Improving Solar Policy: Lessons from the solar leasing boom in California
July 25, 2013
Electricity from solar photovoltaic (PV) panels on rooftops across the U.S. is an appealing low-carbon energy option – it doesn’t require dedicated land and has the potential to make a significant contribution to meeting future energy demands. Until recently, very little of this potential had been exploited largely due to the high cost of solar. However, other barriers also played a role, including permitting challenges, financing, and poorly understood potential impacts on the electricity system.
Recently, steep solar panel cost reductions as well as strong federal and state policy supports have helped to catalyze substantial growth in rooftop solar PV deployment in California. Interestingly, this growth has happened in the face of declining financial incentives for solar installations at the state level through the California Solar Initiative. This growth has also been accompanied by a shift in market demand: Most homeowners in California are no longer purchasing the panels on their rooftops, they are leasing them. Over 75% of California’s new residential solar systems in 2012 were leased as compared to less than 10% in 2007.
As policymakers across the country and elsewhere look to spur further growth of solar PV in a constrained budget environment, the California experience — and in particular, the rise of leasing — may hold lessons for improving the effectiveness of solar policy generally. In this study, we address four questions about the California leasing experience with a view towards formulating such lessons for policymakers. We use financial modeling and econometric analysis to explore these questions:
1. Why are more people leasing rather than buying?
For homeowners, a lease transforms a complex investment into a money-saving service. Solar leasing firms offer customers a way to take advantage of rooftop solar without many of the burdens associated with financing and owning the panels.
2. How has solar leasing affected federal taxpayers?
Leased systems initially cost federal taxpayers more than purchased systems, but not anymore.
For leased systems, taxpayer costs are related to prices, which are determined not only by system costs, but also by bill savings and state incentives. Higher savings and higher state incentives can translate into more generous federal tax incentives for leased systems. However, while leasing initially resulted in higher solar prices, and therefore, higher taxpayer costs for federal investment incentives, our analysis of the California experience suggests that the premium associated with leased systems has disappeared over the last two years.
Declining state incentives have likely helped reduce the cost to taxpayers of federal incentives for both types of systems.
The California Solar Incentive (CSI) was a production-based, up-front incentive for solar deployment that declined in a predictable way with increased deployment. Our analysis suggests that the decline of the CSI helped bring down prices for rooftop solar in California more than can be explained by time trends, declines in solar PV module costs, or other factors. As the cost of federal tax incentives are related to prices, the decline in prices also led to a decline in the cost of those incentives to taxpayers.
3. How has policy affected the ownership of solar PV?
Decreasing up-front incentives have, in part, driven the increase in leasing. As the up-front California Solar Initiative incentive has declined, up front incentives have covered a smaller fraction of project costs, increasing the relative burden of financing and making leasing more appealing.
4. What lessons can we draw from the solar leasing experience for improving federal and state solar policy?
We have found no reason to prohibit solar leasing. While solar leasing once cost federal taxpayers more than purchased systems, we no longer find this to be the case. Leasing companies make it easier for many customers to realize the benefits of rooftop solar: They translate a diverse set of policies and processes into a relatively simple product for households, leaving less for individuals to manage. However, not all states allow leasing. By providing more ways for customers to finance rooftop solar and minimize their transaction costs, states that permit leasing may enable greater solar deployment.
Use incentives that decline with deployment to help bring down prices. Our analysis suggests that declining incentives provide pressure on both solar installers and leasing companies to identify and implement cost reductions help lower prices for solar customers.
Take steps to reduce the cost of leasing to taxpayers and customers.
i. Increase availability and comparability of public data on solar lease and purchase pricing to enhance market competition and reduce costs. Maintaining a publicly-accessible platform to compare solar pricing data — for leases and purchases — would facilitate a competitive solar market environment and enable more robust research and analysis of trends.
ii. Continue to address permitting, interconnection, and inspection process barriers to reduce financing and installation costs. Each of these offers an opportunity to streamline projects and reduce costs.
iii. Minimize or eliminate the need for expensive tax equity to reduce financing costs. Solar leasing companies could reduce their financing costs and provide leases to more customers if they did not have to rely on costly tax equity finance to realize the value of federal incentives.
Finally, we note several further issues that may impede efficient deployment of rooftop solar in California, which we also suggest as opportunities for future analysis: California’s tiered rate structure (along with Net Energy Metering) offers much greater solar PV benefits to high energy consumers; solar generation may not currently be sited in areas it most benefits the grid; and there are unmeasured risks that leasing may present to consumers and investors. These risks include changes in retail electricity rates being considered by the California Public Utilities Commission, changes to federal tax incentives, and lease portfolio performance. Addressing each of these three issues would open opportunities to achieve greater deployment while encouraging cost and price reductions to government and consumers.
Ultimately, policy can and should support the expansion of renewable generation using mechanisms that fit the needs of consumers. Solar leasing has filled and will continue to fill a gap — converting long-term energy savings from a relatively large investment into a product that provides immediate financial benefits. However, leasing is likely not the only way in which business and/or policy innovation can make it easier for consumers to benefit from renewable generation. For example, providing state or federal incentives directly to consumers for choosing to consume clean electricity — and expanding the renewable options available to consumers through, for example, retail green power options — may yield similar results at lower costs. Like leasing, these approaches present ways to catalyze a shift to cleaner electricity generation driven by consumer choice. We plan to study such innovative approaches in future work.