New from Maryland - considering Pre paid lease

[Tomg]

Just in the planning phase. Looking at a 6 KW system for my southwest roofs with clear view of Chesapeake Bay. Probably going the prepaid lease route and am wondering about what the FMV will be 10 to 20 years down the road in case I choose to buy out the system.

Current quote show that A 20 year lease has a favorable NPV and return but concerned about what happens after that as the PPA terms for rernewal are not that good in terms of electricity rate and the FMV is quite uncertain after 10 to 20 years. My guess is the system value will be rather low at that point, but I'd like some other views.

[J.P.M.]

Just in the planning phase. Looking at a 6 KW system for my southwest roofs with clear view of Chesapeake Bay. Probably going the prepaid lease route and am wondering about what the FMV will be 10 to 20 years down the road in case I choose to buy out the system.

Current quote show that A 20 year lease has a favorable NPV and return but concerned about what happens after that as the PPA terms for rernewal are not that good in terms of electricity rate and the FMV is quite uncertain after 10 to 20 years. My guess is the system value will be rather low at that point, but I'd like some other views.

I bought a new computer around 2002. If I had kept it chances are it would still be performing about the same as when new. I don't believe it would be worth much today. I wonder, but wouldn't be surprised if the same outcome will befall most of today's solar electric systems in terms of FMV of the equipment. If I spin the #'s the right way I can give a dead horse a positive NPV and return. Caveat Emptor.

[Tomg]

I bought a new computer around 2002. If I had kept it chances are it would still be performing about the same as when new. I don't believe it would be worth much today. I wonder, but wouldn't be surprised if the same outcome will befall most of today's solar electric systems in terms of FMV of the equipment. If I spin the #'s the right way I can give a dead horse a positive NPV and return. Caveat Emptor.

I tend to agree, but it all depends on the cost curtve of solar panels and inverters over time. Since the PPA allows for the panels to be removed from my roof at the end of the 20 year agreement free of charge, the the FMV would have to be only the value of the equipment off my roof. Assuming a 0.5% reduction in power output per year then The residual output of the panels would be 90% of the original new panel rating. I would then think that the panel value would then be whatever the panel cost per watt at that point in time multiplied by .9 with Some additional discounting to reflect that the is no warranty. I suspect the value of the inverters would be even less due to the uncertainty around their remaining useful life.

On this basis, I conclude that the prepaid lease is a much better deal than purchasing. My cost per installed watt is about $1.5/watt, which is signicantly less than the purchase options which are running about $3.5/watt. So for my systerm , I think I can get about 14% annual return with the prepaid lease, without any concerns about system maintenance costs and a production guarantee from the PPA owner. Have I missed something, it sounds too good to be true.

[Volusiano]

My cost per installed watt is about $1.5/watt, which is signicantly less than the purchase options which are running about $3.5/watt. .... Have I missed something, it sounds too good to be true.

If you can do a prepaid 20-year lease for $1.5/W while your purchase options run around $3.50/W then that seems like a good deal. At the end of the lease, there's a chance that they may even let you keep the system if the cost of taking it down is not worth the FMV at that time. Even if not, you can still opt to make them take it down and go with a brand new system and still beat the $3.50/W by then.

What seems too good to be true is that your prepaid lease is only $1.5/W as opposed to the purchase price range of $3.50/W. But if that's for real then it seems like a no-brainer. I heard that some folks were able to get phenomenal pre-paid lease deals in the past, but I thought that more recent pre-paid leases are not as attractive anymore. Don't know what has changed since, however. I think the law to allow businesses to take accelerated depreciation on solar leases is still the same, no?

[Ian S]

Just in the planning phase. Looking at a 6 KW system for my southwest roofs with clear view of Chesapeake Bay. Probably going the prepaid lease route and am wondering about what the FMV will be 10 to 20 years down the road in case I choose to buy out the system.

Current quote show that A 20 year lease has a favorable NPV and return but concerned about what happens after that as the PPA terms for rernewal are not that good in terms of electricity rate and the FMV is quite uncertain after 10 to 20 years. My guess is the system value will be rather low at that point, but I'd like some other views.

At this point, we can't be sure of the FMV in a couple of decades. There has been a lot of debate back and forth on that issue on this forum earlier when the prepaid leases were more available than they apparently are currently. In my view (and I have a prepaid SunPower lease), I don't think the FMV will be very much at all. Here's my stab at estimating an FMV at lease end.

You mention purchase price of $3.5 a watt - what about the effect of incentives/tax breaks/SRECs? Typically, you give up all those benefits - maybe retain the SRECs - when you do a prepaid lease.

