The massive climate change legislation that’s before Congress includes a provision that, if passed, could make it financially more feasible for solar system suppliers and their business partners—including builders—to extend lower-cost leasing options to homeowners. That provision calls for the federal government to insure loans made by qualified lenders for renewable energy systems leased for residential use, not unlike what FHA does for mortgages. The amount of each loan insured would be determined by the installed system’s future energy production, known as “residual value.”
The thinking is that loan insurance would spur a much-needed secondary market for solar financing.
“Solar leasing will help the average homeowner take advantage of these renewable energy systems without prohibitive upfront costs,” says Ed Perlmutter, a congressman in Colorado who introduced this bill. “It will open up the market to renewable energy savings in a faster, more affordable way.”
Green builders hope he’s right, as some are already tapping into this pent-up demand. In recent weeks, Lennar and Beazer Homes started offering solar leasing programs to buyers in California and Arizona, respectively. Each builder is working with a panel maker, SunPower and SolarCity, to offer homeowners a way to get solar energy systems installed on their roofs with little or no downpayment, and realize significant reductions in their monthly electricity bills.
PulteGroup is also considering leasing solar systems to its buyers in some markets in partnership with SolarCity, whose CEO Lyndon Rive sees home buyers’ appetites for solar energy being sated the same way hordes of drivers lease their cars instead of buying them. “There’s no right or wrong way,” says Rive. Since SolarCity launched its leasing program three years ago, 80% of its customers are leasing rather than buying systems, even though the company provides home-equity financing.
Many other companies have cropped up in recent years to lease solar systems to new and existing homeowners. How widely solar leasing catches on, say experts, will depend largely on federal and state tax credits and incentives that encourage homeowners to rely more on renewable energy sources. The viability of the leasing programs also hinges on the relative willingness of lenders to provide financing to homeowners who want to buy a solar system but are stymied by its prohibitive expense; and on appraisers giving energy efficiency its due when they place a comparable value on a house.
An Expanding Resource
Solar power, which today accounts for just 0.5% of the world’s electricity, is indisputably expanding as a renewable energy source, although by how much depends on whom you ask. A report by the European Photovoltaic Industry Association and Greenpeace projects solar energy could generate 2.5% of the globe’s electricity by 2025 and 16% by 2040. A study released last week by the International Energy Agency estimates that solar power could account for 22% of the world’s electricity by 2050, with photovoltaic systems alone generating more than 11%.
In the U.S., solar power is a minor contributor of electricity, but it’s increasing, especially in the residential sector. The Solar Energy Industry Association (SEIA) estimates that America’s residential photovoltaic (PV) market doubled in 2009, “despite difficulties in the housing and construction sectors.” The price of PV modules (which account for up to half of the cost of an installed solar system) fell by more than 40%, to between $1.85 and $2.25 per watt. (A typical system being installed on new homes can produce between 3.5 and 7 kilowatts at any given time.) SEIA also estimates that average installed costs fell by about 10% in 2009.
But when these systems and their installations still price out at $25,000 or more, the possibility of solar dims for many homeowners, even for new-home buyers who can roll the cost of solar systems into their mortgages. And today’s ultraconservative bank lending practices make it doubly hard for existing owners to secure home-equity loans for solar installations.
Since 2006, Lennar has installed 1,700 solar systems on homes it’s built in northern California. During this period, however, Lennar saw that a certain percentage of buyers simply would not accept solar because of the upfront cost. So last year, it initiated a leasing program in Sacramento through which it installed more than 150 SunPower systems. Last week, Lennar announced that it was extending this leasing program to communities in Sacramento and Fresno, and several in southern California. It’s also considering expanding the program to Colorado and New Jersey, which have attractive solar tax incentives.
“What we’ve been able to do with this program is demonstrate that it can work operationally, and to introduce a financing alternative that make sense,” says David Kaiserman, president of Lennar Ventures, which pursues strategic business activities for the Miami-based builder.
In its pilot program, known as SunPower Access, owners of three-bedroom houses in Sacramento paid about $31 per month to lease solar energy. (As Lennar rolls out this program, the monthly lease payment is expected to rise to an average of $65 over the lease’s 10 years.) As the lessor, SunPower owns the systems and is responsible for their maintenance and monitoring. The panel maker also gains all of the tax benefits and incentives from the lease. If the house is put up for sale before the lease is up, the owner can transfer the lease to the new buyer.
While Lennar’s leasing program doesn’t promise specific reductions in electricity bills, “the cost of the energy produced by the system is 20% below retail,” says Kaiserman. Some homeowners who participated in Lennar’s pilot reported monthly utility bills as low as $1.19. The Los Angeles Times interviewed homeowners Dalia and Dan Mask of Rancho Cordova, Calif., who currently pay $26.90 per month for the electricity produced by SunPower solar panels on their house, and have seen their utility bill average under $50 per month (compared to $125 per month when they were living in an apartment). In some months, their bill has dropped below $5.
In late May, Beazer energized two models in its Terraza at Villago development in Phoenix as part of a pilot solar leasing program it has initiated with SolarCity and APS, the state’s largest electric utility. Beazer is giving buyers in that development, which will have 99 homes, the option to lease solar energy through 5- to 7-kilowatt systems installed on their houses’ roofs. (APS has a green program that returns rebates to the builder if its homes are Energy Star-certified and solar ready.)
