Non-Ownership Business Models for Solar Energy

Abstract

Problem Definition: Solar power companies have introduced innovative non-ownership business models—leasing and power purchase agreement (PPA)—in addition to sales. Under these models, the company installs solar panels for a customer, who purchases the electricity generated from the panels. Under leasing, a customer pays a fixed fee, whereas under PPA, a customer pays a per-unit price for the electricity generated. The adoption of solar panels is also promoted by investment and generation subsidies, which are received by customers under sales, but by the solar power company under non-ownership models. In addition, some states currently have restrictions on non-ownership model(s) to protect utility firms' profits. Motivated by this context, we analyze the economic and environmental implications of such subsidies and restrictions. Practical and Academic Relevance: The share of non-ownership business models of the residential solar installations is approximately 40% and we contribute to the OM literature by being the first to endogenize a solar power company's business model decisions to inform policymakers regarding the ongoing discussion on subsidies and restrictions. Methodology: We develop a sequential game between a profit-maximizing solar power company and utility-maximizing residential customers to characterize a solar power company's optimal business model decisions. Results: We find that a higher investment subsidy makes it more attractive for the company to offer sales, whereas a higher generation subsidy makes it more attractive to offer non-ownership models. Contrary to conventional wisdom, we show that restricting the solar power company from offering leasing can actually lead to higher total adoption and generation of renewable energy. Policy Implications: We show that although a higher generation subsidy leads to higher total adoption and generation of renewable energy, interestingly, a higher investment subsidy can backfire by leading to lower total adoption and generation. Consequently, a higher investment subsidy can actually lead to a higher profit for the utility firm. Finally, we find that restricting leasing can be detrimental for the utility firm and beneficial for the environment.