Solar Leases: Adding a Touch of Blue to Every Roof

by JT McGee

Solar leases let you get solar power cheaper than power from utility companiesWhat do you get when you mix tax incentives with record low borrowing costs? Solar panels.

Thanks to new tax credits that were part of the 2009 economic stimulus package, and long-term borrowing costs that might as well be zero, companies are scrambling to put solar panels on every roof. This new business model is solar panel leases.

The company does everything for you. They buy the panels, install them on your roof, and you can decide to either pay the solar panels off over time, or just lease them from the company. The financing plan works like any other; you make routine payments for 10-15 years and then the solar panels are yours for the rest of their life.

The lease plan, however, is more popular. With a solar lease, you agree to pay the company for the energy the solar panels create at a rate that is guaranteed to always be less than the cost of your local power company.

This has to be the best business model I’ve ever seen in my life because it’s pure finance. Solar company X goes to the debt market to borrow at near-zero and then makes near-zero plus a couple points annually to lease the solar panels to you. Cha-ching! Secured debt (the lease is secured by the solar panels) with net interest margin just as good as any other consumer loan.

Man, this business model is so simple it’s downright sexy.

Solar Panel Tax Credits

There are plenty of solar panel tax credits available from Federal and State governments. At the federal level, solar panels placed on a residential property earn a 30% tax credit with zero upper bound until December 31, 2016. The tax credit is not refundable, however, from what I understand it can be carried over for the length of the program, allowing you to pay $0 in taxes thanks to your solar investment for the next five years.

The tax credits are available to businesses, too. But businesses have it even better. If a business owner installs solar panels on their commercial property, he or she doesn’t have to wait to collect the tax credit over a period of years. Through the 1603 grant program, business owners can receive, in the form of a check from the US Treasury, an amount equal to 30% of the cost of solar panels and installation costs starting from day 1. Cash, not tax savings! Oh, and don’t forget the immediate bonus depreciation. ;)

As for state tax credits and incentives, they vary. In California, a combination of federal and local incentives allow homeowners to find payoff dates of seven to eight years–a cap rate of 12.5% to 14% per year—with a combination of solar panels and solar water heater systems. California residents are all about solar, and for good reason! Where else can you find cash flows of 12-14% annually for the next 25 years with a risk-profile as low as direct solar investment?

Solar Lease Companies are on Fire!

There are two major solar lease companies in the United States, Solar City and Sun Run, two venture capital backed firms that install solar panels on homes for long-term lease.

Even Google is hopping into the game. The company is putting up $280 million for Solar City, which will use the funds to install new solar panels on residential property. Google will receive a cut of the monthly lease payments, which provide for returns far higher than the borrowing costs Google encountered in its first ever debt offering.

According to Fast Company magazine, Sun Run earned a small investment from General Electric to lease solar panels to homeowners. The company has raised a total of $600 million in financing, and $85 million in venture capital.

Borrego, a company that installs solar panels on business and government buildings, recently received a $100 million investment from US Bank and East West Bancorp to spread its leasing program.

Bank of America will finance part of a new $2.6 billion program to create solar panel power stations in 28 states. The Department of Energy will securitize $1.4 billion of the program.

This trend isn’t North America-centric. The Asian Development Bank says Asian countries should invest as much as $10 billion in solar. The bank will put up as much as $2.25 billion to finance new developments, starting first with Pakistan.

All of these articles were written in the past two weeks. Two. Weeks. It’s already booming.

Seeing Blue on Every Roof

The race to put solar panels on every roof couldn’t be happening any faster than it is right now. With all the right incentives in place, solar panels are sure to sweep the country.

But this isn’t just a one-year, one and done operation; the tax credits for residential homes don’t end until 2016, and solar panels are only getting cheaper alongside the cost of debt service. By 2017, the Department of Energy believes improvement in solar panel technology and economies of scale to push solar panels down to a price of $1 per watt.

The solar panel industry thinks they can meet that target. The complete cost of photovalatic solar panels comes to $3 per watt in 2011; $2 is already the new target. First Solar (FSLR) thinks it can drive prices as low as $.64 per watt by 2014, fast enough to match efficiency with excellent tax incentives.

