Thoughts on Solar

When deciding to invest in a photovoltaic solar system one of the first questions everyone has is how to finance the cost. While solar continues to be a great long-term investment, with payback periods often in the 4-7 year range, the hefty outlay is more than many homeowners feel comfortable fronting. Hence, the concept of the zero-down solar lease financing model and third-party system ownership (TPO) was born. While SunRun invented the model in 2007, the three behemoth national solar companies - SolarCity, Vivint Solar, and SunRun - rose to the top over the last five years due to the popularity and ease of the model for customers. Until this year, nearly 100% of Vivint Solar’s business was with solar leases and power purchase agreements (PPA’s).

However, as we at Run on Sun point out to all of our potential clients and in various blog posts, solar leases are simply a bad deal. And, what do you know, finally the wider public seems to be coming around to this fact! GTM’s recent report, “US Residential Solar Financing 2016-2021“, showed that for the first time since 2011, direct ownership of residential solar systems will surpass third-party ownership in 2017. The solar lease has been rapidly decreasing in popularity since it peaked in 2014 with 72% of the market. GTM predicts that in 2017 55% of residential solar systems will be bought outright through cash or loans, and the trend will continue with 72% of all systems sold owned directly by 2021.

GTM Research: Residential TPO Penetration and Installations by Ownership Type, 2011-2021

There are several factors at play in this shift. The total cost to go solar has declined rapidly in recent years meaning the upfront cost continues to be less frightening. Today there are more attractive solar loan options available to homeowners as well. One popular option in California is the PACE (Property Assessed Clean Energy) government loan program which is repaid as an assessment on the homeowners property tax bill. Mosaic is another solar loan program available nationally. While loans do have interest rates and dealer fees to be aware of, the benefits of owning a system outright far outweigh the costs of third party ownership - such as financially damning escalator clauses, the inability to take the tax credit or local rebates, and the risk of selling your home to buyers who don’t qualify for (or want) the solar lease. 

Overall growth of the solar industry is also beginning to slow this year. After growing at more than 50% annually for the last four years, the residential market is expected to see a slower growth rate of 16% this year. The report shows that growth has slowed among all solar installation companies, but much more so for the top three national companies who previously relied upon the popularity of the solar lease. For the first time since 2013, these three will together install less than half the market’s solar systems as their growth slows to just 12%. By contrast, growth among the remaining solar power installation market will slow to 36% according to GTM. It will be interesting to see how the “big three” handle this shift in the coming years.

One thing to note is that while growth is slowing among the largest companies, solar continues to grow overall. Smaller local companies have always offered, and preferred, to sell systems outright rather than through leases and these companies are becoming more popular as more research shows the true value of ownership vs leasing. As one of those companies, we have always stood by the data and educate all our clients on the realities of financing options as the last thing we want is to be in the business of locking people into a twenty-year-long bad deal! Curious as to the specifics of leasing vs owning? Check out our blog from almost two years ago: Top Five Reasons to Stay Away from that Solar Lease! 

Click here if you missed Solar Terminology 101: The Wonderful Magic of Electricity or Solar Terminology 102: What Exactly is a Solar Power System?

Show Me the Money!!

Lastly, let’s talk about the money! For most, when considering going solar, it all comes down to dollars and cents. If solar just doesn’t pencil out, an ethical contractor like Run on Sun will tell you so. But if you undersand the following financial terms that solar sales-people throw your way, you will be in a better position to make that call on your own.

Levelized Cost of Energy (LCoE) — The cost of energy from a solar power system, over the lifetime of that system, measured in $/kWh. LCoE is calculated by taking the total cost of the system minus incentives but plus any equipment replacement or other maintenance expenses, and divided by the total energy produced by the system over its lifetime.

Return on Investment (ROI) – Return on Investment is a calculation that determines how soon a particular investment will be paid back (the “payback period") based on a series of anticipated cash flows, specifically, the initial expense, any maintenance expense, rebates, tax incentives, and savings from the energy produced by the solar system.

Internal Rate of Return (IRR) – A common measure of the relative value of competing investments. Technically it is the interest rate for which the present value of all of the future cash flows associated with a given project is equal to the cost of the project. The higher the IRR the more desirable the investment. 

Payback –  This is the time when you “break even". Meaning it is the point when the total cost of the solar system (including any maintenance costs) is paid back from savings on avoided energy purchases, rebates, and tax incentives.

Annual Solar Savings — The annual solar savings is the energy savings attributable to a solar system relative to the energy requirements of the same building without solar.

