Last year, the price of solar reached a tipping point: In 2020, for the first time, a majority of US residential customers chose to buy their solar system with a loan instead of a lease or a lease-like contract called a power purchase agreement (PPA), according to the energy research firm Wood Mackenzie. And in spite of the pandemic-related recession, there’s been no uptick in defaults, likely because the loan payments replace a monthly electric bill homeowners would have been paying anyway.

“Five years ago solar prices were just too high,” said Bryan White, WoodMac’s US residential solar analyst. “Now that solar is much cheaper today, it makes a lot more sense to finance the system through a loan.”

The lease is up

Residential solar is responsible for about one-fifth of the solar electricity produced in the US (the majority comes from utility-scale solar farms). That share has grown from less than 10% in 2003; panels got cheaper as options for financing proliferated, and a George W. Bush-era solar tax credit was repeatedly renewed.

Is solar “worth it” for your house? The answer depends on the roof’s orientation (south-facing catches more sunlight), size, and other physical factors—about 80% of US buildings smaller than 5,000 square feet have at least some roof space suitable for solar. The more sun-friendly the roof, the more power the panels can produce, and the better chance the system has of meeting the most important criteria: Whether its monthly cost can beat your typical utility electric bill (most homeowners with solar will still have to pay a small fee to their utility company in order to stay connected to the grid for times when the panels aren’t covering the full electricity demand).

Usually, big solar installation companies like Sunnova and Sunrun will produce an estimate that takes these factors into account and translates them into a lease. Because panels were traditionally too expensive for most homeowners to buy outright, the US home solar industry was built on leasing: Zero-down, long-term contracts that promised to beat the cost of a household’s monthly electric bill.

The advantages of a lease for homeowners is that there’s no upfront cost, there are immediate savings compared to the utility bill (usually 10-30%), and maintaining the system is the company’s responsibility. But in order for the company to spread out the cost and still turn a profit, lease contract periods often run 20 years or more. If the home gets sold, the seller has to either buy out the remaining cost or convince the buyer to take on the lease.

There are other issues. Because the company still owns the system, any tax credits or other government incentives accrue to it, not the homeowner. If the cost of hardware drops during the course of the lease, as it is almost certain to do, the homeowner doesn’t get a lower rate. In fact, leases typically contain a clause that raises the monthly rate by a few points every year. And although utility electricity prices also tend to rise over time, if they stagnate, the homeowner’s actual savings margin can quickly evaporate.

As a result, Aggarwal said, “leases and PPAs have always required a hard sell.” Ultimately, that hard sell itself raises costs for customers. Across all solar companies, sales and marketing-related costs have fallen much more slowly than hardware costs, according to federal data. Those costs are highest at the big companies that are the main purveyors of leases, and can run to nearly one-third of the total system cost (the need to cut such high customer acquisition costs are part of what drove mergers of some big solar companies in recent years, including Tesla’s purchase of Solar City in 2016 and Sunrun’s acquisition of Vivint in 2020). As a result, the price that homeowners encounter from large installers is, on average, 10% higher than small installers, according to federal data.

Image for article titled How the rooftop solar industry is changing—and what it means for homeowners

Buy, don’t rent

Owning solar panels, if you can swing it out of pocket or with a loan, is a much better deal for homeowners. It can dramatically lower the cost of installation, make the panels a source of revenue after the payback period, and turn them from a headache into an asset when it comes time to sell the house.

If you’re able to take on some debt up front, solar loans typically yield much greater savings in the long run. In the last couple of years, a number of mortgage lenders and credit unions have begun to offer solar loans with interest rates around 3.5-5.5%. In some cases, the loan can be packaged together with the mortgage.

With a loan, the homeowner gets to keep the 26% federal solar tax credit, which can immediately shave several thousand dollars off the system cost. Most states also offer other solar rebates and incentives, including the option to sell off excess electrons from your panels. But these won’t last forever—the federal credit is set to wind down to zero by 2024. While the Biden administration, supported by a Democratic-led Senate, may push that deadline out a bit, in general the more popular solar becomes, the less money the government will spend to prop it up.

For a typical US home, the electric bill savings catch up to the cost of the system in about eight years, according to EnergySage. After that, if the homeowner owns the system, monthly spending on electricity can fall close to zero. Those savings effectively form a return on investment that, for a household with high energy demand, could reach 30% annually, Aggarwal said, for the rest of the system’s 20-25 year life. If the house gets sold, the payback increases: A 2019 analysis by the real estate website Zillow found that homes with solar typically sold for 4.1% more than comparable homes without solar (apart from occasional cleaning, rooftop solar panels tend not to require much maintenance).

