Scaling Solar Energy

The battle to mitigate the effects of climate change

is widely seen as a race against time. This urgency
was recognized by the 196 countries that signed on
to the 2015 Paris Agreement, which committed to
reaching zero carbon emissions by 2050. Conducting
business as usual will doom those efforts.

Making progress against this ticking clock requires a

multitude of solutions aimed at improving equitable
access to renewable energy sources, combined with
more conscientious consumption. The
circumstances and challenges vary greatly from
market to market, but one common denominator is that traditional views on the price mechanism
create a trade-off that hinders the adoption of cleaner solutions. How can the energy sector transition
from a profitable carbon-based market to one that is equally profitable but greener?

One of the biggest obstacles inhibiting the adoption of solar energy among households is the upfront
investment required to install solar panels. In developed countries, a residential installation can cost
tens of thousands of dollars, even though the price per watt for photovoltaic (PV) panels dropped by
almost 80% between 2010 and 2020.

After making this investment, homeowners must wait many years to break even and start to enjoy the
financial benefits that solar energy provides. The discrepancy between the timing of payments and
onset of cost savings is so large that no reasonable price concession can bridge it satisfactorily. However,
opportunities emerged when the suppliers of solar energy solutions reexamined the three core
questions.

• What are customers paying for? Simply put, households want to pay for cleaner energy rather than
the inputs to access that energy. Recognizing this, pioneering companies Sunrun and SolarCity (now
known as Tesla Energy) began offering customers a power purchase agreement (PPA). Instead of selling
panels or establishing a fixed set of loan payments, they sold customers the energy output from the
panels installed on their roofs, reflected as a discount to their utility rates. They also guaranteed the
system output for 20 to 30 years. This change of focus, from panel sales to the provision of clean energy,
enabled PV manufacturers to offer an alternative to the traditional approach predicated on a large
upfront payment.

• Who is going to pay? Homeowners still pay for energy, but, to a large extent, the U.S. federal
government has also paid large amounts of money for the installation of solar panels, through a mixture
of subsidies and tax credits. Another alternative to outright purchase, leasing, lessens the need for these
extensive government payments as a means to bring down the large upfront cost and create a purchase
incentive. Ideally, this shift can take the government (and its taxpayers) out of the equation entirely and
change the “who” to the homeowners themselves.
• When and how do we transact? Let’s assume that the upfront cost of a PV installation by Sunrun in
the U.S. is $21,000, before tax benefits. The majority of homeowners are still opting to pay for or finance
that expense and draw the “free” solar energy. But around 35% of homeowners now opt to enter into a
PPA, which eliminates this upfront expense in exchange for a guaranteed energy supply from day one at
monthly payments below prevailing market rates. This agreement creates a dependable revenue stream
for the supplier and also offers consumers an appealing alternative to paying or financing a significant
upfront cost.

Combined with the overall decline in PV prices, the introduction of PPAs alongside traditional leasing
agreements helped fuel exponential growth in the solar market. Take California as an example. Installed
capacity increased from 163 megawatts (MW) in 2010 to 1,950 MW in 2015. Leasing accounted for 63%
of the installations in 2015, versus just 10% in 2010.8 For comparison, leasing historically accounts for
around 30% of new car registrations in the U.S. each year. It is interesting to note that the market for
direct purchases grew impressively as well in the same period, from 147 MW to 720 MW. In other
words, the lower prices for PV panels would have naturally driven growth. The lesson is that products
can become even more accessible — and progress toward ambitious environmental, social, and
governance goals can be achieved even faster — when companies are willing to reconsider
preconceived notions about their prices.

Adapted from: MIT SLOAN MANAGEMENT REVIEW