Why rooftop solar costs more than it should

This summer, Texas may see a lot more scenes like this.
This summer, Texas may see a lot more scenes like this.
Image: REUTERS/Tim Wimborne/File Photo
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Rooftop solar is getting cheaper all the time. Twenty years ago, a typical home system in the US cost upwards of $80,000; today it’s closer to $20,000, thanks to technological improvements.

And yet solar isn’t as cheap as it could be, because of longstanding flaws in both the business model for major installers and stringent government regulations. The actual costs of solar hardware (the module, or panels, and the inverter that produces electricity) have fallen much more quickly than the system’s “soft costs,” which include the various overhead costs, from legal paperwork to marketing, that installers pass on to customers.

The first reason for the price gap is the complexity of solar financing contracts. Many homeowners have traditionally leased their panels, rather than owned them. While this model allows solar installation companies to pocket more tax incentives and ultimately earn more on each system, it requires them to lock homeowners into lengthy, sometimes two-decade contracts that can become a major headache for the seller if the home gets sold. In other words, such leases often require a hard sell to homeowners, and as a result, most major installers have high marketing costs, including sending legions of salespeople out to knock on doors.

Over time, those costs drove some companies out of business—Solar City, for example, was teetering because of high soft costs before Tesla bought it in 2016 and slashed its marketing budget.

“A bunch of companies that used to offer leases couldn’t survive the cost of customer acquisition,” said Vikram Aggarwal, CEO of the online solar marketplace EnergySage.

That dynamic is changing as the cost of solar falls so low that, as of 2020, most homeowners are now opting to buy their own system using a solar loan, rather than a lease. That, plus the growing prevalence of solar services offered by local home contractors whose marketing costs are much lower than big-box solar companies, could help close the price gap—although how long that will take depends on solving the other issue: bureaucracy.

Solar installers are required to manage a pile of paperwork to satisfy the permitting demands of neighborhood associations and state and local governments, with little consistency between jurisdictions. In the US, these costs can cause the per-watt total cost of solar to be triple what it is in solar-savvy countries like Germany and Australia, according to energy research firm Wood Mackenzie. Streamlining this process could be an early, easy win for the Biden administration, said Adam Zurofsky, executive director of the advocacy group Rewiring America.

Solar companies in the US can get away with passing soft costs on to the customers because most customers are ultimately focused only on whether their monthly payment (for a lease, loan, or whatever) is less than what they had previously paid to their electric utility. Solar companies are helped in that equation by the fact that utility electric bills tend to increase over time. But as panels get cheaper, solar companies will need to continue to slash their soft costs if they want to start turning a profit.