Arizona, which is ranked #1 for solar energy insolation, is changing its tune...

The federal Investment Tax Credit (ITC) essentially subtracted 30 per cent of the cost of a solar system, with a tax credit for its owners.

Investors and solar developers were quick to utilise the ITC in the US, quickly developing third-party ownership in the form of leases and residential Power Purchase Agreements (PPAs). By 2013, more than two out of three California solar systems were third-party owned.

Under a PPA, the homeowner agrees to purchase power at a set price per kilowatt-hour. With a lease, the payments are based on system size. In both cases, the developer owns the system and gets the ITC, enabling lower prices than utility rates. Contracts are usually for about 20 years.

Renting and leasing

Together with the ITC incentive, consumer psychology helped create the rapid rise of leases or PPAs in the US distributed solar market.

Consumers are already used to “renting” electricity. Homeowners do not expect to own and run a coal plant to get electricity, and for most consumers, it is an equally improbable mental leap to go from merely paying for kilowatt-hours to owning a solar power plant. Many do not want to understand how a solar system works or be responsible for its upkeep.

PPAs and leases duplicate the ease of utility electricity, by continuing the old way of paying for electricity monthly with no money down, and no responsibility for handling repairs.

But qualifying is not easy.

“You have to be pretty much more Catholic than the Pope,” says Chris Stern, who co-founded Pure Energies, which facilitates PPAs or leases for solar developers in 12 states, and is about to add a 13th, Texas.  

“You need to have credit rating of 680 to 700,” adds Tom Kunhardt, the company’s Corporate Trainer. Last year it bought 1 Block off the Grid, the San Francisco start-up that pioneered this kind of third-party solar marketing in California.

“For Sunnova it is 650. Clean Power Finance has something of a sliding scale where they will allow a credit score as low as 600 to qualify, but of course they pay a higher solar rate compared to somebody who has excellent credit.”

Third-party solar PPAs are currently permitted by state regulators in 23 states. But the ITC, with the resulting leases and PPAs are just a part of the recipe for success.

“The ideal recipe is insolation, rebates, high electricity rates and the ITC,” says Stern, but notes that this is almost impossible to achieve. “When somebody calls it's like magic.”

California’s initial leadership came from having that perfect combination of incentives. But the once-generous California Solar Initiative (CSI) rebates through the big three utilities have been 100% exhausted as the state met its target, ahead of the 2016 deadline.

PACE

Because high electricity users - typically owning large homes and swimming pools - pay much higher per-kilowatt-hour rates; the incentive is greatest for those who use the most electricity to go solar. These also tend to be some of those with the means to qualify, with good credit.

But for those who do not perhaps have such high credit scores, Property Assessed Clean Energy (PACE) financing increasingly looks like the next driver in California. A PACE loan is not dependent on credit, as it is included with property taxes on a home, and passed along to the new owner when it sells. The solar generation means the total payments are lower than utility power, so few homeowners default.

“They have a cheaper house to live in even with the assessment on the property taxes,” says Kunhardt.

Industry insiders see PACE as the next growth curve for California, depending on the financing to fund it. Clean Power Finance has arranged an investor funded hybrid prepaid PPA and PACE financing.

But there have been legal challenges. “California First launched in 2010, but was put on hold when Freddie Mac and Fannie Mae would have second position to a PACE lien,” he explains.

Southern California’s insolation is the best in the nation, but insolation is not enough. Developers in Colorado have shut down when rebates disappeared, despite the state’s 308 sunshine days a year. Arizona has the best insolation in the country, yet is almost the worst state for the solar industry. However, the state's tune is changing of late. Arizona Public Service Co. wants to put free solar panels on 3,000 homes to help meet state targets for alternative-energy use and to satisfy customer demand from people who cannot afford to buy or lease the power systems.  According to a news report by The Arizona Republic online, if the plan is approved by regulators, the customers would get a monthly $30 credit on their electricity bills for 20 years in exchange for allowing APS to put solar panels on their roofs. But there are some in Arizona who see this is a political move rather than a policy one, according to a podcast by the news report.

According to Kundhardt, "It's more difficult to do business in Arizona because the utilities are not very friendly to solar companies. Utilities have made connecting difficult, and Arizona’s rebates were already negligible at 10 - 20 cents a watt before ending this year. Arizona has always been very, very competitive, and there are very, very slim margins for solar developers there. But they have great sun. It's the one good ingredient.”

The northeast does not have the insolation of states nearer the equator. A system that produces at 1.8 ratio in Arizona could only produce at 1.1 in the northeast.

On the other hand; the Northeast’s climate also helps put upward pressure on utility rates. “We had a big jump in rates, with all the demand on natural gas, and especially in New England, with the cold snap that really put a strain on the grid,” says Kunhardt.

Cap & Trade

Most of the states in the northeast have high electricity rates. Ten now comprise a cap and trade system that has been operating well for some years boosting distributed solar through the trading of Solar Renewable Energy Credits (SRECs) that must be bought by utilities to offset carbon emissions, under the Regional Greenhouse Gas Initiative (RGGI). But SRECs are not a perfect incentive.

“The SREC market in Massachusetts has been oversupplied for the better part of two years and it's been tough to trade them at a reasonable rate,” says Kunhardt. “If you’re lucky they would trade at $200 an SREC a year ago and now the price is coming up a little bit.”

Massachusetts legislators are trying to make adjustments to increase the RPS standard for the utilities, which would increase the target for renewables as a whole. So developers hope that the SREC values will increase there. The production-based SRECs are captured by the developers, allowing them to offer solar rates that are cheaper than utility electricity rates, which range between 14 cents and 20 cents a kilowatt-hour.

Another RGGI member, Connecticut has excellent state incentives supplying production-based credits for financed systems, and average electricity rates at 20 cents a kilowatt hour. “Connecticut is very good from that point of view,” says Kunhardt. “But it's a very shady state. A lot of big trees; 80 foot or 94 foot trees.”

But policy is always fragile where it depends on politics.

New Jersey, a founding member, once rivalled California in distributed solar. But with the election of a Republican governor, the state pulled out of RGGI. Governor Christie’s master plan reduces the state’s 2020 RPS from 30 per cent renewable to 22.5 per cent.

Political opposition similarly shuts out the Republican-held south from distributed solar, where regulators have not allowed third parties to compete with the powerful coal monopoly utilities, so the consumer loan has been the only route to solar. But with the low incomes and lack of credit in most of these states, this market remains largely undeveloped.