawyers) in the leasing company’s favor. Typically, all the obligations are on the homeowner with limited remedies.

The risks: electric rates may fall due to lower cost natural gas or remain flat and the contracts tie the homeowner into a set schedule of payments that typically escalate over the life of the lease (usually 15 years which is the life not of the solar panels, but of the SRECs). Solar photovoltaic panel costs may continue to fall and the value of subsidies may increase down the road (which happened with the Washington DC SREC market increasing my return). Typically at the end of 15 years the homeowner has the option to have the panels removed, buy the panels (which usually only have a 25 year life) or renew the contract. It is very possible that a long-term lease is more expensive than buying solar panels outright in future years, or it may be a bargain because the incentives for solar panels will not be available in the future and the price will not be low enough.

If you choose to jump on a solar leasing deal, get at least three bids, check the installer’s references compare the quality of the solar panels installed and read all the contracts carefully. You need to understand your rights and obligations under the lease who is responsible for insurance, roof leaks, repairs, snow damage or lightning strikes as well as the economic risks of the agreement to make a sound choice. Just because the company is providing solar panels does not make them altruistic or your friend.

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