residential solar leasing thomas j grant, phd, pe xanaduenergy

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RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

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Page 1: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

RESIDENTIAL SOLAR LEASING

THOMAS J GRANT, PhD, PEXanaduEnergy

Page 2: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy
Page 3: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

GROWTH OF SOLAR IN THE US

Page 4: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

SOLAR GROWTH BY STATE

Page 5: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

REASONS FOR SOLAR GROWTH

• Dramatic decrease in the cost of PV panels• Capability for Excess electricity sold to the grid• Federal tax credits• State and local incentives • Improved performance and warranties• General acceptance by public, regulators,

utilities, and banks • Third party financing

Page 6: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

SOLAR PANEL COSTS

Page 7: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy
Page 8: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

SELLING ELECTRICITY TO THE GRID

• Net Metering – meter runs forward – meter runs backward, at retail rate.

• Market Rate Net Metering – dynamic price based on some function of wholesale price

• 46 States have net metering ranging from retail rate to some market rate. MO – market rate, KS – retail rate

• Feed In Tariff – FIT – a set price for each KW-hr which can be higher or lower than the retail price. Mandated by state. (6 states)

Page 9: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

FEDERAL TAX CREDIT

• Tax credit equal to 30% of residential system installed cost. Expires in 12/31/2016

Page 10: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

STATE INCENTIVES

• Tax credits or exemptions (MO, KS)• Loans (MO, KS)• Mandated FIT (not MO,KS) or Net-Metering

(MO, KS)• Rebates (MO)• Renewable Portfolio Standard (RPS) with

subsequent REC market (MO has RPS but no REC market yet, KS has neither)

Page 11: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

TYPICAL WARRANTIES

• Solar Panels – – Defects/Workmanship – 10 yr– Performance -20-25 years , typical loss of 0.5-1%

per year• Inverter– Central – 5-15 years– Microinverter - 20 -25 years

• Batteries – 5 years • Balance of System – 5-10 years

Page 12: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

ACCEPTANCE

• ENERGY POLICY ACT OF 2005 SIGNED BY GEORGE W. BUSH•Many incentives for solar to

include requiring public utilities to offer net metering

Page 13: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

THIRD PARTY FINANCING

Page 14: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

LEASING• A lease is a contract to rent property or a

specific asset under certain terms• Lessor is the owner, the Lessee is the renter• Also referred to as “Third Party Financing” or

“Third Party Ownership”.• It is usually more expensive to lease than to

purchase outright but the lessee may conserve capital, and may allow lessee to focus manpower and expertise on its main business.

Page 15: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

BRIEF HISTORY OF LEASING

• Land leasing is recorded in Mesopotamia in 2000 BC

• Western leasing law derives from the Statue of Wales in 1284

• 497 of Fortune 500 companies now lease all their equipment

• 26 % of all new auto purchases in US are leased

Page 16: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

SOLAR SYSTEM PURCHASE OPTIONS

• Customer purchases the system using cash, bank loan or other credit

• Customer leases the system and gets to use whatever power it produces

• Customer executes a Power Purchase Agreement (PPA) and pays for the power produced at a set price

• Customer leases his roof or other space to another party who sells power to the utility

Page 17: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

RESIDENTIAL SOLAR LEASING IN US

• Started in 2007 by Sunrun, a startup finance company led by two young Stanford business graduates

• They needed to overcome the rebate and interconnection processes that were based on homeowner ownership

• They persevered and today 75% of all residential solar is sold by leasing

Page 18: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

RESIDENTIAL LEASING CONT’D

• Solar leasing is available in more than 16 states• Primary limitation is regional viability of the

leases• Only 3 states prohibit it• Available today in limited areas of KS (KCP&L

territory by Cromwell) and MO (KCP&L and Ameren territory, by Mo Solar Apps (non-residential), and Greangrid (Ameren, PPA))

Page 19: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

MAJOR SOLAR LEASING COMPANIES• Clean Power Finance (Match.com owner)• NRG Sunlease - sub of NRG Energy• OneRoof Energy• SolarCity – largest, well financed• Sungevity – pioneered the open source web

model, all work subcontracted• SunPower – PV mfg expanded into leases• Sunrun – finance company w/dealer network

Page 20: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

TYPICAL RESIDENTIAL LEASE

• A solar system is provided at little or no up front costs to the lessee. The lessor maintains the system and provides warranty assistance

• The lessor retains all rebates, tax credits and depreciation

• The lessee receives the electricity and pays a monthly lease payment that typically escalates over the course of the lease

• Leases can run from 15 to 25 years

Page 21: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

WHAT HAPPENS AT THE END OF THE LEASE?

