|By Kristian Hanelt, SVP Renewable Capital Markets, Clean Power Finance|
More utilities are beginning to recognize the benefits of investing in residential solar financing. Although some utilities regard residential solar as a threat to their businesses, what they should be looking at is the profit opportunity. Here’s why.
Third-Party Owned Residential Solar
Third-party financing has made residential solar a mass-market service. In 2007, a handful of companies started selling solar leases and power purchase agreements to consumers. Instead of selling solar as hardware, they sold solar as a service. With solar as a service, a third party owns and installs the hardware and agrees to maintain, insure and monitor it as needed during a 20-25 year contract. The homeowner can either pay the system owner a monthly fee for use of the solar equipment, or pay monthly for the electricity generated by the system. Homeowners with disposable income also have the option of paying up front for all the power the system will generate during the contract term. More Americans are going solar each year. About 80 percent prefer solar financing products to cash purchases.
Tax Appetites: Hungry, Hungry Utilities
U.S. utilities are generally highly profitable enterprises with significant incomes. This means they pay a lot of taxes. To alleviate their large tax burdens, utilities look for tax credits put in place by the federal government to encourage investment. Companies that benefit from tax credits are said to have large “tax appetites.” Utility holding companies in the U.S. tend to have big tax appetites.
The idea of tax credits is central to the U.S. solar industry. If a company buys a solar system, the federal government grants it a tax credit for 30 percent of the system’s total cost. The tax credit, known as the federal investment tax credit, helps sate utilities’ large tax appetites. The 30 percent ITC is effective until Dec. 31, 2015, at which point it decreases to 10 percent. Ten percent is unlikely to attract as much interest, but until 2016, we’re living in an ITC world with a lot of potential tax equity from utilities.
Doing What They Do Best
Third-party owned residential solar is a natural evolution for utilities. Unlike other third-party solar investors, utilities have expertise in owning and maintaining power generation assets and selling power to millions of homeowners. This expertise gives utilities a leg up on other investors interested in solar assets.
Solar is also an effective solution to a problem utilities selling power in deregulated markets face: customer churn. Utilities with large numbers of deregulated customers typically experience high customer turnover. In fact, the typical customer in a deregulated market can rotate through electricity providers as often as once every nine months. Investments in third-party financed residential solar are a tool utilities can use to acquire and retain unregulated customers.
Take, as an example, a large retail electricity provider, owned by a utility holding company, based in the eastern U.S., that serves millions of customers. The customers have options about where to buy their electricity, which forces the utility to spend significant amounts of money on customer acquisition and retention. But utilities that are active in deregulated markets can create substantial customer loyalty by enrolling customers in solar leases and PPAs. With solar financing, utilities create a 20-year contracted electricity supply arrangement that can dramatically decrease their customer turnover. Homeowners would also be more likely to adopt solar if utilities were financing the systems.
A Golden Opportunity
To recap: utilities have large tax appetites, which can be fed by attractive tax credits for solar systems; they know about owning energy assets and selling power to customers; and they struggle with customer retention – a struggle that can be alleviated by locking customers into 20- to 25-year contracts. This is true for both regulated and deregulated utilities: for regulated utilities, solar is an investment opportunity they can pursue outside their regulated service territory.
Solar will play a larger role in our energy mix. Utilities should start thinking about participating in residential solar now to evolve with the growing industry. Residential solar is a maturing asset class with high returns and low default rates that affords utilities the chance to put billions of dollars of capital to work.
Solar is not a niche industry. Assuming today’s best-in-class installation costs and a reasonable cost of capital, there is $60 billion per year of homeowner electricity payments that could be refinanced at a savings with a solar lease or PPA. This is an enormous, largely untapped market where there are big profits to be made, and utilities are ideally positioned to reap them.
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