We do not come to bury the lease, but to praise the loan. The residential solar lease gets the credit it deserves for growing the solar industry when it was but a seedling that carried a large upfront cost with few financing vehicles to make it palatable for homeowners, and leases still are a sizable portion of the market. That solar seedling though is now an entire meadow, and people (with money) have noticed.
Everyone from GTM Research to the Wall Street Journal is convinced the future (and present?) of residential solar is loans, and the trendline (and common sense) support this. Just two years ago, third-party owned systems were 72 percent of installs. GTM Research puts that estimate for 2016 at 55 percent right now, with 48 percent forecasted for 2017.
“We have seen a very quick shift away from leasing toward customer ownership over the past two years, and we expect this trend to continue,” says Nicole Litvak, analyst at GTM Research. “This shift has been driven by the decreasing cost of solar and the increasing number of loan products available to customers.”
What this means for PV systems
The plethora of financing options now available in response to the dropping prices and proven concepts made this possible, but so too did the transparency in system costs and financial returns among all of those options.
“Owning is better because it just makes more financial sense than leasing or renting,” says Mukesh Sethi, group manager for the solar division at Panasonic Eco Solutions North America. “The only reason people hesitate to own is they don’t know what they are getting into. In real estate, the numbers are pretty straight forward. In solar, there are too many variations and things that can change, and people don’t understand everything.”
When the numbers are presented plainly over the lifetime of a system, a buyer will rarely go with a lease. The most recent Solar Marketplace Intel Report from online solar marketplace EnergySage showed that more than 90 percent of EnergySage users chose to own their system outright. Just 11 percent entered the marketplace with a stated interest in a third-party owned system to begin with, and the reason is obvious: These days, system ownership results in larger savings, and loans offer more flexibility than leasing.
“While some of our users opt for the simplicity of signing a lease, many don’t feel comfortable agreeing to a 20-year lease or PPA contract,” says Vikram Aggarwal, CEO and founder of EnergySage.
Transparency also leads buyers to choose better systems. Again, as demonstrated by EnergySage’s side-by-side quote comparison tool, interested buyers can not only compare financial metrics, but also the quality of the installer and all of the system components, providing a full value picture.
Suddenly, a customer isn’t just making a passive decision to try and lower their electric bills, but making an investment. If you are now going to own the system, why not get the best bang for your buck? This could lead to greater interest in high efficiency systems from household names, like Panasonic and LG. Sethi says when Panasonic officially re-entered the U.S. residential solar market last year, this was the expectation.
“When homeowners have information and make their own decisions of what type of panels to put on their roof, they will go with what’s reliable and will last the longest,” Sethi says. And this is where high efficiency systems could be the best long-term play for a homeowner and installer.
“Leasing trends toward cheaper panels. They don’t worry about the return after 15 years,” he continues. “Homeowners though, they understand that by paying 5 or 10 percent more they will get 20 to 30 percent more savings in the long run.”
Sethi puts the payback of a high-efficiency Panasonic panel about three to five months longer than what’s expected of a lower efficiency system, which has the potential for 20 to 30 percent more savings over the following 20 to 25 years.
What this means for the installer
Loans mean choice, which also means more business for the solar installer — especially the smaller, regional installers. GTM noted that local installers in particular have taken advantage of these loans, which has leveled the playing field. The larger players — SolarCity, Sunrun, Vivint, etc. — are now starting to offer loans too, but where leases were predicated on size and scale, a model dominated by loans looks more like the regular construction industry, filled with nimble, local companies.
Anecdotally, we had a side conversation with an installer at Intersolar who had once formed a fairly large, national business and his since decided to sell that in favor of staying small. He noted how little money there is in scaling up to that top tier because there’s a ton of overhead, and there isn’t much of a pricing advantage over the smaller installer.
But transparency and choice means increased competition. What value can you provide customers that others cannot? Aligning with certain quality brand names might be key. Using Panasonic as an example again, its Partner Program allows installers to represent the Panasonic brand, while Panasonic provides support, training, marketing materials and even help with financing.
Knowing the direction the industry seems to be headed, think about how this will influence your business.
Chris Crowell is the managing editor of Solar Builder.