[Tomg]

At this point, we can't be sure of the FMV in a couple of decades. There has been a lot of debate back and forth on that issue on this forum earlier when the prepaid leases were more available than they apparently are currently. In my view (and I have a prepaid SunPower lease), I don't think the FMV will be very much at all. Here's my stab at estimating an FMV at lease end.

You mention purchase price of $3.5 a watt - what about the effect of incentives/tax breaks/SRECs? Typically, you give up all those benefits - maybe retain the SRECs - when you do a prepaid lease.

Thanks for the information on FMV estimates at lease end. I agree that it is hard to know what will really happen after 20 years.
As to the incentives for tax credits and SREC's I did run and analysis and with an 8% hurdle rate in my NPV calculations and I found that the lease did better than a purchase even accounting for the tax credits and SRECs. The issue is that I can presumably invest the difference in other investments at a better return and I don't have to worry about maintenance or other uncertainties associated with ownership.

[Volusiano]

...and I don't have to worry about maintenance or other uncertainties associated with ownership.

Maintenance of panels should be very low -> virtually next to nothing. Inverters are usually under 15 year warranty (mine is under 20 year warranty). So maintenance of solar system may not be as big of a deal as you may think it is.

[Tomg]

Maintenance of panels should be very low -> virtually next to nothing. Inverters are usually under 15 year warranty (mine is under 20 year warranty). So maintenance of solar system may not be as big of a deal as you may think it is.

Yes, I understand. In my economics I assumed that there would be minimal maintenance costs for the ownership case. Of course this is the most optimistic case. Any maintenance costs would just further reduce the returns for the ownership case. And besides I live on the bay shore so one major weather event (i.e. a hurricane) could cause significant panel or system damage. So the bottom line is that I will prefer to let the PPA owner until a time that I find it economic to buy out he system at a very low price and use my capital for other income producing activities.

[russ]

FMV will not be a give away - the old still functional panels will have good value somewhere in the world. The leasing company can unload a lot each year on someone for removal and get their best, easiest deal.

Of course with the present economic situation and orientation of this administration the US may well be one of the basket cases where such things can be sold in not many more years.

[Volusiano]

Of course with the present economic situation and orientation of this administration the US may well be one of the basket cases where such things can be sold in not many more years.

That's why FMV is uncertain. Without the 30% federal tax incentive, FMV of solar system may end up holding up better than expected if lower demand due to lack of future incentive drives solar manufacturers out of business. Yes, supply demand may cause pricing to go down initially. But unsustainable low pricing due to lack of incentive may break solar manufacturers in the end and without the economy of scale, pricing may inch up again due to lower production volume.

So the timing of the phasing out of the incentives is critical and if they get phased out too early before lower pricing is sustainable through high volume, it may kill the industry on the whole.

[Tomg]

Decision Made

So I have made my decision and it looks like we will proceed with a 6KW system designed for my roof by Solar City. We will procced with a pre-paid PPA as the economics are very good and the lease minimizes my risks as we are on the bay shore where we can be subjected to tropical storms and hurricanes. With A lease I don't have to worry as much about storm damage issues since it will be owned by Solar City. My return on investment is just under 14% per year with reasonable assumptions that my power company rates increase with inflation.

We did look at SunRun and Sungevity for pre-paid PPA quotes and found that both were higher cost. Both SunRun and Sungevity were slower to respond. In both cases the these other companies use 3rd party installers.

Overall we have found Solar City to be quicker and more responsive than their competition.

[Volusiano]

With A lease I don't have to worry as much about storm damage issues since it will be owned by Solar City

Does the contract actually say anything about this? That beside maintenance, they take total responsibility for insuring their system against loss due natural damages and you're not on the hook to cover for that on your own homeowner's insurance?

If your bank-owned house (assuming that you're under a mortgage) requires that you have homeowner's insurance, it's not far fetched to assume that the solar system's lessor may require that you buy insurance for it to protect their investment, too. So you may want to check your contract closely on what they say about this. If nothing is said about this on the contract, I wouldn't assume your way and I would add them to clearly state on the contract that your assumption is correct.

[Ian S]

Does the contract actually say anything about this? That beside maintenance, they take total responsibility for insuring their system against loss due natural damages and you're not on the hook to cover for that on your own homeowner's insurance?

If your bank-owned house (assuming that you're under a mortgage) requires that you have homeowner's insurance, it's not far fetched to assume that the solar system's lessor may require that you buy insurance for it to protect their investment, too. So you may want to check your contract closely on what they say about this. If nothing is said about this on the contract, I wouldn't assume your way and I would add them to clearly state on the contract that your assumption is correct.

My Sunpower lease specifically provides insurance coverage and I believe this to be fairly typical but it has to be spelled out in the lease.