Solar Investment Tax Credit (ITC) – The ITC is a federal tax credit for solar systems commissioned on residential and commercial properties before December 31, 2016. The ITC is a dollar-for-dollar credit worth 30% of the cost of a solar power system applied to the system owner’s income taxes. The ITC will reduce to 10% for commercial and ZERO for residential solar come January 2017 unless Congress extends this deadline.

Solar Lease – A contractual agreement by which the property owner agrees to let a third party install and own a solar electrical system on your property and you pay rent for this privilege. If you’ve been paying attention at all, you are aware that this is a horrible idea. We even wrote an entire blog about why you should avoid solar leases. 

Solar PPA – A power purchase agreement (PPA) is a long term contract to purchase energy from a third-party owner of a solar power system at a defined cost which may rise over time. In a PPA, the homeowner pays a fee per kWh of energy produced as opposed to a flat monthly fee in a lease agreement. Here’s the kicker, if the system produces more energy than you consume…and is going back to the grid…you get a credit from the utility for this excess energy but you also are paying for this excess energy to the third party owner of the system. Whether those fees cancel each other out or not varies.

Congratulations! You’ve passed Solar Terminology 101,102, and 103! You’re officially an expert on solar concepts! Hopefully the “Greek” terms you’ve been reading as you do your research into going solar will make a lot more sense. If you do decide solar is right for you you’ll have a better understanding of how the big electronic system you purchased and installed on your property really works. Lastly, we hope that this information will help prevent homeowners from being taken advantage of by unethical solar salesmen who really don’t know the first thing about solar! After all, knowledge is power!  

Congratulations, you’ve decided to look into going solar!

Regardless of your reasons…be it economic, environmental, energy independence, or otherwise…it is a sad reality that not everyone can go solar. So how do you know if your property is even a good candidate? Of course, it is important to select a few different installers to do a professional assessment, but even someone with zero solar knowledge can learn how to do a quick preliminary assessment. Here are some simple steps to determining if your home may have a great solar powered future. 

1. My electric bills are killing me!

If your electric bills average $100 or under each month, solar probably won’t be more cost-effective than paying the utility. The costs for permitting, design and engineering all stay the same whether you buy a 3kW system or a 10kW system. Indeed, the labor required to install 5 panels and 10 panels is not very different since installers still have the same amount of electrical ground work. The installation of the actual panels is only a fraction of the total labor. Even the costs of products improves in bulk, so the bigger the system, often the better price per Watt you can get. 

Beyond this, there are many other things to consider such as whether you plan to increase your usage significantly in the future. But since utilities don’t want you to be an energy producer they won’t actually allow for more solar than your historical needs indicate… unless you plan to buy an electric vehicle. These are things you should discuss more in detail with your qualified installer.

2. My roof is perfect for solar…right?

In my blog piece “Roofing Reality Check”, I outlined the main things to consider when you examine your roof’s potential. Here are the highlights:

You could put solar here,
but it will cost you!

Space: First and foremost, to be a good solar candidate you must have adequate obstruction-free space for rows or columns of solar panels facing South, West, or East. The solar array must be three feet from any roof ridge or rake, and 18 inches from valleys to satisfy Fire Marshall guidelines. In addition, most panels are about the same size…roughly 65 inches by 40 inches. An average home in SoCal needs between 15-20 panels to offset their energy needs. This means that triangular spaces and roofs with many small faces are not going to work well for solar, but big open spaces with right angles are perfect. 

Pitch and Height: Labor costs go up when installing on more difficult-to-reach roof spaces. Second story and steeply pitched roofs both increase the overall cost due to the time and effort required to keep crews safe. If you have a very steep roof solar isn’t necessarily impossible, but it will affect the bottom line, and some installers may not feel comfortable at all depending on just how steep. If it looks like an Appalachian incline more than a Rocky Mountain then you should be safe. But if we’re talking summit of Mount Everest, you may have a harder time finding a competent installer who doesn’t run when he sees the pitch. 

Roofing Materials: The best roofing material for solar is composite shingles. Developments have been made to safely attach solar panels to metal and tile roofs but the cost for the racking attachments and labor are frequently higher. Run on Sun prefers to remove tile where the array will go, re-roof with composite shingles, install the solar, and backfill with remaining tiles. This incurs a re-roofing cost but is the safest way to avoid roof leaks and ensure safe attachment of the array to the rafters.

