Photo: Jon Callas
There are two different ways to get solar panels on your roof: ownership, which means you buy (or take a loan) for a solar system, get it up on your roof, and reap the benefits for the next few decades or so; and third-party ownership, under which a solar installer agrees to put panels on your home and you agree to pay them either a flat monthly fee (leasing) or for the electricity the panels make (a power purchase agreement, or PPA).
Third-party ownership has mostly followed the PPA model, and it can be a good choice for people without a lot of income, cash, or equity. PPAs save homeowners money from day 1, and most require no up-front investment. But some states (including the Sunshine State) have banned PPAs, making traditional ownership the only route to solar for much of the country.
Now, a new kind of solar lease in Florida is shaking things up, and it could mean more solar on more roofs in more places. Let’s delve in to whether the new Florida solar leases will be a good deal, why they’re necessary in the first place, and what it might mean for folks in other states.
Different strokes for different folks
Ownership works pretty much the same everywhere that has net metering: you pay for the panels and the panels make electricity, lowering your power bill and paying you back over time. You’re also eligible for any incentives that exist to lower the cost, most notably the federal tax credit that gets you back 30% of the costs you pay for panels as soon as the first year.
Third-party ownership has mostly followed the PPA model in states across the country. The nature of a PPA is that you only pay for the electricity produced, and you get that electricity for cheaper than the power company. That’s an easier sell than a lease, where the payment is the same no matter how much energy the panels make, and homeowners have to rely on estimates and calculations to be sure they’re getting their money’s worth.
The rates for a PPA are typically a penny or two cheaper per kilowatt-hour than the rates from the utility company, which might seem slim, but third-party ownership fills a niche in the solar marketplace. PPAs and leases can work for people who either have no income to take advantage of the tax credits, or home equity or cash to pay for the panels.
As an added bonus, PPAs often come with electricity production guarantees, maintenance contracts, and system monitoring, all included in the price of electricity.
States that don’t allow PPAs
Four states explicitly prohibit the PPA model of third-party ownership. These are Florida, Kentucky, North Carolina, and Oklahoma. It should come as no surprise that these states tend to have strong monopoly electric utilities who have put millions into lobbying against home solar, but have been replacing their coal-driven energy economies with utility-scale solar installations.
The argument against PPAs in these states boils down to a simple policy employed by many Public Utilities Commissions (PUCs): if a company sells electricity to a customer, it is considered a utility, and therefore must be subject to all the rules that govern utilities, especially the rules that allow monopolies for utility companies as long as agree to be regulated by the PUC and to provide service to all the customers in a certain geographical region, 24 hours a day.
Of course, solar panels don’t provide 24-hour-a-day electricity, and a solar company isn’t going to be able to muscle in on a utility’s service area, nor will they ever be able to install panels on everyone’s roofs (some houses just aren’t right for solar).
But even the states that ban PPAs still have provisions on the books that—explicitly or implicitly—allow for homeowners to lease solar panels. As long as the lessees aren’t paying for the electricity, the PUCs reason, the solar companies aren’t acting as utilities.
Well, in April 2018, lawyers from solar installation giant Sunrun successfully petitioned the Florida Public Service Commission (PSC) to rule in favor of their proposed solar lease, which fulfills all the requirements laid out in existing Florida statutes and will be available in the state starting in summer, 2018.
What Florida’s new solar leases include
Sunrun’s new Florida solar lease differs from a solar PPA in several important ways that make it allowable under Florida rules. First, the lease will be paid by the customer in set monthly payments. Next, the lease will not come with a performance guarantee, meaning customers can’t be sure they’ll see the savings Sunrun predicts from the lease.
Wait… no production guarantee? Does that mean the leases might not be a good deal?
Well, no, because why would a huge national company move into a market intending to bilk customers out of their money? It would be a nightmare if they did.
The Sunrun leases will “include maintenance and warranty service to cover repair or replacement of malfunctioning equipment,” system monitoring for Sunrun to check whether the panels are operating properly, estimates of savings first-year production, and a description of the assumptions used to calculate any savings estimates.
The leases will carry 20-year terms, with the option for the homeowner to buy the system at the end of the lease, or re-enter into an annual contract for continued service at a new, negotiated rate based on the cost of electricity at the time of the contract. The sample Sunrun lease agreement includes mention of a “fixed price” for lease payments “based on a negotiated rate of return on Sunrun’s investment,” but it’s not clear whether “fixed” means “unchanging” or “decided upon at the time of the contract.”
The distinction is an important one, because these kinds of agreements usually include a small-percentage annual increase in payments. Knowing whether the lease payments would be the same for the entire 20-year term or change based on a fixed percentage is key to determining whether a lease will be a good idea.
Example: Estimating savings from leases with and without annual escalators
When calculating our solar savings estimates, we use an estimate of 3.5% annual increase in electricity prices. So let’s say you get offered two solar leases for 6.7-kW systems, each of which has a first-year monthly payment of $75 ($900 per year) and will produce enough solar energy to save you $1,000 on your electricity bills.
That’s only a net savings of $100, but hey, you’re getting that electricity from solar, and your savings are estimated to increase as the utility raises rates over the next 20 years.
Now let’s say Lease Option 1 keeps that $75 payment the same for 20 years. That’s $900 per year, every year, or $18,000 all-in. Lease Option 2, on the other hand, increases the monthly payment at the start of each new year by 2%. That annual increase is known as an “escalator.” The total cost for Option 2 becomes about $21,900 over 20 years.
Here’s a chart showing how the annual savings stack up between Lease Options 1 and 2, where the utility charge goes up an average of 3.5% per year:
So you can see that the annual escalator causes a pretty huge reduction in savings, all else being equal. As an interesting aside, in this situation, the monthly payment for Lease Option 2 would need to be $64 in order to beat the Net Present Value of Option 1.
How Florida’s new solar leases might change things in other states
Is Sunrun’s new solar lease a game-changing new way to pay for solar? In almost every case, the answer is sadly “no.” But in states like the four we mentioned above, especially in North Carolina, which has very similar climate and electricity rates to Florida, this could be a boon.
North Carolina passed a law last year that specifically allows solar leasing, and given the Sunrun contract seems to show a willingess to let homeowners claim eligible rebates, this kind of lease could be an excellent solution, given Duke’s new rebate program there.
In Kentucky, a document put out by the state’s Public Service Commission seems to indicate they’d allow exactly this kind of solar leasing agreement in the Commonwealth.
This solar lease model could mean very good things for retirees and other low-income folks in Florida. Still, in almost all cases, where the homeowner has the income tax appetite to take advantage of the federal solar tax credit, buying solar with either cash or a loan is almost always the best bet. If you’re interested in finding out how much solar can save you in your state, whether you’re looking for a loan, lease, or cash purchase, connect with one of our partner installers today.
Last modified: May 24, 2018