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Making solar affordable

Google, Citi, and others are reaping nice returns by funding solar rooftop power projects. Will it last?

SolarCity installers lay solar panels on a house in Texas.

When Bruce Buller looked into installing solar panels on the roof of his ranch house in Diamond Bar, Calif., he suffered severe sticker shock. “We had been thinking about solar for years,” says Buller, “but we found the cost — about $35,000 — to be prohibitive.” He then discovered SunRun, one of a number of solar installers, including SolarCity and Sungevity, that are applying a new financing model that makes residential solar affordable. They are attracting investors from U.S. Bancorp to Google. Here’s how it works.

SunRun raises project capital to buy, install, and maintain its customers’ rooftop solar systems. The private company, whose biggest investor is U.S. Bancorp (USB), has attracted a total of $750 million. In Buller’s case, his new solar panels (which SunRun paid for entirely) cut his $200-a-month electricity bill by $140, or 70%. Buller gets to keep $50 of the savings and pays the balance to SunRun, which uses it to cover the cost of buying the solar system and hiring a contractor to install and maintain it. The appeal to customers like Buller is that they don’t need to spend $35,000 upfront or hassle with maintaining the system. (SunRun also lets customers put some money down or buy the whole system, if they choose, to lower their monthly solar payments.) If Buller moves, SunRun’s contract can be transferred to a new homeowner. Says Edward Fenster, the CEO of SunRun: “We have proved we can make solar affordable.”

This solar-leasing model is taking off. SunRun, which says it is profitable, will fund close to 10,000 solar systems this year, double the number in 2010. One of its competitors, SolarCity of San Mateo, Calif., which does both commercial and residential buildings and, unlike SunRun, has its own installation teams, has built 17,000 home systems. The fast-growing company has raised $1.4 billion in project financing from, among others, Citibank (C) and Google (GOOG), which alone put in $280 million. Typically, these investors earn 8% to 10% after tax.

Is this simply the latest flavor of securitization à la mortgage-backed securities, which one day could turn into a bubble? Perhaps, but SolarCity CEO Lyndon Rive insists these projects are safe because Americans almost always pay their utility bills. “The default rate on our solar projects is way under 1%,” he says.

Other obstacles loom. The price of solar panels is dropping, but they are still more expensive than fossil fuels and don’t make economic sense without federal subsidies. Investors like Google and U.S. Bancorp are attracted to these deals because they can take advantage of the 30% federal tax credit program for solar. Take that away, and the industry could suffer. The bill is slated to expire in 2016 and, given the current mood in Congress over green subsidies (think Solyndra), renewal is by no means assured. Also, if interest rates — now at historic lows — rise, the higher cost of capital would crimp returns.

In the meantime, customers like Buller are enjoying clean solar power with no money down.

This article is from the November 21, 2011 issue of Fortune.