Why it’s Needed
The appeal of solar power is simple: a tireless source of clean energy, a compact solar module that allows any property owner to locally generate power, and durable equipment without moving parts that can operate for 40 years and then be recycled.
The obvious question is why isn’t solar power everywhere. The answer: cost. Solar is expensive.
In this post and two others, we’re going to explore how businesses like Carbon Lighthouse overcome solar’s cost problem and make a profitable return. Solar project finance in the United States is something of a swamp. We will try to drain it.
Most people in the solar industry believe the price of solar will continue to decrease. They have good reason to believe in such declines: over the last forty years the cost of manufacturing solar panels has decreased 99% (solar used to be really expensive). The much talked about point of “grid parity” – when, without incentives, solar electricity costs the same amount as grid electricity – is much closer than it used to be. In certain sunny places with high electricity places it is already reality. Hawaii, for instance, has excellent sun and expensive electricity because of the high cost of importing fossil fuels to the islands.
Nevertheless, as things stand, most large solar projects, and many smaller residential ones, require financing. The reason is that energy producing assets are costly. Traditional power plants are pricey to construct and solar power plants are as well. While solar power plants have an operating cost advantage over natural gas and coal ones because fuel costs are lower (i.e. sunlight is free, but natural gas is not), the up front capital required to purchase and install solar panels is about two to five times that of other power plants.
Solar projects therefore require cash. Lots of it. It won’t surprise you that many homeowners don’t have $20,000 at hand, nor do many businesses have $500,000 available for a commercial scale system. So even though (with incentives) an investment in a rooftop solar array could yield a building owner a return in excess of 20%, most people could not afford them. To understand how good a return this is, try asking your local banker how you can achieve a 20% return today; since he or she is unlikely to suggest criminal activity, the banker will probably offer you a 36-month CD with a 2% yield.
Thus, outside financing enters the picture. Investors with pools of capital – banks, hedge funds, Carbon Lighthouse’s project funds etc. – are happy to earn 20% annual returns. At 20%, $1 million becomes $6 million in just 10 years. These sources of finance provide cash to building owners’ – houses, offices, schools, etc. – through two primary means: leases and Power Purchase Agreements (PPA).
A lease is what it sounds like. The bank lets you use the solar panels to power your home or business. You pay them a fixed monthly fee.
A PPA is slightly more complicated but ultimately more intuitive, which is why it is what Carbon Lighthouse uses. Carbon Lighthouse lets you use the solar panels to power your business. You then pay for every kilowatt-hour (kWh) of electricity you use. If it’s sunny and the panels generate lots of electricity (many kWh) and hence give you greater energy savings on your utility bill, you pay more. If it is winter time and solar energy production is low (fewer kWh), you pay less. In other words, just as you pay your utility for the energy they provide to you, you pay Carbon Lighthouse for the energy the solar panels provide. Since you pay Carbon Lighthouse less per kWh of energy than you do the utility, you end up saving money from day one. Assuming electricity prices continue the trend they have over the past 40 years, your savings will grow over time (see figure).
One critical feature to understand in these financing scenarios is that the financier, whether it be a bank, hedge fund, or Carbon Lighthouse, maintains ownership of the solar panels. Unlike a mortgage in which you are paying your way towards ownership, in solar financing agreements, even though you own the property the panels are placed upon, you do not own the panels.
It is this fact of ownership that allows financiers to sell you solar electricity for below current utility rates and still make a profitable return. How you ask? Stay tuned. It’s going to get very swampy.