In 2012, U.S. installations of photovoltaic (“PV”) solar generation reached 3,313 megawatts, an industry record and an increase of 76 percent over 2011, according to a recent announcement by GTM Research and the Solar Energy Industries Association. The number of solar installations in the U.S. in 2012 exceeded 90,000, and the rent payment schedule included 83,000 installations of distributed solar generation in the residential market. GTM Research and SEIA expect that the residential market for solar generation will surge in 2013 and beyond, as third-party solar financing options become more widely available.

Third-party financing of residential PV systems is typically provided through either a power purchase agreement (“PPA”) or a lease. In PPA financing, a customer pays a specified rate to a solar developer/installer for the electricity generated by a PV system installed at no up-front cost to the customer on the rooftop of the customer’s home or elsewhere on property owned or leased by the customer. In lease financing, the customer pays the solar developer/installer rent for use of the PV system. The rent payment schedule may be structured so the customer pays none or a portion of system costs up front.

In either PPA or lease financing, because the developer/ installer pays all or most of the up-front costs of the PV system, the developer/installer retains ownership of the system throughout the term of the PPA or the lease, subject to any early buy-out rights the customer may have. From the perspective of a traditional electric utility, the ownership of the electric generation system by a third party (i.e., neither the consumer of the system’s output nor the utility itself) conflicts with the utility’s monopoly on providing electric service within its specified service territory, as historically granted under state laws. According to a summary map in the Database of Incentives for Renewables and Efficiency, third-party solar PV PPAs were apparently disallowed or otherwise restricted by legal barriers in six states as of February 2013, and their status was unclear or unknown in an additional 22 states.

Notwithstanding the decreased costs of residential PV systems (average prices dropped 20 percent to $5.04 per watt in the fourth quarter of 2012 compared to the fourth quarter of 2011), where third-party financing is permitted, it is popular. For example, in California and Arizona, the two largest state solar markets in 2012, third-party financing accounted for more than 50 percent of new residential solar installations, and GTM Research projects that the size of the thirdparty financing market will grow from $1.3 billion in 2012 to $5.7 billion in 2016.

Three additional states may join the ranks of those that permit third-party solar financing under proposed legislation in Georgia, Minnesota, and South Carolina, albeit with certain limitations on total renewable capacity in the case of Georgia and South Carolina. Minnesota’s proposed legislation (H.F. 956 and its companion Senate bill, S.F. 901), introduced in late February 2013, is currently under committee review. In addition to allowing third-party ownership to enable third-party financing options, the Minnesota bills provide a number of measures supporting renewable energy growth. They would also prohibit the Minnesota public utilities commission or any municipal utility’s governing body from limiting the cumulative amount of renewable or other distributed generation eligible for net metering from a utility to less than five percent of the utility’s average annual retail sales over the previous three years, and would require any limitation greater than five percent to be based on a determination that it is in the public interest.

Both the proposed Georgia legislation (H. 3425) and the proposed South Carolina legislation (H. 3425 and companion bill S. 0536) are more narrowly targeted at enabling third-party financing. The Georgia bill provides for a single, certified “community solar provider” to be the sole provider of thirdparty financing and limits the utility’s obligation to purchase net-metered energy from renewable sources to a cumulative renewable capacity of 0.2 percent of the utility’s peak demand in the previous year. The South Carolina legislation would limit the aggregate capacity of all third-party-owned renewable energy facilities in a utility’s service territory to two percent of the utility’s peak demand.