PPAs – Affordable PV Power for the Average Homeowner

With price tags ranging from $15,000 to $50,000 or more for residential PV [photovoltaic] systems, the residential market has been limited to homeowners with a strong green ethic that either had the cash or were willing to tap into their home equity to pay for the cost of a system. Given a 15 year plus payback and an average home ownership turnover of 5 years that represented a pretty small population of potential customers. As a result, it was only a matter of time before entrepreneur’s realized that the PV industry had reached a point where it needed more financial innovation than technical innovation.

Power Purchase Agreements [PPAs] are offered by companies that are basically independent, solar electric utilities. They use your south facing, roof-top real estate to install PV [photovoltaic] panels at their expense and then sell that energy back to you at a pre-determined rate under a long term PPA agreement. Solar PPA’s represent over 50% of large commercial and industrial PV installations, and if you’re a big box store like WalMart, the economics are such that you pay zero upfront cost, lock in favorable long term rates and never have to worry about how it works or the costs to maintain the system.

Until recently, the PPA business model has been non-existent for the residential market, however two California companies now offer forms of residential PPAs to qualified homeowners. Sun Run of San Francisco offers an 18 year residential PPA that requires an relatively modest (~30% of the system cost) upfront payment by the homeowner and Solar City Inc. of Foster City offers as low as a no money down 15 year lease to highly qualified (≥720 credit score) homeowners. Whether it’s called a lease or a PPA the end result is the same, the company owns, maintains, and profits from the system and the homeowner pays a monthly charge that is off-set by their savings in electrical costs. It’s a win-win-win situation for the company, the homeowner, and the environment.

To answer the “what happens if I move” question, both Sun Run and Solar City offer their customers the option of buying the system at any time, transferring the PPA/lease to a new owner, or renewing the PPA/lease agreement at the end of its term.

You’ve got to love the potential for the PPA business model to expand the residential PV market to millions of additional homeowners, but what are the factors that make it technically and financially viable for a companies like Sun Run and Solar City, and why are these programs currently limited to California? The answer lies in tax credits, rebates, and utility rates, and in the case of California all of these factors are aligned to make the numbers work.

Whether it’s a lease or a PPA, since the company owns the system they get the tax credits and any state or utility rebates. In the case of the Federal Investment Tax Credit [ITC], because they are a business, they get the full 30% credit and are not capped a $2,000 like us lowly homeowners. Because the Federal ITC is scheduled to expire at the end of 2008, the PPA/lease business model may fall apart if it is not renewed. If not renewed, the economics would probably dictate that the homeowner cover an additional 30% of the purchase cost upfront making the deal considerably less attractive.

Other factors that make the model work are the relatively high California utility rates and favorable net metering laws. Additional requirements include an unobstructed southern exposure for the panels, a roof surface that will last the lifetime of the PPA or lease, and a system that’s large enough to make economic sense for the company.

If the Federal ITC gets renewed for several more years, look for both of these companies to rapidly expand into states with relatively high utility rates and strong incentives for renewable energy. As utility rates inevitably increase and PV panel costs decline, this business model will only get stronger.

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3 responses to “PPAs – Affordable PV Power for the Average Homeowner

  1. sunsetbeachguy

    One significant difference between a lease-purchase and a power purchase agreement that you glossed over is end of term options.

    PPA’s must be either uninstalled, renewed or sold at fair market value.

    Lease-Purchase financing the system is the property of the homeowner.

    That being said, I am extremely doubtful that the PPA model will succeed at the residential scale.

    Just read up on the Citizen RE debacle and run some elementary numbers on the size of balance sheet required to aggregate hundreds of residential PV systems to a securitizable size (~5-10MW). Now think about 300 individual homeowners with monthly bills and collections activities.

    The margins just simply aren’t there at the residential scale.

    If you look at the 2 companies, they are solar installers and not utility companies.

  2. The Emergency Stabilization Act of Oct. 2008 extended all the ITC’s to 2016 and 2017, and removed the $2000 cap on residential credits.

    I got he impression somewhere that PPA’s somehow allowed both the system lessee (homeowner) and the lessor/installer (business) to claim energy investment tax credits. This would surprise me, but it seems possible.

    http://highnoonsolar.com/green-blog/federal-tax-credit-for-solar-pv-extended-and-expanded

    • The Act did extend ITC’s and remove the cap. It also opened up the credit to wind power. However, in the PPA business model it is the lessor that gets the credit and removing the cap should go a long way toward accelerating residential PPA deals.

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