Francois Gratton, Beazer’s regional vice president of construction, says the Atlanta-based builder is eager to see how well solar leasing complements Beazer’s eSMART green building model, which is standard on all of its homes. As of last Thursday, the builder had sold six homes in its Phoenix development, and two buyers opted for the 15-year solar lease, whose monthly rate is based on the house’s exposure to the sun and how much energy homeowners draw through their systems. Buyers with FICO scores of 700 or above aren’t required to make a downpayment on SolarCity’s panels.
Gratton says Beazer is now working with eight other communities in Arizona, where it will experiment with offering lease options for spec homes.
For Some, Leasing Is The Only Option
Leasing is likely to gain ground with builders and home buyers until the calculus of owning a system either gets less expensive or when solar’s long-range cost savings are better understood by the public. Right now, “the PV market is still all over the place” in terms of panel costs, says Ken Jubik, an installer for Pittsburgh-based Sota Construction Services, which recently launched its own leasing program. He notes that an 8-kilowatt system and its installation can run as high $64,000 if an engineer is called in to assess a roof’s load-bearing capacity. So far, Sota has done two installations for homeowners who signed lease agreements.
Walter Cuculic, PulteGroup’s director of sustainability, still thinks owning, rather than leasing, a solar system is a better deal for homeowners in the long run because of the tax benefits. And he’s not keen on leasing if it doesn’t allow homeowners to purchase their systems eventually. But PulteGroup is thinking about solar leasing, he concedes, because some buyers can’t justify the expense of a solar system when appraisers won’t acknowledge the value that renewable energy adds to a home. “There needs to be more education [for appraisers] about energy efficiency in general,” agrees Gratton of Beazer.
That leasing versus purchasing solar systems is even being debated is further evidence that arguments against solar energy in general are becoming harder to support as existing providers get stronger and new players enter the solar field.
For example, San Francisco-based SunRun started offering 18-year solar leases to existing homeowners in 2007, and now controls more than 20% of the solar systems installed in California. In January SunRun entered into an exclusive partnership with PetersenDean, the largest private roofing and solar contractor in the U.S., through which SunRun will lease PetersenDean’s solar systems.
A New York-based startup solar leasing company called Ad Energy is targeting customers in New Jersey and Massachusetts, where solar incentives have been robust. (New Jersey’s solar rebate program is currently on hold by order of Gov. Chris Christie.) The “handful” of homeowners whom Ad Energy has signed to lease agreements are paying between $80 and $90 per month, and have seen their utility bills cut in half. “Leasing has a lot of advantages, like performance guarantees, free maintenance, and monitoring,” says T. R. Ludwig, one of the company’s partners.
And last week, groSolar, a White River Junction, Vt.-based supplier of solar systems, entered into a partnership with Middle Atlantic Solar Leasing, the creation of investment firms Gemstone Group and AFC First Financial. Nearly all of groSolar’s residential business in five states comes from existing homeowners for whom financing the installation of solar systems is prohibitive. Like SunRun, groSolar’s 15-year lease monetizes tax and renewable energy credits, which can be applied to the downpayment. “This allows the homeowners to realize the benefits right away,” instead of waiting until the end of the tax year, says Jamie Resor, groSolar’s COO.
Creative Financing
Resor notes that the availability of capital for financing solar systems still inhibits the expansion of solar energy in the U.S. “We need to get more equity into the system.” On that score, programs have emerged that are making solar energy more financially practical, particularly for existing homeowners.
A smattering of states issue Solar Renewable Energy Certificates, or SRECs, to registered account holders—such as homeowners with solar systems—based on recorded or estimated production of those systems. (For example, Ludwig estimates that a 7-kilowatt system might earn 8 SRECs per year.) These certificates are traded on open-market exchanges, and their buyers are often utility companies looking to meet their renewable electricity procurement obligations. In New Jersey, the exchange settlement on June 16 for one-megawatt hour generated by renewable sources was $673.50. The knock against SRECs, though, has been that they aren’t securitized and that their trading can be volatile.
Property Assessed Clean Energy (PACE) bonds are another intriguing, and perhaps more viable, instrument for financing the purchase and installation of solar systems. Berkeley, Calif., was the first city to issue a PACE bond in January 2009, and since then 22 states have adopted the idea. Essentially, the bonds allow people to borrow money from municipalities for energy efficiency upgrades and improvements, and to pay for those improvements through their property taxes over a 20-year period.
PACE bonds, SRECs, leasing, and other financing ideas that may be percolating out there are removing obstacles that so far have limited solar power from becoming more widespread in the built environment. Kaiserman of Lennar Ventures believes the housing industry could play a pivotal role in alerting home buyers to the availability of these financing options. And he hopes that more builders take Lennar’s cue and offer leasing to buyers “because as volume increases, prices will come down, and the whole process has more credibility. There’s little proprietary in what we’re doing.”
John Caulfield is senior editor for BUILDER magazine.
Learn more about markets featured in this article: Phoenix, AZ, Pittsburgh, PA, Los Angeles, CA, San Francisco, CA.
