Catching Up on Solar Leasing

by JT McGee

solar leasing, solar panel leasesI wrote about the emerging business of solar leasing back in June, noting that long-term borrowing costs, as well as favorable subsidies made solar leasing an attractive business model.

Solar power is subsidized heavily by the Chinese and American governments. The Chinese subsidize the manufacture of solar panels. The US government, through the tax code, subsidizes the purchase and installation of new panels on residential and commercial property.

A New Perspective

BusinessWeek ran a story about the booming solar leasing business last week. I’m glad to see this story in the news because it is quietly becoming a major industry. Solar leasing and installation could very well become a major employer in the United States as solar panels become less expensive over time and interest rates ride record lows.

BusinessWeek published a chart of solar panel costs per watt over the 2011-2012 timeframe. In one year, prices fell some 51% in 2011 to 88 cents per watt. Here’s a chart of falling solar prices:

In my original article I referenced a research report that charted the expected payoff of solar panels vs. coal power plants. The chart below shows the cost per watt for each source of energy over time. At $1.25 per watt, solar would be less expensive than coal power from start to finish.

Solar panels are more efficient than coal

Today, panels are only 88 cents per watt, which means that, pending installation is less than 37 cents per watt, solar panels are now more economically efficient than coal power plants from day 1 to day 1 million.

Economic Viability

Solar power still cannot stand on its own two feet. The Chinese government subsidizes tremendously the manufacturing of solar panels. The US government offers 30% rebates for commercial solar investment, and 30% (nonrefundable) tax credits to residential buyers.

As far as the $.88 cents per watt cost, that’s a function of an over-supplied market and Chinese production subsidies. The purchase price for residential users and commercial owners is even further reduced by a lower tax burden.

Falling Prices Forever

Given that solar panel prices fell by 51% in a single year, one has to wonder how low prices might go. We’re reaching a point of at least temporary market efficiency where financed solar panels are less expensive than traditional utility bills. Further improvements in technology and economies of scale should easily enable lower per-watt prices. First Solar originally planned to drive prices to 64 cents per watt by 2014. The company now says it will hit 65 cents per watt by the end of 2012, and push prices as low as 51-52 cents per watt by 2014.

The BusinessWeek article cited above expects 2.4% of all American homes to have solar panels by 2020, up from less than .1% of homes in 2012.

There exist some 125 million homes. The potential for installation business is potentially far greater than anticipated. Given the number of venture-backed firms with ample cash, one would expect the industry to lobby for fewer building codes and regulatory burdens, which add greatly to installation costs. Building codes written many years ago simply haven’t kept pace with solar leasing and installation. It is very easy to ignore regulatory complications on a product that affects less than 1 out of every 1000 homeowners. But, luckily for the industry, 24 out of 1000 homeowners are significantly louder and more difficult to ignore.

Roughly 3 million installations at $5,000 a pop (I’m just picking numbers out of the sky as all-in installation prices vary greatly) comes to $1.5 billion in installation revenues, not to mention the long-run utilities savings from solar panel buyers.

Consumers Benefit

So, while the solar industry isn’t booming from low prices (solar manufacturers are actually losing their shirts to subsidized foreign production and creative destruction) consumers and installers are winning out in a big way. The growth projection by BusinessWeek implies that in the next 8 years at least twenty-four times as many solar panels will be installed on American homes as were installed in every single year leading to 2012.

That’s a pretty big deal. This is going to be a huge industry. Job seekers might want to start thinking about moving west in search of the riches to be made in the new solar rush. It will be in the west, where the sun shines longer and the tax advantages are bigger (California!) that this industry really blossoms. PayScale.com shows total compensation (salary plus bonuses) for solar panel installers at $25-50,000 per year. Given the poor labor environment for residential construction and negligible barriers of entry to employment, those wages are fairly attractive.

The boom is on! Solar leasing and installation are certain to be a major growth story in an otherwise uneventful economy. Enjoy the scenery for now. The early adopter pays too much for new technology. It is quite possible that solar panels will sell at another 40% discount by 2014, and cash flow yields will thus be 66% larger for those with patience. Keep this idea on the backburner – by 2014 the economics of solar panels will provide for huge energy bill savings for the marginal cost consumer.

{ 7 comments… read them below or add one }

Ashley @ Money Talks February 19, 2012 at 18:05

I seriously looked into solar leasing last month. Solar City was offering $1,000 of free electricity if you signed up in Jan. But we were disgusted with what we found, which was that you had to sign a 15 year lease! Which means we can’t sell the house unless the buyer wants to take over the lease for the solar panels. If we sell to someone and they don’t take over the solar lease then we are still on the hook for it even if we don’t live there. Insanity. I thought it would be a one year lease, maybe 5 years if it was a long time. 15 years! No thanks! One of the benefits of leasing is that I’m not stuck with old technology but with a 15 year lease they have no incentive to come update my panels if/ when better ones come out.

Plus the lease included a 3% increase in price every year. So you don’t even get the benefit of stable prices. I get that traditional electricity is going to go up every year, but solar… is the sun charging more too?

So anyways, we are passing for now… but very interested in going solar when the time is right.

Reply

JT McGee February 19, 2012 at 20:33

Wow, that sucks, but I guess they have to protect their downside risk in the falling value of solar leases.

In one year, those panels will be both used and outdated, so if you cancel Solar City has to pay for the one-time installation/removal costs. The 3% increase each year is kind of a slap in the face. I thought the idea was that you could essentially lock in your electricity prices for several years, not lock in a guaranteed price increase!

I never really thought leasing to be that good of a deal relative to purchasing panels. If you can finance solar panels, you might as well buy them outright. If you lease, you’re essentially saying you care more about the environment than money (which I don’t, but I guess some do.) Now that I hear the actual terms…leasing is a definite no-go, no matter how eco-happy panels make you feel. Put one more checkmark in the buy column and one less in the leasing column.

Thanks for your comment. Very valuable information to be considered here.

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still a good deal August 3, 2012 at 21:35

Who wouldn’t want to get cheaper energy along with a house purchase? You should be able to *increase* the sales price.

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Darwin's Money February 20, 2012 at 22:34

There seem to be a lot of risks/flaws in the model for me still. Since these units are still new and untested, there’s no saying what kind of hassles, repairs are going to be needed; I’m sure the contracts are piggishly in favor of the installers, and most importantly… Moore’s law (or equivalent). Like you just pointed out, within a year, we’ll have even more efficient cells out there and anyone that signed the prior year at those terms would look like a chump. So, I guess it comes down to some sort of linear algebra looking at where the optimal point is to finally pull the trigger – i.e. keep paying more for electricity now, but wait long enough and lock yourself into an incredibly efficient deal. I would venture, based on your locale, that point is probably when a lot of other people start doing it. The companies will have scale which will further reduce costs and they’ll be offering incentives to convert entire areas at a time, etc.

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AverageJoe February 21, 2012 at 15:28

I’ll admit–I’d never heard of solar panel leasing until this post. Then I thought it was cool….until I read Ashley’s comments above. Still, the install numbers you project are huge. It’ll be interesting to watch. I’m going to make popcorn right now….

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Robert @ The College Investor February 21, 2012 at 20:43

The model sounds appealing in that most don’t make you pay out of pocket, and you get a locked in rate. However, like Ashley mentioned, there are so many different models for solar leasing, you have to read the fine print.

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freedom February 29, 2012 at 09:49

Even here in the UK where we don’t exactly get a surplus of sun there is a move to get more of us to take up solar power. For those who have the means to use solar it’s definitely worth considering, both from a financial, and environmental point of view.

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