Solar leasing - the new, new normal?

Historically, survey after survey has described the upfront cost as the major barrier that prevents house holders from adopting solar more widely.

While reasonably sized system costs were beyond a few thousand dollars, or the payback period was beyond an average of five years (close to the turnover rate of homeownership), this barrier remained the case. It is also what has driven a huge surge in interest in financing PV in Australia, following a boom in other solar markets, particularly the US.

Recently released data from the US-based Climate Policy Institute highlighted the shift in the market, noting that “Over 75 per cent of California’s new residential solar systems in 2012 were leased as compared to less than 10 per cent in 2007.″

Intriguingly, however, recent research conducted by the CSIRO and the APVI for ARENA has found that an overwhelming  majority of Australian respondents preferred the idea of paying upfront to using finance despite the fact that “being able to afford the technology” remained an important factor.

So what’s going on?

We think this difference is down to several factors and perhaps, most importantly, that the trends will change in Australia.

The first issue is that Australia has typically been focused on small, low-cost systems with significant rebates. We have benefited from foreign exchange rates and feed-in tariff’s too, so the financial benefit has arguably outweighed the cost of using your own capital. It was such a good deal, you were nuts if you didn’t do it.

Now that’s not to suggest a segment of the market didn’t use some finance – they did – but it was typically zero interest for two years with a big slug at the end if you didn’t make all the payments, and very low barriers to accessing the money. As long as the payback period was within a 2-3 year period, it worked.

But this is no longer the case.

This brings us to the second issue. Since the rebates and FITs have been reduced (and despite falling systems costs), the payback period has pushed out a little, typically back in the 5-7 year range. The benefit of market hindsight has also helped solar buyers to understand that 1.5kW systems are really a bit small for the average home and average system sizes have steadily risen, now hovering around 3kW.

We also have the quality issue hovering and have measured trends in how consumers are moving away from the lowest cost offers, having heard horror stories about poor quality and service from their social networks. This has helped with economy of scale in installations and sales and ultimately, delivers a matter match for average consumption levels.

But larger systems have a higher capital cost.

I also believe there is a third issue at play and that is about who bought in the past and who is likely to buy in the future.  

Early adopters are willing personal investors and let’s face it, in the last few years we have scooped up a large number of Australia’s early adopter market. Anecdotal evidence suggests that early adopters who are highly committed may be more willing to spend their own money. We also know that the classic Australian demographic of 40-65 year olds are income poor but sitting on nest eggs or, in some cases, able to divert superannuation into better returning solar systems.

What we also saw in the hyper rush of the last few years is that first home buyers and young families entered the solar market for the first time. Traditionally unable to afford the cash or the debt, they were rare solar buyers historically but the incentives and power price surges drew them in, in recent times. And what we can see from the CSIRO and APVI research is that these younger buyers are more willing to finance (or perhaps have fewer alternatives).

As for the future solar customer? We know there will be less early adopters and potentially less of our classic buyers because they are already in the market to some degree. So we’ll have more young customers, sceptical customers, more customers who couldn’t necessarily afford solar or they would already be in. The ‘wait and see’ brigade.

Will they be more likely to want finance? I would suggest for an increasing proportion of the market the answer is ‘yes’.

I have a view that reflects what we have seen in other countries that once solar can deliver electricity at lower cost than conventional electricity it increasingly becomes a financial service, rather than a product offer. The product simply enables a financial outcome – in fact, it is the only tangible outcome; kWh’s. That’s why finance fits so nicely with solar.

There are a couple of tricks to get right though if it is to boom in Australia like it has in the US. 

All of the financiers  I have spoken to agree that Aussies are less willing to get into debt than our US cousins, and we lack the tax incentives that their market provides. Secondly, the success of the major companies offering finance in the US has been about streamlining a technological and financial offer down into a simple, trustworthy and compelling offer. We have seen some great progress here including new offers launched at Clean Energy Week and more to come, but there remains room for innovation and competition in this space.

There are a myriad of ways of structuring finance and we have only seen the tip of the iceberg I suspect.

Energex’s Mike Swanston talked about “the new normal” last week in his presentation at Clean Energy Week in the context of electricity networks and how things have changed forever. It may be that financed PV will become the new, new normal.

This article was originally published by Solar Business Services. Republished with permission.