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This story was originally published in Columbia Ideas at Work.
Solar energy has exploded in the United States in the past decade, growing at a compound annual rate of 60 percent according to SEIA, an industry group. The solar boom is thanks in part to generous federal tax credits and rapidly declining prices — the cost per watt of solar panels has dropped from $76.77 in 1977 to just 74 cents today. Prices have declined 70 percent just in the past ten years, thanks in large part to low-cost panels coming out of China.
Even so, the total installed cost of a residential photovoltaic system lies between $15,000 and $45,000, depending on the state, placing it well outside the reach of the average consumer. “The challenge to solar has long been who’s got the money to spend up front and who wants to take the risk,” Bruce Usher explained in an interview. “What if it doesn’t work? What if something better comes along a few years from now?”
Questions like these hampered the growth of residential solar for years, according to Usher, a professor of professional practice and co-director of Columbia Business School’s Tamer Center for Social Enterprise. The key to unlocking solar’s potential, accordingly, wasn’t technological, but rather financial — leasing systems to homeowners rather than selling them.
The model, pioneered by SunEdison on big-box retail stores in the early 2000s, generally relies on a fixed-length contract, with consumers either purchasing energy from the system at a discounted rate compared to the local utility or paying directly for the cost of the system over a period of years while receiving the energy for free. It quickly spread to residential properties through companies like SolarCity (presently in the midst of a controversial merger with Tesla), Sunrun and Vivint. The leases, with their long durations and promise of regular, stable cash flows also make them ideal for securitization — reducing risk to investors. And, in addition to receiving regular payments in exchange for financing the solar panel loans, financiers still benefit from the 30 percent Solar Investment Tax Credit granted to solar panel owners.
The model has shown near instant results. In the past five years residential solar generating capacity has expanded elevenfold, according to research done by Usher and Albert Gore III ’15. More than 70 percent of the residential installations in the US’s three largest solar markets (California, Arizona, and Colorado) were leased.
For consumers, the appeal of solar leasing isn’t hard to see. In addition to precluding the need for an expensive down payment, leasing also shifts the risk of an unfamiliar technology off home owners. Further, as Usher explained, electricity is a commodity — there’s no difference between electrons — so most consumer behavior is driven by price. “The real reason solar has been exploding is that in the majority of states today — and soon probably all 50 — consumers can switch to solar and save money.”
To achieve those savings, however, consumers must be able to sell the excess power generated by their systems back to the utility company, an arrangement known as net-metering.
Net-metering has increasingly come under fire from local utilities, who have argued that it displaces the costs like grid maintenance onto other users. Some states seem to be buying the argument. In December of last year, Nevada moved to cut the state’s official net-metering rate by 75 percent. The decision effectively drove SolarCity out of the state.
“If you can’t sell electricity back to the grid, the economics of solar are terrible,” Usher explained. ‘The vast majority of power generated is in a five hour window during the day. You can’t use it all, so you need to sell it back to the grid, which, in theory, is wonderful because the grid needs a lot of power in the afternoon.”
The utilities, however, aren’t entirely wrong either. Like much of the US’s infrastructure, the power grids are massive, dated, and costly to maintain, and arrangements that allow residential solar owners to sell energy back to utilities at the same price they purchase it at effectively get a free ride. Those consumers most able to make the switch to solar — those living in large suburban homes, with large roofs, rather than those renting urban apartments, for example — are also likely to be amongst the wealthiest consumers, meaning the cost of maintaining the grid is shifted to those least able to afford it.
Simply eliminating the grid entirely is unlikely to be an effective solution either. Even if battery technology were sufficient to store more of the power generated by residential solar systems, both energy demand and solar supply are highly variable. A grid connection is a guarantee of power when you need it.
Instead, what’s needed are clear and consistent rules, Usher argues. “When it comes to net metering, residential consumers shouldn’t get the full retail rate, but they shouldn’t be cut off from the grid either. The answer is somewhere in between. The government needs to set those rules today, and set them in a way that reflects the way the whole energy system in this country is changing.”
Bruce Usher is a Professor of Practice and The Elizabeth B. Strickler '86 and Mark T. Gallogly '86 Faculty Director of the Tamer Center for Social Enterprise at Columbia Business School. Professor Usher teaches MBA students on the intersection of finance, social and environmental issues, and is a recipient of the Dean's Award for Teaching Excellence. Prior to his work at Columbia, Professor Usher was...
Read the Research
Bruce Usher, Albert Gore III
"The Spectacular Growth of Solar PV Leasing"