The solar lease has made going solar possible for over 100,000 Americans, but there's still little that we know about the long-term implications of the financial structure for homeowners and the industry. A typical lease term is for 20 years. With the average home selling in 5-7 years, that means a potential buyer is buying not only a home, but a lease obligation as well.
The solar industry itself has a high success rate of transferring leases, but that may not tell the whole story. Bloomberg pointed out earlier this week that just having a lease can scare away homebuyers who don't understand or want the long-term obligation, and that's becoming a challenge for people to consider. As the residential solar industry grows, this is something for homeowners, companies, and investors to consider.
The challenge of a solar lease
The first thing to understand is why solar companies want to sell leases to homeowners. As companies moved into the residential market, they had a hard time selling a system that could cost as much as $40,000 in cash when loans weren't readily available. So, a lease was conceived that brought the initial cash outlay for homeowners down to as little as $0 and was very profitable for solar companies.
SolarCity (NASDAQ:SCTY) and SunPower (NASDAQ:SPWR) have seen that leases add more value for shareholders than simply selling systems. They're able to sell off the tax benefits to tax equity investors and collect revenue to cover their financing costs over 20 years. SolarCity says the present value of all cash flows, or retained value, from the residential solar systems it installed last quarter was $1.82 per watt, and value in the past has approached $2 per watt. SunPower doesn't explicitly give retained value per watt, but management says its retained value is in excess of $2 per watt.
This is important because it's advantageous for solar companies to sell leases. They're higher margin, and in SolarCity's case it's why the company focuses solely on leases in the residential market. But they're also a 20-year obligation for homeowners, which is a challenge when trying to sell a home.
A homeowner who signs an initial lease may see the value in monthly energy savings, but the new homeowner may not, and the home buying process is complicated enough without making a decision on a solar lease. It's also very possible that anticipated savings projected when the lease was signed don't turn out to be true when the home is sold. I highlighted some of the optimistic and problematic assumptions solar companies use when selling leases in an article here.
It should also be noted that most leases allow new buyers an option to take down the systems, but even making that decision is a lot for potential buyers.
Solar can add value for homeowners
What's interesting is that, while accusations of leases lowering the value of a home are increasing, there's little dispute that owning solar panels adds value to a home. The Lawrence Berkeley National Laboratory released a study late last year that showed that the average home that has solar panels that are owned, not leased, appreciates in value by $25,000.
The fact that solar panels could add to the value of a home makes sense. There's no financial obligation as there is with a lease, but there's a benefit in the cost savings solar energy provides. Not each homebuyer will value a purchased system the same, but it's an incremental value add to say the least.
How will solar companies adapt?
One of the challenges solar companies like SunPower and SolarCity face is educating homeowners about what leases are and how they're structured. They're not just an obligation, they're a way to save money on energy overall. But often times that side isn't appreciated by a potential homebuyer, and that's understandable.
Long-term, the industry may adjust by increasing loans or cash sales versus leases because those actually add value to the home. I recently discussed this in a deep dive I did on the residential solar industry. Trends are already showing that loans are gaining traction, and GTM Research recently predicted that solar leases will peak this year at 68% of the residential solar market and fall in coming years. Pushback from homeowners who are having trouble selling their homes may be another piece of that.
Given the margins solar companies generate from solar leases, this isn't a trivial debate for investors. Generating $2 per watt from leasing a system versus razor thin margins for building them make the economic incentive the lease. But the economic incentive for homebuyers may push them elsewhere.
The answer to whether solar is good or bad for homeowners may come down to how a project is paid for. Asking a potential buyer to take over a 20-year obligation is a lot, even if they have the option to take the system down. Buying puts the onus on the current owner, but could increase the value of a home. At the least, this is another thing for homeowners looking at solar to consider.
Travis Hoium manages an account that owns shares of SunPower and is personally long shares and options of SunPower. The Motley Fool recommends SolarCity. The Motley Fool owns shares of SolarCity. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.