Another advantage of loans is that they open up a much wider range of installers for homeowners to choose from, since leases are only offered by a few of the big companies. The 10 largest installers nationwide performed 40% of total installations in 2019, but they face increasing competition from local contractors and electricians, for whom adding solar to their mix of services is an easy choice. In addition to offering lower installation costs, many local installers are often also able to provide ancillary clean energy and electrification widgets, including electric vehicle charging stations, electric heating systems, and electricity storage batteries (the cost of which is also plummeting).

Stephen Irving, the CEO of Colorado-based Amicus Solar, a collective of local solar installers, said that batteries are an especially hot commodity; in 2020, about 9% of the group’s installations included batteries, but they except that to rise to 25% this year. Clean energy advocates are pushing for the Biden administration to create new tax incentives for batteries.

Solar loans aren’t without pitfalls, White cautioned. Loan providers typically make installers pay a sort of finder’s fee, some of which gets passed to the customer. There’s little transparency in most contracts about this fee, White said, and it tends to be higher in longer-term, lower-interest rate loans. So buyers should make sure to ask about it.

“Customers want lower interest rates, but they don’t know that could add to the system cost in the end,” White said. “It’s a bit of a taboo subject in the industry.”

Image for article titled How the rooftop solar industry is changing—and what it means for homeowners

Remaining challenges

As much as the cost of solar is falling in the US, it’s still not falling as fast as it could be. Comparable systems in other solar-heavy countries like Germany and Australia are a third of the price, because the permitting and regulatory requirements there are much more streamlined. In the US, a huge portion of the total cost goes to things like architectural renderings, multiple site visits by construction teams, independent architectural planning reviews, and layers of paperwork. A recent federal analysis identified at least 11 steps US-based installers are legally required to complete in between signing a solar contract and installing the panels. In Australia, all of the necessary permitting is dispatched in a single five-minute online application.

States, cities, zoning boards, neighborhood committees, and other local government agencies across the US all have different rules for solar permitting; many historic neighborhood associations are notorious for taking a not-in-my-backyard attitude toward solar. Smoothing out these inconsistencies should be as much a priority for the Biden administration as extending solar tax credits, said Adam Zurofsky, executive director of the advocacy group Rewiring America.

Rooftop solar also has a racial equity problem. A 2019 study by Tufts University found that in census tracts with a majority of Black residents, there was 69% less solar than in tracts with no racial majority; majority white tracts had 21% more solar than in tracts with no majority. The authors blame a combination of high costs, low racial diversity within solar companies, and low solar “seeding” in minority neighborhoods—that is, homeowners are less likely to go solar if they don’t see panels on their neighbors’ roofs. One solution, Irving said, would be for the federal tax credit to come instead as a cash grant, which could make it more attractive to low-income households whose tax bill may already be too low to benefit much from the solar write-off.

Even that won’t help renters, for whom installing panels still isn’t an option. Some power companies offer renters subscription plans for clean energy, but these tend to be a premium on the monthly bill, not savings, and often derive from solar or wind farms already hooked to the grid, meaning the subscriber hasn’t personally contributed to the climate benefit of expanding clean energy infrastructure. A better alternative for anyone whose roof isn’t available is community solar, essentially a small solar farm in which nearby renters or homeowners can buy a stake at a similar rate to a solar lease.

While consumers navigate these choices, the big solar companies are still trying to figure out how to turn a profit. Long-term leases require an unusually large leap of faith from investors in solar companies that homeowners will make good on their leases. This year, the US’s two biggest solar companies posted $500 million in losses, but saw their stock price grow by hundreds of percentage points.

“There’s no other industry to compare it with,” White said. “Wall Street seems to think this is fine for the moment, but it can’t be fine forever.”

As more homeowners turn to loans, companies are responding: At Sunnova, where revenue used to come mainly from power purchase agreements and leases, loans now account for 40% of the business. Large lenders like LoanPal, that work with many small installers, are now some of the biggest players in the solar industry, ultimately responsible for more projects than most of the big installers, White said. But with the decline in the cost of hardware showing no signs of slowing down, even that model has its limits.

“It’s clear that third-party ownership is falling out of favor,” White said. “But loan companies will eventually run into this too. When it’s less than five grand for a system, does it even make sense to take out a loan?”

📬 Sign up for the Daily Brief

Our free, fast, and fun briefing on the global economy, delivered every weekday morning.