Leasing of solar photovoltaic systems (PV leasing)

published on february 27, 2019 | reading time approx. 4 minutes

The cost of purchasing, installing and maintaining solar photovoltaic (PV) systems is beyond the easy reach of most consumers therefore the market of outright purchasers of solar PV systems is quite low. In order to create access to solar PV products it is necessary for vendors to come up with a means to reduce the financial barriers to entry.

Solar PV leasing is a means of financing the acquisition of solar PV equipment. In a solar PV lease, a vendor enters into a long-term agreement with a customer whereby the customer pays periodic rents for use of the system. The amount of electricity generated is irrelevant in the lease arrangement.

 
The solar PV lease may be structured either as a finance lease or operating lease. In a finance lease the customer will be given an option to purchase the solar PV equipment at the end of the lease term. In an operating lease no such option exists, and the solar PV equipment will be returned to the vendor at the end of the term. The cost of maintenance and repair is borne by the vendor in an operating lease and by the customer in a finance lease. The solar equipment is owned by the vendor during the pendency of the lease in both cases. A finance lease is treated as an asset on the company’s balance sheet while the operating lease is treated as an expense off the balance sheet. The tax treatment on an operating lease is similar to that of a finance lease except upon termination of the lease and the transfer of the asset. In the finance lease upon transfer of the asset to the customer, the deductions which were made by the customer for the payment of the lease become disallowed and the customer will be entitled to capital allowances.

 
Solar PV leases are often compared with power purchase agreements (PPA) though they are technically different. As with PV leasing, the vendor in a PPA retains ownership of the system. In a PPA, the customer only pays for the electricity consumed and may in addition be required to pay a standard charge that helps the supplier of electricity cover fixed costs such as the provision of a meter and connection to the supply. On the other hand, with a PV leasing the amount payable is a fixed rent. Therefore in instances where the system is not generating electricity, the customer will not accumulate any bill save for minimal standing charges. By contrast, in a solar PV lease, the lessee will still be required to pay a standard rent under the lease agreement. The payments under the lease agreement are constant and they do not therefore relate to the rate of consumption of energy.

 
Solar PV leases are attractive to customers as they reduce the financial barrier to accessing solar electricity. Depending on the vendor, the lease may be structured such that only periodic rent is paid with no requirement for a deposit. They may also be structured as requiring a deposit with low and affordable lease payments thereafter. The overall cost of solar lease financing is higher than an outright purchase; however the low financial barrier to entry makes it a viable choice for those who cannot afford the large upfront payment for the purchase of a solar PV system.

 
It remains the duty of a vendor, to ensure that the computation of the rent payable and the reliability of the electricity remains competitive compared to the cost payable on other sources of electricity. The vendor must also ensure that the PV equipment is safe and accessible for maintenance and recovery at all times.

Solar PV Leases in Kenya

Solar PV leasing is in common use in Kenya. It is the key financing method used by industry heavy weight M-Kopa Solar (M-Kopa). M-Kopa sells and leases solar home systems for lighting, charging of mobile phones and transistor radios, and the powering of televisions. If leasing, the customer is required to make an upfront payment amounting to between 10 – 12.5 per cent of the gross price of the leased product. The balances of the payments are made on a Pay-As-You-Go basis. The customer is required to make daily lease payments of between 0.5 to 2 USD in 400 – 600 instalments, depending on the product, until payment of the balance in full. Should a customer fail to make any payment, the solar PV system is automatically shut off preventing further use until the customer updates its payment.

 
Solar PV leasing solutions are also available in the commercial and industrial space but the uptake is not as widespread as it could be. For many small and medium businesses, it is not bankable or practical. Most do not own the premises from which they operate, the buildings themselves may not be well suited for the placement of solar panels, the businesses might not be stable or mature enough to undertake such long term financial commitments and lastly and more commonly, many may not be aware of the financial and environmental benefits available from using solar power.

 
For larger institutions and commercial and industrial enterprises, solar and other renewable energy solutions, are already under consideration as viable means of reducing operating costs and reducing the environmental impact of their activities. Nonetheless, even for these larger institutions and enterprises, the cost of adopting these solutions acts as a limiting factor. For this reason, PPAs have been the popular choice for this segment of the market. Solar PV leases, if structured by the vendor competitively, can provide an alternative mode of financing the acquisition of solar PV systems. The one advantage they have over PPAs of having fixed rent payments, which is useful for budgeting purposes.

Conclusion

Solar PV leasing provides an affordable way for individuals in all segments of the market to access the benefits of solar technology. Solar PV leasing remains beneficial to vendors as it manages the initial cost barriers and enhances market penetration. It is also beneficial to vendors since it is not subject to the tedious regulatory approvals and licenses by the Energy Regulatory Commission that relate to generation and supply of electricity. If the benefits of adopting and/or supplementing solar technology are well publicized in the market and if solar PV leasing products are competitively structured, there will be plenty of opportunities for both vendors and end consumers to participate in the benefits of renewable solar energy and the green sustainable future it secures for the planet.