Solar Leases Are Here to Stay, but Where To From Here?

A very informative and thorough study from the National Renewable Energy Laboratory (NREL) called “The Transformation of Southern California’s Residential Photovoltaics Market through Third-Party Ownership” has rightfully received wide readership for its insight into the trends of residential PV markets moving towards third-party ownership models – particularly, as the study’s evidence demonstrates, in southern California. A key finding of the study is that third-party ownership models, namely solar leases, are increasing their overall residential PV market share in SoCal, but not to the detriment of the more traditional customer-owned model. In the latter model, the homeowner finances a system out-of-pocket, usually with the assistance of government rebates and tax credits. The study found that rather than stealing customers away from installers that offer customer-owned installations, solar leasing is in fact expanding PV installations to an entirely new demographic.

The most straight-forward distinguishing factor between the new demographic and the customer-owned one, not surprisingly, is household income. The solar lease industry has grabbed a large share of homeowners with a household annual income between $100k-$150k. Obviously given current PV prices, as the study demonstrated, $150k/year is a stark cutoff for those that can reasonably afford the upfront costs of going solar, which, with incentives, runs over $15,000. However, this finding prompts a few other questions: 1) what about the $150k/year mark, aside from current PV pricing, separates those below so starkly from those above?; and 2) what other technological advancements could expand the residential PV market into this or other (possibly unforeseen) demographics?

The rest of this post will address the first question. Obviously current residential PV prices are the main determinant in what income level is generally sufficient to finance a system out-of-pocket. But what are other relevant factors? For starters, several homeowners that own their system finance the upfront costs by taking a private loan or putting together a home-equity arrangement. The lower a household’s income, presumably the less equity one could expect the home to have for such options. Second, in addition to the federal income tax credit (30%), some states add another tax credit either in lieu of or addition to the federal credit. Although tax credits usually carry forward a few years, households with lower incomes cannot take advantage of these incentives to the same extent that larger equity investors that finance leasing programs can. By achieving large economies of scale with huge tax appetites, solar leasing packages put these same credits to more efficient use than a household under $150k/year could.

Another consideration comes to mind related to the nuts and bolts of solar leases: electricity rates. As rates ($/kWh) are generally the same for a household bringing in $125/year versus one pulling in $200k/year, it’s reasonable to expect that electricity savings have a larger appeal to the first home, since the bills eat up a greater proportion of their income. An argument against this claim might note that a house with a higher income has a larger electricity bill corresponding to increased consumption levels (holding the rate constant). However, an equally valid counterpoint can be made that houses with lower incomes have less efficient appliances and leakier physical household structures. These are obviously general claims that merit further research in their own right, but the point stands that each dollar saved on electricity bills has a greater benefit to a household making less money. Leases have an obvious hedge here by locking in prices that, if the last 20 years are any indication, would keep climbing higher.

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