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Solar power your home, for cheap

A Silicon Valley startup rents solar panels to homeowners - a strategy that is both cost-effective for customers and, thanks to generous tax breaks, a boon to its bottom line.

Last Updated: October 22, 2008: 11:13 AM ET

NEW YORK (Fortune) -- Even for the greenest of homeowners, powering their homes with solar energy has long been an idea more attractive in theory than in practice.

The problem? The cost of buying and installing new solar panels runs $30,000 to $40,000 for a typical-size home. Even if solar panels reduce a homeowner's electric bills by $200 a month, it will still be 10 to 15 years before he or she sees any return - any economic return, that is - on the investment.

"The biggest barrier for solar is the upfront cost," said Lyndon Rive, CEO of Foster City, Calif.-based SolarCity.

Rive's company may have hit on a solution. Instead of selling solar panels to homeowners, SolarCity's main business is leasing the panels. The consumer pays SolarCity a monthly lease payment - about $75 for a 2.8 kilowatt system - which, when combined with his newly-lowered electric bill, typically adds up to a savings of 10% to 15%.

SolarCity does all the installation work, and there's little risk for the consumer since SolarCity guarantees a minimum level of power production. (Of course, the house needs to be well-suited for solar, preferably with a large south-facing roof that receives sunlight unblocked by trees or chimneys.)

For SolarCity, the leasing model works because of the various solar-power subsidies. Because it owns the solar panels it installs - SolarCity has a financing deal with Morgan Stanley (MS, Fortune 500) that, so far, has withstood the current credit crisis - SolarCity pockets the federal solar-power tax credit, any state rebates or tax credits, as well as any "renewable energy credits" which can be resold to utilities.

And that federal tax credit just became much more valuable. Under the 2005 Energy Act, purchasers of solar panels received a tax credit equivalent to 30% of the panels' purchase price up to $2,000. The bank bailout bill just passed by Congress renews the credit while also removing the $2,000 cap. In other words, starting next year, SolarCity will get a $12,000 federal tax credit for every $40,000 solar system it installs.

The biggest residential solar company in California, SolarCity expects to install 2,000 systems this year, up from 1,000 last year. A two-year-old, venture capital-financed company - backers include Draper Fisher Jurvetson and Elon Musk, the founder of Tesla Motors and co-founder of PayPal - SolarCity now operates in California, Arizona and Oregon. However, Rive says he's scouting the East Coast for SolarCity's next market.

A good bet is New York State, which has particularly generous solar subsidies. New York offers a tax credit of 25% of the purchase and installation cost, up to a maximum credit of $5,000. On top of that, it also offers homeowners a rebate of $4 per watt on the installation of 5 kilowatt (or less) solar systems; on a 5 kilowatt solar system, that's a $20,000 rebate. To top of page

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