Some commentators expect 90 per cent of owner-occupied homes to have solar within five years.

15 October 2013 — The economics and business models around solar energy are changing. Expect solar to take over the residential market.

Tony Seba, an entrepreneurship, disruption and clean energy lecturer at Stanford University, claims that since the 1970s the unit cost of new solar photovoltaic panels has improved by a factor of 100. That is, the dollar cost per watt has dropped from about $65 per watt to about 65 cents per watt. And that, he says, is a challenge for the fossil fuel dinosaurs.

“There’s no doubt solar is disrupting power markets,’’ Seba says. “Disruptive innovations tend to improve quality and decrease costs over time until it’s too late for the incumbents to compete.”

We can expect prices to come down further with China now providing tax breaks to solar power manufacturers. China is this year expected to overtake Germany as the world’s largest solar producer.

In Australia

In Australia the cost of solar energy has plummeted. According to Alistair Sproul, photovoltaics lecturer and postgraduate coordinator in the School of Photovoltaic and Renewable Energy Engineering at the University of NSW, average cost of electricity from the grid is 25 cents a kilowatt-hour while the levelised cost of solar energy can be as low as 6 cents a kWh.

This is based on the average cost of a 1.5 kilowatt PV system, now about $3100, which equates to 6 cents a kWh for electricity produced or 12 cents if the cost of interest payments of seven per cent are factored into the investment over a 25 year lifespan of the product.

Utilities landscape will change

In an interview, Jon Wellinghoff, chairman of the US Federal Energy Regulatory Commission, says the falling costs will transform the utilities landscape.

“Solar is growing so fast it is going to overtake everything,” he said.

The exciting part here is that the falling costs have helped create new business models for solar that would in time see it dominate the energy market. The big trend in solar now is leasing, and that will change everything. Home owners will pay nothing to install solar PV systems. We can expect the market to boom.

US rooftop solar installer SolarCity pioneered leases for solar panels for rooftops. The company gets a bank to cover the costs of the upfront solar system and then the customer pays a monthly bill (usually less than a utility bill) over a set time period, like 15 or 20 years.

Peter Rive, the chief operating officer of SolarCity, explained how good a deal it was for home owners.

“Customers get the benefits of solar panels without a big cash outlay, and they can do it with zero down,’’ Rive said. “We want people to think of it as a pay-for-use benefit, which is just what your utility company does now. When they do an equipment upgrade, they don’t ask you to pay for it. It’s a flat monthly fee, similar to our lease.”

The great advantage with leasing is that it makes it easier to upgrade panels at minimal cost. This is good since technology is advancing quickly. The other advantage with leasing is that solar system maintenance is the responsibility of the financier, not the homeowner.

Since the homeowner does not own the system, they don’t have to pay for repairs. And they will not be charged for down-time.

SolarCity is going from strength to strength. In December, it had an initial public offering, and investors couldn’t get enough of it; they could see that the solar market was about to boom. It started trading at $9.25. Last week, investors were paying up to $37.13.

And Goldman Sachs, Google and Honda are pouring money into the company. Stuart Bernstein, global head of clean technology at Goldman Sachs, told Bloomberg that the SolarCity agreement will help reach the Wall Street bank’s goal of financing $40 billion in renewable energy during the next decade.

Another company in the space is Oakland-based Sungevity, which was started up by Sydneysider Danny Kennedy.

Sungevity leases rooftop solar system in nine US states, Australia and Europe. General Electric, the world’s largest maker of power-generation equipment, participated in a $15 million equity investment in the company.

Under Sungevity’s model, people pay nothing for installation. They pay for the panels through a pay-as-you-go solar agreement.

The company says electricity bills can drop dramatically depending on location and usage, as customers are getting most of their electricity from the sun. The lower bill plus the leasing payment is still usually less than what they would pay for their old electricity bill. And because power bills are now forever on the rise, it means people using the new system would get an increasing amount of savings every year.

Commentator Nigel Morris says leasing is now fast becoming the new normal for the solar market and it will see more people entering.

“As for the future solar customer? We know there will be less early adopters and potentially less of our classic buyers because they are already in the market to some degree. So we’ll have more young customers, sceptical customers, more customers who couldn’t necessarily afford solar or they would already be in. The ‘wait and see’ brigade.

“Will they be more likely to want finance? I would suggest for an increasing proportion of the market the answer is ‘yes’.

“I have a view that reflects what we have seen in other countries that once solar can deliver electricity at lower cost than conventional electricity it increasingly becomes a financial service, rather than a product offer. The product simply enables a financial outcome – in fact, it is the only tangible outcome; kWh’s. That’s why finance fits so nicely with solar.”

Green Cross Australia has now created an innovative leasing model that aims to make solar power more accessible to homes around Australia. The scheme, Every Rooftop, has partnered with well-known Australian solar installation company Ingenero, which owns and maintains the photovoltaic panel system for the term of the lease. Monthly lease payments for 10 to 15 years will deliver savings compared to the average electricity bill.

Sunwiz managing director Warwick Johnston has told ABC that Australia is on track to see 90 per cent of owner-occupier homes install solar panels within the next five years.

“I suspect that as saturation approaches there’s going to be new markets that are opened up by innovative businesses, and those markets will include rental housing and those on lower incomes.”

Certainly, there is evidence that the takeup of solar is starting to hurt the utilities. They are starting to discover their business model is now under siege. In its annual report, Energex said the increased use of rooftop solar is starting to damage the company.

“Changing consumer behaviour is continuing to have a detrimental effect on prices. Due to a combination of influences including the significant rise in prices in the last few years and the increasing use of solar energy, there is reduced consumption of electricity, which in turn means the mostly fixed costs Energex faces have to be spread over a smaller chargeable base.”

Leasing will only exacerbate this for all utilities. This is not about technical issues, it’s purely about economics.

But there’s a missing part of the equation. All these leasing schemes are aimed at the residential market. The take up of solar would be greater if it were adopted by business.

Kylie Catchpole, associate professor of solar engineering at Australian National University, says we need these sorts of financial innovations for the business world so that more offices around Australia will be powered by solar energy. At the moment, she says, business is struggling to find it delivering any benefit to the bottom line.

“The main issues are split incentives (where one company owns the building and another pays the electricity bill) and lack of capital,’’ Catchpole says. “There is plenty of opportunity for innovative financing arrangements between companies that could make installing solar on commercial infrastructure a win-win situation.”

Creating a solar leasing model for business is the next big challenge.