John Farrell, of the Local Institute for Self-Reliance, has recently noted several ways in solar PPAs and leasing are increasing the taxpayer-subsidized cost of renewable energy.

In “The High Cost of the Solar Middleman” (Jan 9, 2014), he cites a Massachusetts report that explains that “leased solar arrays require more than double the incentive needed to support customer-owned solar arrays.”

Why does solar leasing cost more?

In the words of the report authors, “These transactions often require attracting additional tax-motivated parties to the project financing, and at considerable expense for transaction and capital.” How much more expensive? A host-owned solar array is expected to get financing at 4% interest and have a return on equity expectation of 4%. A solar leasing company is expected to pay 6% interest on shorter-term debt and to require 15% return on equity.

It might seem convenient to blame solar leasing companies for this problem, but they’re merely opportunists in a poor policy environment. Making your money back on solar in America is complicated. It requires a combination of tax savvy, skilled navigation of state bureaucracies, persistence at a local permitting office and limited options for low-cost financing. Compared to Germany, with a simple, non-nonsense long-term contract that permits low financing costs and broad participation, America’s solar market is a joke (and the installed cost of solar is much higher as a result).

Furthermore, big banks have also played a role in inflating solar leasing costs to taxpayers, using a legal loophole to collect tax incentives based on (higher) estimated costs of solar installations instead of actual costs. Leasing company SolarCity was notable targeted by the Treasury Department for its participation in the practice.

According to a separate story posted by John Farrell in October of 2012,

The Treasury Department inspector general is probing solar leasing company SolarCity (and others) for its use of “fair market value” pricing on leased systems.  At issue is the federal 30% tax credit for solar, based on the installed cost of the system.  As an accepted practice, many leasing companies have reported the “fair market value” to the federal government in lieu of the actual cost.  But in the case of Solarcity’s California operation, in particular, that reported price was often much higher for leased systems than for customer-owned solar arrays.

That this is an ongoing investigation is confirmed by a story in Greentech Media dated December 19, 2013.

Farrell writes:

LSR first covered this issue in May 2011, when I wrote about this phenomenon, tipped off by Jigar Shah from Carbon War Room that solar leasing companies inflated project cost estimates in order for their bank financiers to collect out-sized tax credits. But Jim Jenal added powerful evidence, culled from analysis of data from the California Solar Initiative.

The data shows the reported installed cost for customer-owned and leased solar arrays that participated in the state incentive. It fingers Solarcity in particular, whose leased systems cost 50% more than residential solar projects that are owned by the customer. The following chart shows the average installed cost of leased and owned residential systems for four different solar contractors in California, using the California Solar Initiative Data from 2010 for smaller than 10 kW residential solar PV projects in Southern California Edison territory.

Solar City of course defends the practice as legal, “stating that fair market value (i.e., the price the buyer actually paid for the system) must be determined by an independent appraiser. The company goes on to state that its practices follow the IRS guidelines detailed in “Valuation of Solar Generation Assets” by appraiser CohnReznick and adhere to “the 1603 Program’s rules and guidance.”

But the larger issue is that the price of solar-generated electricity will never reflect its true cost if the only systems readily available to consumers are through leases or PPAs, because these have to include the costs of the middleman and well as the interest paid to investors. PACE eliminates most of this, by financing customer-owned facilities. There is still an interest charge that has to be paid on the money borrowed to finance the system, but with PACE the majority of benefits (tax credits, solar RECs, etc.) accrue to the owner, so when these are taken into account the cost of solar energy is dramatically reduced, and more and more users can enter the market.