Will third party ownership shine after the 2016 sunset?

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Third party ownership (TPO) has catalysed the US residential solar market to the extent that within just a few years, hardly any rooftop PV systems will be owned by the people who live under them.

In the first quarter this year, 90% of installations in Colorado were third party owned, Arizona was not far off that pace, while California and Massachusetts hover at around the 65% mark (see slide 1), according to GTM Research.

But is this a problem and what impact will the 2016 sunset of the Investment Tax Credit have on all the companies who based their TPO lease models on the 30% ITC, not 10%? Will the ITC sunset bring a corresponding twilight for the giants of TPO such as SolarCity and Sunrun?

At the Intersolar North America conference in San Francisco last month, Sanjay Ranchod, director of government affairs and senior counsel at SolarCity, attempted to shrug off the ITC spectre that looms over its business model.

“We don't have that concern because we have visibility into the ITC dropping from 30% to 10%,” he said. “Of course, we are preparing for it and our industry should be preparing for it. It would be great if [we] got 10% to 30% indefinitely, but I don't assume that. As an industry we have to grow up, we have be get off incentives and be self-sufficient. But as an industry we need to scale, to continue to bring our costs down so we can be competitive even on a very unlevel playing field [with] the fossil fuel industry.”

We'll have to wait and see quite what those preparations are for the drop in ITC to 10% at the SolarCity HQ in San Mateo. But at the same event, Ranchod's colleague indicated that company executives didn't lose too much sleep over the ITC sunset.

Jimmy Chuang, chief structured finance officer at SolarCity, said that he estimated the addressable market for distributed generation at US$90 billion.

“Our penetration rate is so low for the industry in the distributed generation space, roughly around .05%, so there's huge growth for the existing market but people didn't quite realise how big the additional market is,” he said. “Every new home available in the US is roughly 300,000 to 400,000 homes. That's more than the industry can address every year, multiple times. The growth is infinite in our lifetime. No matter how hard we work, it will be very hard for us to address the market. It's very exciting.”

To add further comfort to SolarCity's financial confidence, Chuang said that if the company shut up shop tomorrow, it would still have US$1.2 billion in a 20-year cash flow.

“Even if we shut down the business today, which is not going to happen, we would have US$1.2 billion coming back to us over the next 20 years,” he said.

But will that “infinite growth” continue through direct ownership by homeowners or by Wall Street investors, especially as prices decline, the SunShot Initiative of $1/watt by 2020 nudges closer and the ITC's influence wanes?

In a recent webinar, Shayle Kann, vice president at GTM Research, pointed out that the US had seen impressive growth over the past couple of years on a percentage basis.

Last year, cumulative installations reached 3.3GW of PV in 2012, a 76% increase on 2011. That number, together with a relatively slower rate of growth around the world, has bumped the US global market share from 5-7% between 2004-2011. This year, that share will reach 13%.

“The US market is growing and it's increasing in importance from a global scale,” Kann said. “But when you look at the US market it's a bit misleading to look at overall installation figures because everything occurs differently in each market segment and in each state. Everything in the US is a build up of micro-markets.

“Particularly interesting is that the residential market has been surprisingly consistent in most states. You see this incremental growth almost every quarter; over the past 14 quarters 13 quarters have seen growth.”

Cost declines and the dominance of TPO have helped boost the residential market, without question. GTM estimates there are around 15 companies in 17 states offering TPO, including SolarCity, Sunrun and Sungevity.

“Although we don't have data on every state, there's a very clear and consistent trend to date among the states where it is offered,” he said. “You start offering TPO and over the course of a couple of years it becomes the dominant model.”

“But a question that we've been asking ourselves and hearing not as often as you should in the media is whether this is the way you should expect the market to be in perpetuity.”

The answer will depend on who is asked the question. Nicholas Lazares, vice president and director of strategic partnerships at Admirals Alternatives, a division of Admirals Bank based in Massachusetts, clearly has a bias since his company is offering an alternative to TPO through debt-based residential solar financing.

“In around 2008 solar leasing was born as a way to provide easy access to solar for homeowners,” he said. “We believe that solar leasing really did create this market because it was easy. It made it simple on the front end and complex on the back end and created a huge capital market with significant returns to investors as third party owners. However, until recently there weren't that many attractive financing vehicles outside of solar leasing for residential solar.”

But the political tide may be turning against such easy money for the lease companies, Lazares suggested. The Massachusetts Department of Energy Resources issued a white paper in June this year, which recognised that the potential benefits to the local economy are greater with direct ownership.

“They know that the leasing trend has grown,” Lazares said. “However, their view is that the value to Massachusetts homeowners and the local economy is greater if project and subsidy benefits accrue to local owners or investors.”

Massachusetts' response has been to create a solar carve-out rule that might support direct ownership by providing higher a SREC adjustment factor for direct ownership installations. Meanwhile, lease obstacles exist in states like North Carolina, which classifies TPO companies as utilities, and Florida, where Admiral Alternatives makes around 20-30 loans per month, does not allow TPO.

Admirals Alternatives reckons that a 20-year lease would have a net benefit of US$19,156 on a 6kW system costing US$27,000 assuming a utility rate of US$0.26 which increases annually at 5%. That same system would have a net benefit of US$57,294 on a 20-year loan [see slide 2], largely because of the lender's ability to amortise the loan within a year, they say.

Popularity of the TPO model is not likely to drop any time soon, but solar is such a dynamic industry right now that I won't be making any bets too far into the future as to a renaissance for direct ownership, especially post 2016.

Neither is Lazares.

“2016 is the 900lb gorilla,” he said. “The 30% ITC has a sunset that creates uncertainty around leasing. We're seeing several policy shifts within local markets to support the movement towards direct ownership in Massachusetts and other states.”

In Connecticut, Sungage launched in May this year with a US$1.5 million pilot funded by Clean Energy Finance Authority to supply loans for about 70 solar installations. That's small, but it's significant.

“Direct ownership through a debt-based financing programme provides great monetary benefit to the homeowner who is also the ratepayer and the taxpayer,” said Lazares. “We also know that the availability of capital for solar exists in debt markets we're seeing more companies coming into this space – there is significant growth to be had and significant market share to be taken.

“It's not our view that leasing will totally die off or lending will take over entirely but we think that there will be more of a shift and more consumers owners who will decide to own their systems.”

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