Solar Power for Your Shower! Business Models for Third-Party Ownership of SWH (Part 2 of 2)
Earlier this week I discussed the market penetration of solar water heating (SWH) in the United States and how states and utilities are incentivizing these systems. This article discusses how the private sector has responded to this emerging market by creating new business models for third-party ownership of domestic solar hot water.
Third-party ownership, through solar leases and power purchase agreements (PPAs), has led to increased penetration of solar PV in the United States. By Greentech Media's estimate, third-party owned systems made up 17% of all residential solar PV projects and 43% of non-residential installed in 2010 . While third-party ownership is less common for SWH, it could be attractive to customers.
Third-party ownership of SWH could have the following benefits for customers:
- • No/low upfront cost for installing SWH
- • Operations and maintenance costs borne by the third party
- • Savings on monthly hot water expenditures and immunity from fuel adjustment costs on natural gas or electricity bills
- • Opportunity to replace or improve an existing hot water system at a significantly lower out-of-pocket cost.
In the United States, certain energy service companies (ESCOs), solar leasing companies (e.g., SolarCity), and at least one utility (Lakeland Electric of Florida) have implemented third-party models for SWH installations. There are several possible business models available to a company entering the business of owning customer-sited SWH. These options include: a performance contract model, a service fee model (lease or rental), and a metered sale-of-energy model .
With a "shared savings" or "performance" contract model, a third-party owner guarantees a certain level of savings from a baseline estimate over the course of the contract. To determine the baseline energy consumption, the ESCO conducts an energy audit. Then the ESCO designs, constructs, and finances a project to meet the customer's needs.
Under a performance contract, the customer is typically charged a monthly fee that is based on a fixed percentage of the avoided energy cost. For example, if the system saves the customer $100 /month, the ESCO might charge the customer $75.
A few companies—the largest being FLS Energy and Skyline Innovations—have used a performance contract model with commercial and industrial customers seeking to install SWH.
FLS Energy operates in North Carolina, where the solar requirement under the renewable portfolio standard (RPS) creates an incentive for the installation of solar water heaters. Skyline Innovations started its business in the District of Columbia's solar renewable energy certificate (REC) market, but has recently acquired funding from WGL Holdings, Inc. to expand its SWH services into other markets, including California .
These companies focus on commercial-scale SWH systems, on the order of $100,000–$400,000 per project. They have worked mostly with customers in the hospitality, multifamily housing, military housing, and university sectors, as well as smaller businesses with high daytime hot water usage, like agribusiness, car washes, and laundromats .
Zach Axelrod, CEO of Skyline Innovations, notes that, though many states have financial incentives for SWH, it can be difficult for commercial installers to break into new markets . One major reason is that SWH is often incentivized using state-level tax credits. As such, a third-party owner will be limited to states in which it has tax appetite.
Additionally, according to SolarCity's website, SWH is an eligible technology that the company offers to homeowners under their energy efficiency services program. Information about SolarCity's SWH financing model and the uptake of SWH systems under the program is not publically available.
Service Fee Model — Lease and Rental
A second option for third-party ownership of SWH installations is a service fee model. Under this model, participants sign up to host a solar thermal system and pay a flat, monthly rate for solar-heated water. The implementer of a service fee program either leases or rents the SWH system to the customer. Metering equipment is not used and the customer is responsible for paying for any supplemental heating of water (to reach delivery temperature or to make up for tank heat losses) .
With a leasing program, the cost of the lease is determined by the value of the system at the beginning of the lease term and remaining value after the lease has expired. At the end of a lease, the parties could choose to renew the contract, the customer could purchase the system at fair market value, or the implementer could chose to remove the system. The consumer's payments cover the declining value of the product and a margin of profit for the leasing company . A rental program is implemented in a similar fashion, except that the title (or a predetermined value) for the system is not transferred to the customer at the end of the rental period .
Lakeland Electric's current SWH program for residential customers has been implemented as a rental program. Under the new program, eligible residents can rent a SWH system from Lakeland Electric in exchange for a fixed service fee ($34.95 per month), regardless of use . The utility has contracted with a solar equipment vendor that installs, owns, and operates solar water heaters on residential buildings.
Metered Sale-of-Energy Model (the 'thermal PPA')
Under a metered sale-of-energy model, the system owner sells energy generated by solar thermal system to the customer at a lower rate than conventional electricity costs. A solar thermal meter is necessary to measure either the hot water production of the solar collectors or the customer's hot water usage (from the solar equipment and from the supplemental water heater) . In the late 1990s, Lakeland Electric developed a metered sale-of-energy program for residents and businesses .
Under this program, residents and businesses paid a monthly bill that was based on a net combination of the total thermal energy delivered from the SWH and the energy consumption in an auxiliary heating element . Through program implementation, Lakeland Electric analysts found that, if not properly housed, thermal energy meters experience a high rate of failure due to weather elements, and that revenues under a metered sale-of-energy program are highly dependent on customer usage . Additionally the utility found that this type of program took a high level of coordination between several distinct utility departments . Lakeland Electric did not resume this program after its conclusion in 2001.
To date, only a few companies have entered the business of building, owning, and maintaining SWH systems on behalf of customers. Expansion of the third-party ownership model for SWH depends on the strength of financial incentives for SWH, customer need for water heater replacement, and awareness of the SWH technology and its benefits.
This will be my last Market Insight piece at NREL. It's been a fun run. Thanks to all who read this blog.
 SEIA. 2011. "U.S. Solar Market Insight 2010 Year in Review." Solar Energy Industries Association and Greentech Media Research, 2011.
 Guiney, W.T., Harrison, J., Kaufman, S., Milton, S. (2006). "A Guide To Fee-for-Service Solar Water Heating Programs For Caribbean Electric Utilities."
 WGL Holdings, Inc. (2011) " WGL Holdings, Inc. and Skyline Innovations Team to Develop $30 Million of Commercial-Scale Solar Water Heating Projects."
 Axelrod, Zach. (18 November 2011). Skyline Innovations. Personal communication. Telephone interview.
Colon, C.; Curry, J. (June 2002). "Solar Thermal Billing Program in Florida." Florica Solar Energy Center/ University of Central Florida. Publication Number: FSEC-RR-98-06.
 DSIRE. (2011). "Lakeland Electric — Solar Water Heating Program."