Back to top

Understanding the Choice Between Leasing and Owning for Residential Solar Systems

Principal Investigator/Project Leader: 
Co-Principal Investigator/Co-Project Leader: 
Department of Project: 
Resource Economics Dept.
Project Description: 

Each potential adopter faces a crucial decision--to lease or to own the panels. Leasing the panels from a solar company incurs little to no upfront cost. A fixed lease payment, however, reduces the net saving from the electricity generated by the panels. On the other hand, owning solar panels includes a high immediate cost with a higher return in future periods resulting from the absence of lease payments. Moreover, solar owners can receive additional revenue from selling Solar Renewable Energy Certificates (SREC). The price of SRECs is determined in the marketplace for such certificates and is subject to significant price fluctuation. The tradeoff is obvious. Owning is risky and involves high upfront cost, but can potentially yield higher future returns from SREC revenues. Leasing is risk-free with no front-end payment, but lessees forgo SREC revenues. The choice between these two options naturally depends upon the decision maker's tendency to tradeoff payment over time (known in behavioral economics as "time preference") and tolerance towards risk (namely "risk preference").

In this study, we propose a conceptual model that considers the household's costs and benefits in both owning and leasing options. More importantly, the model takes into account decision makers' preference for delayed return and risky outcomes. We then empirically examine the connection between an individual's behavioral preference and their own-vs-lease choice. To implement this project, we plan to recruit solar homeowners from Massachusetts and measure their time and risk preferences using state-of-the-art decision tasks recently developed in the field of behavioral economics. Participants of the study will receive real monetary payoff based on their own decisions. This "revealed" preference approach may provide a more accurate measurement of individual preference than the stated preference approach. We then link homeowners' responses in these decision tasks with information from a detailed survey on their solar system specifications and history of energy usage. The choice of owning versus leasing has significant policy relevance. Currently, among the households that have solar PV systems in Massachusetts, 68% are lessors and 32% own their systems. State governments, such as that of Massachusetts, provide many incentives on top of the federal tax credit in hopes that more residents would adopt solar energy. The return to such public investment varies depending on the ownership of the panels. The state government prefers solar ownership since its residents fully retain the benefit of the subsidy. Leasing panels from a national solar installer, on the other hand, channels part of the subsidy benefit outside of the state. By understanding how individual behavioral traits determine the decision between owning and leasing the residential solar system, we will be able to suggest ways to increase the public "bang-for-the-buck" for solar incentives at the state level. In addition, the findings in this study have broader relevance for the adoption of other green technologies such as battery storage and electric vehicles that can either be bought or leased.

Energy topics: 
Solar PV