• Lease details differ but typically there are three options for the homeowner:

1. Renew the lease or convert to PPA2. Purchase the system at a nominal or fair

market price IAW the lease3. Have the system removed from the roof

Page 22: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

WHAT HAPPENS IF YOU SELL YOUR HOUSE BEFORE THE LEASE ENDS?

• Typically the homeowner has four options:1. Get the new homeowner to assume the

remaining lease term (most popular but new owner must have good credit score)

2. Pay out the remaining lease and adjust the house price accordingly

3. Have the system removed and installed on your new home (fee)

4. Cancel the lease and have the system removed and pay cancellation charges

Page 23: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

HOME SALES

• Solar companies feel that having a leased solar system on your roof should increase the value of your home.

• Experience to date shows the opposite – it is a negative factor in the home sale.

Page 24: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

WHAT IF I NEED TO REPLACE THE ROOF?

• Lease typically has a provision that the lessor will remove and replace the system during roof repair for a set fee.

Page 25: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

LEASES ARE COMPLICATED DOCUMENTS

THERE ARE

ABUSES

Page 26: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

CURRENT ISSUES•High Pressure Sales Tactics

www.youtube.com/watch?feature=player_detailpage&v=fNdgTBSLBmQ

www.youtube.com/watch?feature=player_detailpage&v=QRdm3DsIWjc

Page 27: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

CURRENT ISSUES CONT’D

• Selling the home – buyer reaction• Value of the system is inflated• Savings or performance exaggerated• Escalation factor higher than actual electricity

escalation• Installation problems – surprisingly SolarCity

has the most complaints compared to smaller firms.

Page 28: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

POTENTIAL ISSUES

• Default issues – fixture lien• End of Lease fair market value• Cant upgrade – you are stuck with a system for

15-25 years• Bankruptcy or default of companies in the

supply/installation chain• Warranty disputes• Lower quality components

Page 29: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

ENOUGH OF THE THEORY

LETS GET TO REALITY

Page 30: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

CROMWELL SOLAR LEASE

• 6 KW system, stated value of $20,427• 15 year lease, payments escalate $60/yr starting

at $931.48• Assume electricity escalates at 7%/yr starting at

$0.111/kWhr• Estimated 8,328 kWhr production first year with

.8% annual decline• Assume ownership after 15 yrs at nominal fee• Estimates savings of $31,855

Page 31: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

WHAT SEEMS RIGHT

• System price of $3.40/watt is a little on the high side but in the ball park for systems about 8 months ago.

• Annual production of 8,328 kWhr is about right for 6 kW system in Paola, KS. NREL calculator estimates with optimum angle/direction for Paola is 8,415 kWhr/yr

• PV Degradation is about 0.5 – 1.0% a year. Their number of 0.8% is in the ballpark

• Pollution prevention numbers appear correct assuming this is mainly CO2

Page 32: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

ISSUES

• Minor math errors• No O&M costs are given for owner after 15 years,

especially since an invertor will surely need to be replaced. NREL calculator suggests $126/yr

• No fair market value stated after 15 years for ownership transfer. Literature search suggests a few percent of original cost.

• 7% energy escalation greatly above national average last 10 or 20 years – KEY!!!

Page 33: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

SPREAD SHEETS

Page 34: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

KS ELECTRICITY ANNUAL ESCALATION

• 2015 EIA Prediction 1.7%• 2013-2014 actual 3.1%• 2002 – 2012 actual 3.59%• 1992 – 2002 actual 0.3%• KCP&L(Paola, KS) requested 12.5% for 2015• KCP&L (Paola,KS) 2009 – 2014 actual 5.39%• KCP&L (Paola,KS) 2004 – 2014 actual 4.07%

Page 35: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

WHAT HAPPENS IF ENERGY ONLY INCREASES BY 3.5%/YR?

• Breakeven isn't until year 19• Total savings decrease by more than 70%• Assumption of energy escalation is key to

financial savings

Page 36: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

HOW WELL DO THE BANKS DO?

• IRR = 8% in this case

Page 37: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

BOTTOM LINE - PROS

– No upfront cost– You are helping the environment– You are insulating yourself against large (>3.5%)

electricity annual price increases– You are part of a movement pushing utilities to

change their model

Page 38: RESIDENTIAL SOLAR LEASING THOMAS J GRANT, PhD, PE XanaduEnergy

BOTTOM LINE - CONS

• Direct purchase would be more economical, especially with zero down financing options available

• You are betting that rates will escalate greater than historic levels

• You will have house sale issues• Net metering rules could/will change• You are locked in to the same system for 25

years to achieve the stated savings