NREL Weighs In on Solar Leases vs. Solar Ownership

solar homeThanks to greater confidence from bankers, solar loan programs are gathering market steam — and homeowners could reap just as many financial benefits as compared to a third-party ownership agreement, says a recent report from the National Renewable Energy Laboratory (NREL).

“We’re trying to make the cost of that energy as cheap as possible, and [solar systems] are long-lived assets,” said David Feldman, NREL senior financial analyst and the report’s co-author. “So if you can reduce the financing costs and costs of capital for these systems, you can reduce the energy costs.”

With last year’s rise in the number of solar loan products, Feldman added, both homeowners and companies have access to debt financing at lower costs than ever before.

“If you look at traditional financing vs. some of the new loan products, the new loan products offer a great deal of savings because they can provide money at a lower cost of capital if your loan is long enough,” Feldman said. “You’re not necessarily paying any more and [you’re paying] a lot less vs. a normal electricity bill.”

The NREL report found that the cost of energy for homeowners who financed their systems via loans were between 19 percent and 29 percent less than the energy costs for vs. those who signed third-party power purchase agreements — or solar leases — with the variation depending on the length of the loan.

Yet tradeoffs exist for those taking the loan vs. the third-party route. Loans tended to be cash-flow negative for up to the first 11 years, and only provide better payoffs after 20 years, NREL found. But the power purchase agreements materialized a positive cash flow early on and provided more financial benefits for the first six to 14 years, according to the report.

That still leaves plenty of room for third-party ownership heavyweights such as SolarCity to stay in the game, as one’s eventual choice all depends on individual risk tolerance, credit score or desired payback time, according to Feldman. In fact, the San Mateo, Calif. company developed a loan offering for customers last year that folds in the benefit of third-party involvement: The residential customer owns the system and can take advantage of federal tax credits, but repays SolarCity via a monthly bill.

And for business, the strategies of IKEA and Staples illustrate the reasons why some companies choose to own their solar systems vs. signing third-party leases.

Though both companies have amassed some of the greatest installed capacity of solar, each has taken a different route based on risk tolerance, desired payback period and the willingness to take on the additional tax liability presented by self-financing, a second NREL report found.

IKEA has installed self-financed solar on more than 90 percent of its properties because it owns all of its own buildings, Feldman said, while Staples has primarily chosen the third-party ownership model.

Along the way, each has learned lessons. “When Staples is negotiating lease contracts with property owners they now build in favorable language to make it easy to install solar on roofs they are leasing,” Feldman said. “So when they’re doing their leases they don’t run into problems when they want to [install] solar.”

But the office products company has also self-financed solar on the property they own, such as their distribution centers, since they don’t have to worry about whether or not they’ll have to sell the solar systems before the investments starts to pay off.

“Each particular business or homeowner’s decision is different, but low-cost financing is a real key lever in making solar power competitive with traditional sources of energy,” Feldman said.

Solar roof photo CC-licensed by Tim Fuller on Flickr.

Kristine Wong
Author: Kristine Wong

Kristine Wong is a multimedia journalist who reports on energy, the environment, sustainable business, and food. Her work has been featured in The Guardian (UK / US), The Huffington Post, GreenBiz, and other publications. Before becoming a journalist, she worked in community-based environmental and public health organizations for more than 10 years as a researcher and community organizer. She has degrees in natural resources and journalism from U.C. Berkeley and a master’s degree in public health from the University of Washington. Follow her on Twitter @wongkxt.

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