3. Solar’s arch nemesis…shade.

One of the first things an installer will do is take a quick look at a satellite image of your property to check for shade elements as well as the layout of your roof. A useful tool in the Los Angeles area is the LA Solar Map. This takes into account shading throughout the year and provides a handy report on your property’s viability for solar. It isn’t a perfect tool, however, so take a look around your property and note if there are any trees shading the roof spaces that you’ve identified as ideal for solar. Trees to the north would not pose a threat since solar will never be placed on a north-facing roof. But tall foliage to the south could negate any energy production value of a solar array. All may not be lost as microinverters, like the ones from Enphase that we feature on our projects, can do a lot to salvage a site plagued with shade. But even with this technology, 100% shaded areas are a non-starter. In addition to trees, note tall parapets on a flat roof, chimneys, satellite dishes, HVAC units, and second story walls which directly shade your ideal roof spaces.  

4. Can my electrical system handle it?

Center-fed panels, like this one, can be a problem for going solar.

This is something many people are uncomfortable with, but a quick glance at your main electrical service you can be very informative. First, find your main service. This should be located on an outside wall of your home with circular enclosed meter protruding out. Open up the main panel where you’ll find a column of breakers. The main breaker, the one with the largest number stamped on it, is either at the top or sometimes in the middle of the column of breakers. If it is in the middle, this is called a center-fed panel and you may need to upgrade your electrical service before going solar.

If you find yourself tripping breakers every time you turn on a hair dryer, that is also a sign you should upgrade your service. Even if you aren’t tripping, depending on the size of your home, if the main breaker is stamped with anything under 200 you may need a higher electrical service before going solar to avoid tripping in the future.

Next, take a look at the rest of the breakers. Does it look like the entire column is full? Sometimes there are rectangles in the metal face plate which can be punched out to add breakers when needed. If there is no space at all for a new breaker for solar, then you may need to upgrade your service. 

Unfortunately upgrading your service will add some cost. Ask your solar installer for their opinion but if any of the above rings true be prepared for this additional hurdle to sunshine power.

5. It’s all about the money…

The reality is, solar is an investment. While some companies may insist you can go solar for free, I would never count on getting something for nothing. We have outlined some of the myriad reasons we recommend avoiding zero-down solar leases in other posts like “Top 5 Reasons to Stay Away from that Solar Lease” and “The Perils of Solar Salesmen”. Frankly, the costs can more than double over time when you lease instead of purchase your system. 

So the last step to assess if you are a good candidate for solar is to assess your financial position. There are many low-interest solar loan options out there as well as property-assessed PACE financing, but in order to get the economic value of solar you need to be prepared to own the system outright. This way you can take the 30% federal tax credit and any additional rebates if available from your utility. 

To give you a ball-park idea of the cost for going solar in Run on Sun’s service area (LA Metro area) today, including design, labor, permit fees and the whole shebang, is roughly $4 to $5 per Watt. This means that an average house with a 5kW system will cost between $20,000 and $25,000 before rebates and incentives. Obviously the cost will be on the low end if you have a composite-shingle, single-story, low-pitched roof with no need for a service panel upgrade. Depending on your electric bills pre-solar, this investment can pencil out with a return in as early as year 5 or as late as year 10+. But deciding if the financial outlay is worth the long term investment is something you must assess before signing on the dotted line. 

 After going through the above steps you should have a solid idea of whether solar is right for your home or not. If you’ve determined its a go, the next step is to call your local installer and make sure they check all the same qualifiers and more. Now that you’re an expert on solar assessment 101 you can even suggest solar to any neighbors with homes that beg to be powered by the sun!

UPDATE: See end of post for National Renewable Energy Laboratory (NREL) report findings regarding solar leasing vs loans.

In the debate of owning versus leasing solar panels, the folks over at NPR weighed in with a story last week that caught our eye, er, ear.  While it offers a fair explanation of some of the pros and cons,  we don’t think it did a good enough job of highlighting just why that solar lease should be avoided.  Here’s our top 5 reasons to avoid a solar lease.

Reason #5 - You can’t get credit on your appraised home value with leased solar panels. 

As we noted in our recent post about solar ownership boosting your home’s resale value, if you don’t own the panels on your roof, they aren’t an asset toward boosting your home’s value.

Reason #4 - The “benefit” of covered maintenance is a myth!

Leasing companies tout that they cover the maintenance on your solar system, but the truth is that most maintenance is already covered by product and installer warranties.  (For example, Enphase microinverters come with a 25-year warranty - longer than the typical lease term.)  For most residential system owners the only maintenance their systems need is to wash the panels off with a hose.

Reason # 3 - You don’t have to be a Geek to own solar!

