Paying for solar power isn't what it used to be

Many consumers still can’t afford the steep sticker price of home solar, even if it offers the promise of low-cost, clean renewable energy in the long term. But innovative third-party financing is changing how solar panels are bought and sold.

Ten years ago many Americans couldn’t afford to buy a solar electric system for their home. Today, many consumers still can’t stomach the steep sticker price, even if it offers the promise of low-cost, clean renewable energy in the long term. But thanks in large part to third-party financing that frequently includes no-money-down options for residential PV systems, that’s changing.

In 2003 there were only 5,000 residential PV customers in the United States. Last year alone, there were roughly 83,000 residential PV installations. Since 2010, more than 1,100 megawatts of residential PV have been installed across the country.

A similar solar revolution is happening in the developing world. While the scale of the challenge is vastly different, the nature is the same: overcoming the high upfront cost of solar to access its long-term promise of low-cost, low-carbon energy.

Surmounting the upfront cost barrier

The majority of growth in residential PV systems in the U.S. over the past several years has been in households with median incomes of $40,000 to $90,000. The upfront cost of installing an average 6 kW system would run $21,200 at the 2012 price of $5.30/W and including the federal tax credit. This is approximately 25 to 50 percent of PV customers’ median income. 

Similarly, a 40-watt solar home system for a rural family in the developing world, which is typically enough to cover the majority of a family’s needs such as lighting, cell phone charging, and radio or television, may cost around $350. For the 1.2 billion people earning less than $1/day, that is nearly 50 percent of a family’s income, assuming a two wage earner family. Needless to say, it’s obvious why many homeowners, in both situations, do not have the capital to buy a system outright.

Pre-pay-as-you-go solar

Third-party financing models such as those offered by SolarCity and Sungevity allow homeowners in the U.S. to lease systems with no or very low money upfront. The homeowner is basically paying monthly for the energy they generate and consume, often at lower rates than they would be paying their utility company. The same thing can be said of the innovative financing programs taking off in off-grid areas of the developing world (1.5 billion people have no access to grid electricity). People pre-pay for the energy their system generates and they consume, often paying less than they did previously for kerosene, batteries, and candles.

Many of these models in lesser-developed countries rely on cell phone technology. While only 75 percent of people in the developing world have access to electricity, 89 percent have mobile phones. Ironically, those cell phone users not connected to the grid need to charge their phones somehow, and solar energy is often the best option.

In India, Simpa Networks has implemented a pricing model it calls Progressive Purchase, in which customers make a small initial down payment for a PV system and then pre-pay for the electricity it generates by purchasing energy credits using a mobile phone or a local agent. Once paid, the company remotely “unlocks” the customers’ equipment until they use what they’ve paid for. Once the paid-for energy is consumed, the system locks until the customer purchases more energy. Each payment for energy also adds towards the final purchase price. Once fully paid, the system unlocks permanently and produces energy, free and clear.

A similar program by Angaza Design, operating in Tanzania, Kenya, and Zambia, is making transferring money to pay for solar energy simple as well. Less than 50 percent of people in the developing world have bank accounts. The lack of banking services makes transferring money from one remote location to another challenging. Thus the rise of mobile banking, allowing the transfer of money through mobile phones. Angaza’s PAYG software platform takes advantage of mobile banking and allows people to make pre-payments for the combination solar-powered lanterns/cell phone chargers they provide using only a mobile phone with a voice plan, requiring no Internet access. The user makes a payment to Angaza Design using a mobile money platform. He or she then places the phone on the solar lantern and the devices exchange data encoded in audio tones. Thus the system is unlocked and their payment from one of many mobile money providers is received.

Azuri Technologies’ Indigo system uses an approach that might be even more familiar to rural customers. The user buys pay-as-you-go scratch cards, which people use around the world to add minutes to their mobile phones. The user enters the passcode from the card into the Indigo unit allowing the system to operate for a period of time. The smallest system starts at three watts, and a single payment is enough energy to charge a mobile phone and light two rooms for eight hours a day for one week. Similar to Simpa Networks, some of the scratch card fee goes to paying off the system. Once the system is paid off, the customer can upgrade to a larger system, eventually purchasing the largest 80-watt system, which can run four lights and multiple appliances. The Indigo system is currently empowering people in ten countries throughout Africa, including Kenya, Rwanda, Ethiopia, and Uganda.

Disproportionate energy bills

These financing solutions are bringing great change and possibility to people around the world, just as third-party financing is doing in the U.S. There are however a couple of significant differences. While in the U.S. putting PV on your roof makes an environmental statement, saves money, and lowers your carbon footprint, in the developing world it means dramatically raising your standard of living when there is no or very limited grid access.

There is also a big difference in the disproportionate amount of money saved. In the average U.S. home less than three percent of income is spent on residential energy bills. However, in rural areas of the developing world, families often spend 30 percent or more of their income on kerosene for lighting. While a homeowner in the U.S. may pay between 10 and 15 cents per kilowatt-hour for electricity, a person in rural Kenya or Rwanda will pay a cost of 800 cents (~50 to 80 times more) per kilowatt-hour for kerosene lighting. And mobile phone charging is even worse, with a rural villager in Kenya paying nearly 400 times more to charge their phone—at a charging shop running off car batteries and/or diesel generators—than in the U.S.

For the 1.4 billion people in the world without electricity, solar energy is often the cheapest option. “There are all these debates about when solar will reach grid parity in the United States and elsewhere,” Angaza’s Chief Technology Officer Bryan Silverthorn told Scientific American. “Africa is a place where, for a huge swath of the population, solar energy is now the cheapest option. No one knows what will happen next.”

As we watch the evolution of the solar industry in the U.S. and Europe, the market in the developing world likewise has great potential for growth. As industrialized nations struggle with how to lower their carbon footprints, the world must also address how the 1.4 billion people without electricity in the world are going to connect. With innovative financing models that remove the upfront cost barrier, it can be through clean renewable energy.