Debate over net energy metering has become so divided it sometimes seem that there is no way to cross this particular chasm.
The story so far is of hugely successful companies such as SolarCity and Sunrun installing solar systems to the chagrin of utilities who see their already low margins cut further by these rooftop revolutionaries fuelled by third party ownership (TPO).
In Arizona, the debate has turned ugly with an all-out war against net energy metering, a major driver in the adoption of solar.
But somewhere amid it all there has to be some consensus. All wars between nations and rivals come to an end, eventually, leaving the spirit of competition to express itself in sporting arenas or on open markets.
Some companies have opted for outright confrontation in trying to beat the utilities at their own game, while others appear to want a more conciliatory, collegiate approach.
Kristian Hanelt, senior vice president of renewable capital markets at Clean Power Finance (CPF), said: “Third party financing and its increasing penetration poses strategic and operating challenges for regulated utilities. The more customers go solar, utilities will be required to amortise their fixed cost of maintaining the grid across a smaller base of people buying electricity from them. That causes the utilities to have to raise rates for those homeowners, which encourages them to go solar at an increasing rate.”
It's a vicious cycle or virtuous circle depending on which side of the debate you're on. But Hanelt is optimistic that utilities can profit from solar.
“Solar has great implications for utilities as we think about the short, medium and long term,” he said. “We've established that solar is popular and trending towards greater adoption and more markets. We've established that the economics are sustainable in the current net metering regime and current federal and state subsidies, even when those go away. We've established that it's a great investment [people] will continue to invest in solar even in the face of rising interest rates because of the risk return that it pays out.”
Hanelt's company is participating in an initiative led by the Rocky Mountain Institute to try to bridge that yawning chasm over the costs of solar to non-solar customers. The main objective of the Electricity Innovation Lab (eLab) is to address three key challenges: understanding the costs and benefits of distributed generation (DG); harmonisation of business models of utilities and DG developers; acceleration of the adoption of distributed resources.
James Tong, senior director of programmes at CPF, told PV Tech: “RMI saw as we did that there was a brewing fight over NEM where utilities saw it as a threat to their existence.
“RMI believes that as we do that there is a middle ground where solar can peacefully co-exist with the utilities – in fact the utilities can make money from solar; it's just a matter of reconfiguring their business and updating their business model.”
If you look at the participants in eLab, the giants of third-party ownership (TPO) are absent [see slide 1]. It's impossible to tell if this is significant, but it makes CPF's approach seem all the more emollient.
CPF analysis suggests that even if utilities lose market share, the pie is so big that no one needs to go hungry.
“We think of solar as the next wave of consumer financing… we do believe within the next year it will be a US$6 billion annual market,” said Hanelt during a Solar Electric Power Association webinar last week. “Fifty-six million homes can refinance their electricity bills with solar – but only 1% of the market has been penetrated.”
Even when the Investment Tax Credit drops from 30% to 10% from 2016, McKinsey data shows that the economics of solar remains strong assuming annual utility rate increases of a very conservative 2.5%, an 8% yield for investors and continued decline in system costs [see slide 2].
“When that tax credit goes down to 10% in 2017 and 2018 you get to a $3.20/w cost [of installation],” he said. “That is fairly common today in terms of where the best in class solar installers and originators are operating. We already see folks today at these numbers and below. That's a very good sign for the industry being sustainable without a federal tax credit of 30%.
Solar has a great risk-return profile that yields 12% for investors [see slide 3].
“We expect and plan that over the next number of years, that 12% will come down significantly commensurate with the size of the balloon increasing dramatically,” said Hanelt. “That is what gives us great confidence that there is going to continue to be lots of capital available for residential solar.”
That's good news that just gets better when you consider how much further balance-of-system costs could decline.
“California today is basically where Germany was in the first quarter of 2009 –what Germany has done that California still needs to get better at is reducing soft costs. Those have replaced modules as the most expensive part of installing a solar system today. If you think about what are the primary cost drivers of profitably selling and installing a solar system today it used to be modules now it's the cost of customer acquisition, costs of permitting and being efficient with labour costs.
“Germany can serve as a very good blueprint and guidepost for what kinds of cost decline are possible over the next few years while we still have that 30% tax credit. You can see Germany is now installing for approximately $2.20/W.”
Received wisdom assumes that TPO either through a lease or power purchase agreement (PPA) is going to be the dominant model for some time to come. But others in the industry, such as Admirals Bank, have tried to argue that loan products such as theirs will become increasingly attractive as costs decline. So confident is it that it can compete in California, Admirals Alternatives established a San Francisco office in recent weeks.
Hanelt agrees, but only to a very limited extent – hardly surprising given that the CDF model is based on TPO.
“Everybody's saying that people are going to finance using loans because these systems are going to get so cheap,” he said. “That's right on one level, but I do not believe that loans will replace PPAs and leases as the dominant financing product. If you look at what loans do.”
PPAs and leases offer the lowest monthly payments and monetise the ITC efficiently and TPO companies offer a full service throughout the lifetime of the contract.
“A big driver of why people like to finance solar is operations and maintenance,” he said. “If I'm going to finance a solar system for 20 years I want to make sure it's taken care of and it's producing so that the benefit of avoiding utility electricity purchases is as I expected it would be. Most loan products today do not include any kind of maintenance monitoring or performance guarantees, mechanisms that are all very common in loans and PPAs and leases.”
But loans have their place in states where there are generous state-based taxes, he said. North Carolina, for example, offers a 35% personal tax credit for renewable projects.
If there is a bright spot for utilities, it could be in servicing, he said: “If you look at 2013, we expect about 100,000 homes will go solar this year, the majority of those through financing, and we expect that number to double by 2016 to 200,000 homes. Even at those numbers we're still just a fraction of penetration of the US housing market and this is going to be an industry that continues to grow and scale as time goes on.”