The NPR story suggests that to own solar requires a very “hands-on” approach, with the homeowner being forced to navigate the shoals of rebates, tax credits and permitting on their own.  Nothing could be farther from the truth.  A reputable, local solar installation professional, like Run on Sun, will handle all of those messy details for you.

Reason # 2 - A leased system complicates selling your home!

If you decide to sell and you have a leased system on your roof, your prospective buyer has to not only meet your required offer, they also need to satisfy the leasing company’s qualifications to assume the remainder of your lease.  A buyer might qualify for a mortgage, but not satisfy the credit requirements of the leasing company, and even if they do, they might not be interested in the hassle of dealing with a lease payment for the remainder of your twenty-year term.

Reason # 1 - The leasing company is ripping you off!

Bottom line, this is the number 1 reason to avoid a lease.  But don’t take our word for it, let’s look at what one of the largest solar leasing companies says, right there in the tiny print on their website:

Savings on your total electricity costs is not guaranteed. Financing terms vary by location and are not available in all areas… A 3 kW system starts at $25-$100 per month with an annual increase of 0-2.9% each year for 20-30 years, on approved credit.

Just how bad a deal is that?  Well, let’s take a typical 3 kW solar project.  That is really small, so the cash price from a local installer is probably around $4/Watt - which works out to $12,000 up front.  However, if you own, you receive the rebate (if any) and the tax credit.  In PWP territory, that rebate works out to roughly $2,200 but in SCE territory, the rebate is zero.  So to take the worst case example for ownership, we will assume no rebate.  In that case, the tax credit is worth 30% of $12,000 or $3,600 leaving the ultimate cost to own at $8,400.

Now what happens in a lease for that same system?  No rebate or tax credit goes to you - the leasing company pockets those.  What about your payments?  Well, let’s take the middle ground suggested in the leasing company’s quote above and look at a cost of $60/month in year 1, with an annual increase of 1.45%.

Here the green line represents the cost of ownership - $8,400 which is constant over the life of the 20 year lease.

The orange bars are the annual payments which in year 1 amount to $720 (12 x $60) and by year 20 have increased to $947.

The red bars are the cumulative cost of leasing solar.  By year 11, the owner has come out ahead.  By the time the lease ends in year 20, the solar leasing customer will have paid $16,567 in lease payment - nearly twice what the system purchaser paid - and they still will not own the system on their roof!

 While it may be true that not everyone can afford to purchase a solar power system outright, that is changing as solar becomes more affordable for more people.  Plus, with the emergence of solar loans, which can provide for little or no out-of-pocket cost while still retaining the benefits of ownership, cash-constrained consumers can still go solar without resorting to the leasing trap.

For all of these reasons, and a whole bunch more, we at Run on Sun have never offered residential leases, and we never will.  If you want to go solar but avoid the pitfalls of leasing, give us a call - we are waiting to help!

UPDATE: Two reports from NREL bolster our conclusions above: “To Own or Lease Solar: Understanding Commercial Retailers Decisions to Use Alternative Financing Models,” and “Banking on Solar: An Analysis of Banking Opportunities in the U.S. Distributed Photovoltaic Market“. Analysts found that businesses that use low-cost loans to purchase a PV system and homeowners who use solar-specific loans can save up to 30 percent compared with those who lease a system through a third-party owner.

Yesterday we reported on the Stakeholder’s meeting that is being held next Monday, December 7, at the MTA HQ building. This is an important update meeting on the County’s progress toward implementing an AB 811 program for LA County and its member cities that will greatly facilitate funding for solar projects.

Today we are reporting on the Cities that we have been able to identify as potentially attending the meeting. Is your City on the list? Find out after the jump.

Here is the list of Cities that we have been able to identify so far (we will update this list if we learn of more participants):

• Claremont
• Culver City
• Lancaster
• Lomita
• Long Beach
• Los Angeles
• Malibu
• Monrovia
• Palmdale
• Palos Verdes
• Santa Clarita
• Santa Monica

That is it!  Pretty pathetic – there are 88 incorporated cities in LA County - the above list accounts for 12 of them.  (There are also two Government Associations listed, the San Gabriel Valley Council of Governments and the South Bay Cities COG.)

Why does this matter?  As we understand the program, if your city does not adopt a resolution of participation, YOU, as a potential solar customer, will not be eligible to participate in the program - and thereby cutoff from a low-cost source of solar financing.

Frankly, there is no excuse for any city not to participate.  So contact your city manager and find out why your city is not represented.  Better yet, insist that they have someone attend this meeting and get with the program!