Solar Monetization Option Challenges Third-Party Ownership Assumptions

SI Staff
Written by Mark Del Franco
on April 16, 2014 No Comments
Categories : E-Features

While third-party ownership (TPO) represents much of the growth in residential photovoltaic installations, several factors may be starting to inject a few new wrinkles into the home solar market.

The current third-party model – evident in places like California, where third-party structures equate to 74% of the home market – works something like this: Solar providers, such as SolarCity and Sunrun, own, maintain and insure solar panels on a homeowner's roof. Homeowners switch to solar without the high upfront cost, avoid the responsibilities of ownership and save money on electricity bills.
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According to law firm Akin Gump, more than $3 billion in project financing has been raised since SolarCity and Morgan Stanley closed the first residential tax equity portfolio financing in the U.S. in 2008.

However, several market factors could begin to turn the popular model on its ear. In an emerging scenario, the homeowner – not the solar company – owns the PV system and typically signs a maintenance and service contract with an electrical contractor.

But here's where the market has begun to change: By paying cash for the solar system, or borrowing from a bank, homeowners can claim a 30% tax credit – a departure from the existing TPO model, explains Andy Redinger, managing director and head of KeyBanc Capital Markets Utilities, Power and Renewables Group.

Redinger says such an arrangement is more efficient: The homeowner is able to fully monetize the tax credits on a dollar-for-dollar basis – as opposed to the current climate, where solar companies seeking to monetize the tax credit would need to wade into the tax equity market to find a willing party to monetize the tax credits.

‘Invariably, the tax credits get discounted to get anyone interested to do it,’ Redinger says. ‘Not only is it inefficient, it's a complicated and expensive way to do it.’

This scenario is part of an emerging residential solar lending market that surfaced last year as a viable alternative to TPO, explains David Burton, a partner at Akin Gump.

As evidenced by sales organizations such as Sungage and commercial banks like Admirals Bank, Burton contends that firms are deploying debt products in an effort to shift industry focus away from TPO.
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Increasingly, such organizations are partnering with installers – as opposed to creating vertically integrated corporations. The rationale is that the installers may already be working with the homeowner and – per the arrangement – could steer the homeowner toward financing. The installers benefit from getting a fee for finding the customers – as well as an ongoing service contract – and the manufacturer benefits from finding built-in sales leads.

However, there are two shortcomings with the homeowner's owning the PV system and claiming the tax credit itself, Burton says. The tax law does not permit the homeowner to claim the depreciation associated with a system on the roof of his house, while a solar provider – or its tax equity investor – could claim depreciation.

‘The question is how does the benefit shared with the homeowner of the depreciation claimed by the solar provider (or its tax equity investor) compare with the 'skim' that the solar company (or its tax equity investor) is taking on the investment tax credit,’ Burton says. ‘Unfortunately, there is no easy way to answer that question.’

Secondly, he adds, if the homeowner enters into a lease or power purchase agreement, maintenance will be handled by the solar provider, rather than the homeowner having to pay a contractor to do it. However, with direct ownership, the homeowner would contract for maintenance and theoretically have to deal with all that entails.

‘The maintenance provider could go out of business, and then the homeowner has the hassle of finding a new provider,’ Burton says. ‘Alternatively, the contractor could raise its rates after the initial contract period.’

While it is unclear if such a model will be able to overtake TPO-backed residential solar, it has certainly captured the attention of lenders and service providers.

‘Both models are equally efficient,’ says Chris Diaz, senior vice president at Belleair Bluffs, Fla.-based Seminole Financial Services. ‘The ownership model works best for people who have the money to invest in a system, and the SolarCity model works best for people who don't have the money or don't want to spend the upfront money, but want to have solar.’

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