Let’s do some simple math:

  • We’ll guesstimate that at $.64 per watt, installation costs would bring a per watt price of $1-$1.50.
  • The price of installation is really inexpensive; labor is cheap. The real cost of solar installation is in the cost of permitting, which can add as much as $.50 per watt in some regions.

I don’t do science, which is why I like finance–we round and say, “hey, yeah, looks good!” So, I’m enlisting the help of Ken Zweibel of George Washington University, who created the following chart:

Solar panels are more efficient than coal

This chart compares the long-run cost of operating solar panels compared to coal-powered power plants, the cheapest type of electricity generation. According to Zweibel, solar panels degrade at a much slower pace than advertised, at a rate of .5% per year. He suggests solar panels could have a life longer than 50 years, even 100 years. Of course, new and better technology will be out then, but we’ll ignore it. Let’s focus on the single investment we have before us.

From this chart we realize:

  • Solar panels at $3 per watt don’t come close to beating coal, at least not until both systems are running for 85 years. Too long. (Imagine a giant “we are here” sign on the chart’s $3 line.)
  • Solar panels that cost $2 per watt beat coal at roughly 45 years. Still too darn long.
  • Solar panels are the kingmaker at $1.25 per watt. At this price, the cost of solar power from construction to any point in the future is always cheaper than coal!

Solar is in a position to win it. Combine subsidies with a general trend toward sustainability and you have a heck of a business model in the solar lease business.

On Public Subsidies and Direct Investment

From a top-down view, I have a really hard time believing that this will do anything to solve our energy dependence problems. Our real addiction to energy is in the form of oil, and oil is a much better product for transporting people, goods, and doing so at a reasonable speed. Electric engines just don’t have the “oomph” yet.

Whether I like it or not, solar is being subsidized at a rate that makes it efficient right now, and it should soon be 100% efficient in the coming years. I’m not entirely sure that this country’s best investment is in solar energy–the Treasury really doesn’t get all that much out of millions of new solar panels, but hey, I’m not a dictator. The best I can do is find an avenue to make money with direct subsidies, good or bad, and in the future I’ll do just that.

Photo by: Spanginator

{ 6 comments… read them below or add one }

Krantcents June 29, 2011 at 11:18

Although I am interested, I am discouraged by the break even point. There is a southern California company advertising on the radio that if your electric bill must be $100 per month to qualify. Fortunately, my bill is smaller so I guess I will have to wait.

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JT July 4, 2011 at 22:34

Hmm, Krant, do you think you might break even if you bought rather than leased? Seems to me that you would?

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Ashley @ Money Talks June 29, 2011 at 16:19

They are building a First Solar plant right by my house. I hope they do well because they are bringing a lot of jobs right to my immediate area. I heard they have a type of solar panel that is farily new and very thin and lightweight. I don’t know if that’s good or bad. I’m hoping good.

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JT July 4, 2011 at 22:33

First Solar is driving costs the lowest, so that’s definitely good. The also just earned a huge contract and loan from the government. Ahh, sweet socialist dollars!

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Car Negotiation Coach July 2, 2011 at 18:11

I can’t wait until there are tax breaks in my area (Philly). Of course, I’ll need to convince my home owner’s association to let me do it and I don’t think my roof is facing the right direction, but still I love the idea.

I think another area that will be hot for investors are solar installing companies. And the nice thing about those that removes some risk is they are less likely to be tied to a specific solar panel manufacturer.

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JT July 4, 2011 at 22:33

Hmm, I didn’t even think about roofs facing the right direction–needless to say I’m not in an area where solar panels are really popular right now.

In regards to solar installing companies, I agree. Solar panel producers aren’t going to see much of this upside since solar manufacturing is subsidized by China, and I won’t own companies in China. Plus, Europe isn’t demanding nearly as many solar panels as they once were. Oversupply in the intermediate term plus foreign subsidies = no go on solar companies. Another industry, though, maybe.

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